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INTERNET TAX FREEDOM ACT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

JULY 26, 2007 

Serial No. 110–136 

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. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

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 

JULY 26, 2007 

Page 

OPENING STATEMENT 

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 

The Honorable Anna G. Eshoo, a Representative in Congress from the State 

of California 

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

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

The Honorable John Campbell, a Representative in Congress from the State 

of California 

Oral Testimony ..................................................................................................... 8 

Ms. Meredith Garwood, Vice President, Tax Policy, Time Warner Cable 

Oral Testimony ..................................................................................................... 17 

Prepared Statement ............................................................................................. 19 

Mr. David C. Quam, Director of Federal Relations, National Governors Association 

Oral Testimony ..................................................................................................... 24 

Prepared Statement ............................................................................................. 25 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 3 

Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Member, Subcommittee on Commercial and Administrative Law ............................................................................... 4 

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Ranking Member, Committee on 

the Judiciary ......................................................................................................... 4 

H.R. 1077, a bill to amend the Internet Tax Freedom Act to make permanent 

the moratorium on certain taxes relating to the Internet and to electronic 

commerce, submitted by the Honorable John Campbell, a Representative 

in Congress from the State of California ........................................................... 11 

Editorial from the Wall Street Journal submitted by the Honorable Chris 

Cannon, a Representative in Congress from the State of Utah, and Ranking 

Member, Subcommittee on Commercial and Administrative Law .................. 37 

Page

IV 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Responses to Post-Hearing Questions submitted by the Honorable Linda T. 

Sa ́nchez, a Representative in Congress from the State of California, and 

Chairwoman, Subcommittee on Commercial and Administrative Law, to 

Meredith Garwood, Vice President, Tax Policy, Time Warner Cable .............. 40 

Responses to Post-Hearing Questions submitted by the Honorable Linda T. 

Sa ́nchez, a Representative in Congress from the State of California, and 

Chairwoman, Subcommittee on Commercial and Administrative Law, to 

David C. Quam, Director of Federal Relations, National Governors Association ........................................................................................................................ 42

Prepared Statement of Joe Huddleston, Executive Director, Multistate Tax 

Commisssion ......................................................................................................... 44 

(1) 

INTERNET TAX FREEDOM ACT 

THURSDAY, JULY 26, 2007 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:15 a.m., in 

room 2141, Rayburn House Office Building, the Honorable Linda T. 

Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Sa ́nchez, Conyers, Lofgren, Delahunt, 

Watt, Cohen, Cannon and Feeney. 

Staff Present: Norberto Salinas, Majority Counsel; Adam Russell, 

Majority Professional Staff Member; and Stewart Jeffries, Minority 

Counsel. 

Ms. SA ́ NCHEZ. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law, will come 

to order. And I would now recognize myself for a short statement. 

Over 2 months ago this Subcommittee held an oversight hearing 

on the Internet tax moratorium. The hearing provided Members of 

this Subcommittee with the opportunity to learn more about the 

issues the current Internet Tax Freedom Act addresses. We heard 

opposing views regarding whether Congress should impose a permanent moratorium, a temporary moratorium or no moratorium at 

all. We heard arguments for and against the continuation of grandfather protections for those States that had already imposed taxes 

on Internet access prior to the implementation of current law. And 

most importantly, we heard contentious differences regarding the 

definition of Internet access. 

Now that we have gained a deeper understanding of the issues 

in this debate, it is time for us to consider the different legislative 

approaches to the Internet tax moratorium, which is scheduled to 

end, without congressional intervention, on November 1, 2007. 

The purpose of today’s legislative hearing is to examine different 

legislative approaches to the intricacies of the Internet tax moratorium. Specifically, two of our House colleagues are here to testify 

today about their legislation to make the Internet tax moratorium 

permanent. Our other two witnesses will discuss the legislation 

and other legislative answers to this question. 

As we hear today’s testimony, let us remember how Congress approached the original Internet Tax Freedom Act, which was enacted in 1998, as well as subsequent developments in the information technology industry. Congress understood that when considVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
2 

ering a moratorium on taxing Internet access, it should balance the 

interests of State and local government to collect revenue while encouraging the development of the Internet and its related industry. 

Congress also justified the moratorium as a temporary solution to 

provide time for administrative and definitional issues to be addressed regarding the fledgling industry. 

However, since 1998, that once-fledgling industry has grown, and 

in 2006 was deemed to be worth an estimated $108.7 billion. And 

it is almost certainly worth more today. What was still seen as a 

novelty by some in 1998 has become a daily part of life at home, 

in school and in the workplace. 

To help us explore these issues, we have invited four witnesses 

for this hearing this morning. I am pleased to have from my home 

State, both Representative Anna Eshoo from the 14th Congressional District of California and Representative John Campbell 

from the 48th District of California on our first panel to discuss the 

Internet tax moratorium legislation that each has introduced in 

this Congress. 

For our second panel, we have Meredith Garwood, Vice President 

for Tax Policy at Time Warner Cable; and David C. Quam, Director 

of Federal Relations at the National Governors Association. 

I want to emphasize that today’s testimony is very important for 

our understanding of the legislation. Accordingly, I look forward to 

hearing today’s testimony and welcome a thorough discussion of 

the issues and the legislation. 

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

Cannon, the distinguished Ranking Member of the Subcommittee, 

for any opening remarks he may have. 

Mr. CANNON. Thank you, Madam Chair. 

Today, we are having our second hearing on the implications of 

extending the Internet tax moratorium. Almost 10 years ago, Congress made the decision to protect the Internet access and trade 

from discriminatory taxes. I think that was a wise decision. It has 

led to the prospering of eCommerce beyond what anyone could 

have imagined. And 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 

prevent States and localities from imposing discriminatory taxes on 

eCommerce. I am pleased that the sponsors of those bills, Representative Eshoo and Representative Campbell, are here with us 

today. They will tell us, along with Ms. Garwood, why a permanent 

end to the discriminatory taxes will help guarantee America’s place 

as a leader of Internet commerce in the global economy and continue to act as a boon to the American consumer. 

Both bills will allow the current grandfather exceptions to the 

Internet tax moratorium to expire. One of the bills, H.R. 1077, 

would go further by eliminating the grandfather exceptions from 

the law entirely. Three out of our four witnesses here will again 

testify why it is time for these grandfather clauses to expire, given 

that the States have had almost 10 years to wean themselves from 

the revenue from the discriminatory taxes that are protected under 

these clauses. 

3 

These three witnesses are not alone on these points. Almost 150 

Members of the House of Representatives from both parties have 

cosponsored either one or both of these bills. That is a strong showing. 

Against such a strong showing, I am happy that we have a Representative from the States who will present the 

counterarguments. I don’t think he has the best of those arguments, but I respect his willingness to be the lone voice of dissent 

on this panel. I also look forward to his testimony, as well as that 

of Ms. Garwood, on the issue of the definition of Internet access. 

One of the issues at our last hearing was that some States were 

attempting to tax some forms of Internet access, notwithstanding 

the clear intent of Congress to the contrary. On the other hand, we 

also heard from the States about their concerns that certain companies may attempt to bundle certain goods and services that would 

ordinarily be taxable with Internet access in an attempt to make 

those goods and services untaxable. 

I understand that the States and representatives in the industry 

have been working to create a definition for Internet access that 

would address both of these concerns. And I look forward to hearing what progress has been made in that regard. 

Finally, Madam Chair, keeping Internet commerce and access 

free from discriminatory taxes has been a success for the American 

economy. I hope that we will move soon to mark up this legislation 

and get it passed prior to the November expiration date. 

Thank you, Madam Chair, and I yield back. 

Ms. SA ́ NCHEZ. I thank the gentleman for his statement. We may 

be visited very shortly by Mr. Smith and Mr. Conyers. Without objection, all other Members’ opening statements will be included in 

the record. 

[The prepared statement of Mr. Conyers follows:] 

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Today we revisit an issue that previous Congresses have dealt with during the 

last ten years. The Internet tax moratorium is a serious issue that Congress will 

have to address before November 1, when the current moratorium expires. 

In May this Subcommittee held an oversight hearing on this issue so that we 

could learn how the current moratorium has affected state and local revenues and 

whether it increased the opportunities for every American to access the Internet. 

What we learned is that we face the same issues that previous Congresses have 

faced. What the witnesses told us at that hearing was that the moratorium has a 

negative affect on the revenues of state and local governments. The witnesses also 

told us that the United States has fallen behind many other industrialized countries 

in broadband deployment during the last four years. 

The witnesses testified that the definition of ‘‘Internet access’’ was a major problem with the current moratorium. Since that time I have learned that the state and 

local governments and the industry representatives have worked together on that 

definition. And I thank them for doing so. 

As we hear from our witnesses today, we will hear about how the introduced legislation on the Internet tax moratorium affects them and why they support or oppose it. I look forward to the representative of the states and local governments to 

tell us why the moratorium should be temporary and why Congress should continue 

to protect the states and local governments with a grandfather provision. I look forward to hearing from the representative of the industry why it and the state governments worked together on a such a contentious definition as ‘‘Internet access.’’ And 

most importantly, I welcome testimony from two of my esteemed Members of ConVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
4 

gress on why they proposed legislation to make the Internet tax moratorium permanent. 

The issues we are examining today go to the heart of state’s rights to collect taxes 

as well as the interests of people to have access to the Internet. We should not forget how our actions in Congress affect the revenues of state and local governments. 

But we must balance all of the interests going forward when we consider legislation 

on the Internet tax moratorium. 

[The prepared statement of Mr. Cohen follows:] 

PREPARED STATEMENT OF THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TENNESSEE, AND MEMBER, SUBCOMMITTEE ON

COMMERCIAL AND ADMINISTRATIVE LAW

I am a co-sponsor of H.R. 743, the ‘‘Permanent Internet Tax Freedom Act of 

2007,’’ because there should be no obstacles to Internet access, nor should there be 

multiple or discriminatory taxes on Internet transactions. While proponents of repeal or of a temporary moratorium contend that the amount of Internet access tax 

would be minimal, any state or local tax on Internet access, however minimal, 

would have a disproportionate impact on lower income individuals—the last group 

of people who need obstacles to Internet access. Moreover, states and localities do 

not appear to have suffered catastrophic, or even notable, financial loss as a result 

of the moratorium that has been in place since 1998. While I understand the states 

and localities can always use additional sources of revenue and I sympathize with 

their situation, I believe that the balance of public interest in this case weighs in 

favor of a permanent Internet tax moratorium. Moreover, I would support elimination or expiration of the grandfather provision in the Internet Tax Freedom Act 

because a permanent moratorium on Internet taxes should apply to all states equally. I urge my colleagues to join me and the other 135 co-sponsors of H.R. 743 in 

supporting this legislation. 

[The prepared statement of Mr. Smith follows:] 

PREPARED STATEMENT OF THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS, AND RANKING MEMBER, COMMITTEE ON THE

JUDICIARY

Madame Chair, in the absence of congressional action, the Internet tax moratorium will expire next November 1. 

This legislation, which was initially enacted in 1998, prevents states or localities 

from imposing a sales tax that applies only to Internet transactions. 

Internet commerce has yet to approach its full potential. The imposition of discriminatory taxes would threaten the future growth of e-commerce and would discourage companies from using the Internet to conduct business. Internet taxation 

would also create new regional and international barriers to global trade. 

I have long supported a permanent extension of the moratorium on discriminatory 

Internet taxes and to end the grandfathered exemptions. 

I was a co-sponsor of the House-passed version of this bill in the 108th Congress, 

and I am now a co-sponsor H.R. 743, the ‘‘Permanent Internet Tax Freedom Act of 

2007.’’ 

I hope that we will move to extend the Internet tax moratorium for as long a period as we can as soon as we can. 

I trust that such measures will continue to enjoy the broad bipartisan support 

they have in the past, and I hope that we can successfully move a bill soon without 

any extraneous provisions attached. 

Ms. SA ́ NCHEZ. Without objection, the Chair will be authorized to 

declare a recess of the hearing at any point. 

I am now pleased to introduce the witnesses on our first panel 

for today’s hearing. Our first witness is Congresswoman Anna 

Eshoo of the 14th District of California. Ms. Eshoo was first sworn 

in as a Member of the House of Representatives in 1993, and since 

then has continued to defend the right of consumers and promote 

American competitiveness and innovation. 

Ms. Eshoo serves on the House Energy and Commerce Committee, Subcommittee on Telecommunications and the Internet, 

5 

and on the House Committee on Intelligence as Chairwoman of the 

Subcommittee on Intelligence Community Management. 

Ms. Eshoo is the author of H.R. 743, the ‘‘Permanent Internet 

Tax Freedom Act of 2007.’’ 

Our second witness is Congressman John Campbell, representing 

the 48th District of California. Elected to Congress in December of 

2005, Mr. Campbell champions fiscal responsibility. He serves as a 

Member of the House Committees on Financial Services, the Budget and Veterans’ Affairs. 

Mr. Campbell is the author of H.R. 1077, the ‘‘Internet Consumer 

Protection Act of 2007.’’ 

I want to thank you both for your willingness to participate in 

today’s hearing, especially in light of the fact that your schedules 

can be very hectic. Without objection, any written statement that 

you have will be placed in its entirety into the record, and we 

would ask that you limit your oral remarks to 5 minutes. 

I am sure you are both familiar with the lighting system. The 

green light signifies that you may begin your testimony and will 

have 5 minutes to testify, the yellow light warns you that you have 

a minute remaining, and the red light will warn you that you are 

out of time. If you are caught midsentence when the red light 

comes on, we would appreciate it if you could finish your thought 

and wrap up your testimony so that we can proceed with the hearing. 

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

the 5-minute limit. 

With our understanding of the ground rules now settled, Ms. 

Eshoo, I would invite you to proceed with your testimony. 

STATEMENT OF THE HONORABLE ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Ms. ESHOO. Thank you, Madam Chairwoman, and distinguished 

Members of the Subcommittee. Especially, thanks to you, Madam 

Chairwoman, for not only the hearings, your interest, but also allowing us to be here today—Mr. Campbell, myself and others—to 

testify on this very important issue. 

The bill that I have sponsored, H.R. 743, is the Permanent Internet Tax Freedom Act of 2007. It enjoys strong bipartisan support 

in the House with 138 cosponsors as of today, including 18 Members of the full Committee, the House Judiciary Committee. 

I also want to recognize and thank—I am not going to call out 

all the names, but there are many Members in previous Congresses 

and this Congress that have worked on this effort, both sides of the 

aisle. And then I think the father of the effort over in the Senate, 

Senator Ron Wyden. 

My legislation is very short and it is very simple. It strikes the 

beginning and the end dates of the current moratorium, making 

the moratorium permanent. That is what the legislation does. It is 

silent on the grandfathering issue that you commented on in your 

opening statement, Madam Chairwoman. 

The legislation guarantees that the barriers created by taxation 

of Internet access and eCommerce would not be erected when the 

6 

current moratorium expires later this year, nor would the barriers 

arise in the future. So as we know the Internet today, that it is 

open, it would remain so. 

I think that we use—there is a lot of jargon and terminology that 

hovers around so many issues that we deal with in the Congress. 

We talk about access. What access is, is an entrance fee. It is an 

entrance fee. So think of entering a building and having to pay an 

entrance fee every time you walk in, and you can apply that to 

thousands of situations. That is what it means. 

Now, there is the certainty that innovators and start-ups are 

looking for—they always are, we all appreciate that—that which I 

believe and others believe only a moratorium can—a permanent 

moratorium can provide. 

When this issue first arose to prominence in the late 1990’s, in 

my congressional district, which includes, along with Congresswoman Lofgren, Silicon Valley, it was bustling with activity in the 

burgeoning Internet sector. In just 1 year, from 1997 to 1998, the 

number of Internet users more than doubled from 70 to approximately 150 million people. And the 2 millionth domain name was 

registered in May 1998. 

In September 1998 a small, start-up company was born in a garage in Menlo Park, Google, Inc. I remember saying to Eric 

Schmidt, what kind of a name is that? Well, it certainly is a great 

brand around the world today. 

Congress and President Clinton at that time recognized the 

promise of the Internet and the need to foster its growth and development by maintaining an open architecture with a very, very— 

with very limited barriers to entry. 

A big concern was the potential for Internet access and services 

to become a target for taxation. We realized at the time that it 

wouldn’t serve our economy or our country well to interfere with 

the exciting growth and we prohibited new and discriminatory 

taxes. 

I think when you look at the data across the board, that we were 

spot on. We anticipated well and we see what has happened. The 

Internet is now, as you said, Madam Chairwoman, an integral part 

of everyday life. It has integrated itself into everything that we do. 

We can’t even think of a day where, whether it is in communication, in commerce, in business, in education, in research where this 

doesn’t apply. 

I think if we reverse this, we will essentially kill what I call the 

‘‘golden goose dot-com.’’ I don’t think it is acceptable for our country, the country that has led. And I see the applications of this at 

another Committee that I am on, at the House Intelligence Committee, of how this has served our country. So to impede this effort 

that has been successful, I think, is clearly the wrong direction. We 

would drive ourselves into the past, pre-1997-1998. And I think 

that this has served the American people well. 

The threat of new Internet taxes will also impede innovation. 

You have to have some kind of certainty for people to make their 

investments, to develop the capital and to move forward. So we 

don’t want to dampen this down. 

7 

For all of these reasons, obviously, I think, as well as many on 

both sides of the aisle believe, that it is important to enact a permanent moratorium. 

The marvel of the Internet and the key element in its rapid 

growth has been the ability of any user, any business, to get onto 

the Net and reach any other user without paying what I call an 

entrance fee. So I think Congress needs to step up. This is an important debate. 

I came out of—my original public service was in local government and county government. I know firsthand the restrictions 

that are there. I wish the States had come up with a standard, because we would be having a different conversation. But the threat 

of 1,000-2,000 taxing authorities in the country jumping on one 

pony I don’t think, number one, is attractive; two, I don’t think it 

is workable; three, there is a lot at stake when that becomes a 

major part of the conversation. We should have a conversation 

about it, but I think the overwhelming evidence points in this direction. 

So I would be happy to answer questions, I am thrilled to be 

here. It is really nice to be at this end rather than up on the dais. 

It is a different experience. I welcome it. I thank you for it, Madam 

Chairwoman. 

You are all my friends and colleagues, and it is an honor to testify before you. 

Ms. SA ́ NCHEZ. Thank you for your testimony Ms. Eshoo. We appreciate your taking the time and your thoughtfulness with respect 

to the issues that we are grappling with in this Subcommittee. 

[The prepared statement of Ms. Eshoo follows:] 

PREPARED STATEMENT THE HONORABLE ANNA G. ESHOO, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you Madam Chairwoman for inviting me to testify today about my legislation, H.R. 743, the Permanent Internet Tax Freedom Act of 2007. This effort enjoys 

strong bipartisan support in the House, with 138 cosponsors including 18 Members 

of the Judiciary Committee. 

It’s an honor to join with Representative Bob Goodlatte, a Member of this Committee and with my longtime friend and ‘‘father’’ of this effort in the Senate, Senator 

Ron Wyden. 

My legislation is very short and very simple. It merely strikes the beginning and 

end dates of the current moratorium, thus making the moratorium permanent. 

H.R. 743 would guarantee that the barriers created by taxation of Internet access 

and e-commerce would not be erected when the current moratorium expires later 

this year, nor would the barriers arise in the future. 

This is the certainty that innovators and start-ups are looking for and which only 

a permanent moratorium can provide. 

When this issue first rose to prominence in the late 1990’s, my congressional district, home to Silicon Valley, was bustling with activity in the burgeoning Internet 

sector. 

In just one year, from 1997 to 1998, the number of Internet users more than doubled from 70 to approximately 150 million, and the 2 millionth domain name was 

registered in May of 1998. 

In September of ’98 a small, start-up company was also ‘‘born’’ in a garage in 

Menlo Park—Google, Inc. 

Congress and President Clinton recognized the promise of the Internet and the 

need to foster its growth and development by maintaining an open architecture with 

limited barriers to entry, and minimal regulatory and administrative burdens. 

Of particular concern was the potential for Internet access and services to become 

a target for government taxing authorities looking for new sources of revenue. 

We recognized at that time that it would not serve our country well to interfere 

with the growth of this exciting and invaluable tool for information, communicaVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
8 

tions, and commerce, and we prohibited new and discriminatory taxes on the Internet. 

The moratorium has served us well. The Internet is now an integral part of everyday life. Americans across the country utilize the Internet for communication, commerce, business, education and research. 

If we reverse course now, we’ll essentially kill GoldenGoose.com. 

According to the most recent data, the U.S. now ranks 24th in broadband penetration among all industrialized countries. 

This is simply not acceptable for the country that invented the Internet, and I’m 

proud to support a variety of efforts, including the Speaker’s Innovation Agenda, 

which will rectify this deplorable situation. 

I can think of few things we could do to impede this effort more than subjecting 

Internet access and e-commerce to new taxes. Our competitors realize that access 

to broadband is essential to be competitive in the 21st Century global economy, and 

they are heavily subsidizing it. 

Allowing this moratorium to expire would do the opposite and disincentivize 

broadband access for every American. 

These taxes are also inherently regressive and would hit low-income households 

the hardest, widening the breach of the ‘‘Digital Divide.’’ 

And the threat of new Internet taxes will also impede innovation and the development of new technologies and applications that will revolutionize business, 

healthcare, education and entertainment in our country, but only if all Americans 

have affordable access to advanced broadband service. 

For all these reasons, it’s essential to enact a permanent moratorium to remove 

this cloud over the Internet once and for all. 

The marvel of the Internet and the key element in its rapid growth has been the 

ability of any user or business to get onto the Net and reach any other user without 

paying an ‘‘entrance fee’’ or imposing significant barriers. 

It’s critical for Congress to enact a permanent moratorium: 

1. To reflect our commitment to universal broadband in America; 

2. To provide certainty to the entire Internet community that access to the Net 

will remain tax free; 

3. To ensure e-commerce will remain free of discriminatory taxes. 

Thank you again Madam Chairwoman for the opportunity to testify today. I look 

forward to working with you to enact this important legislation. 

Ms. SA ́ NCHEZ. At this point, I would invite Mr. Campbell to begin 

his testimony. 

STATEMENT OF THE HONORABLE JOHN CAMPBELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. CAMPBELL. Thank you Madam Chairwoman, Ranking Member Cannon and Members of the Committee. And I, too, appreciate 

the opportunity to be here and speak with you all about this important issue. 

Now, I am the primary sponsor of H.R. 1077, but also cosponsor 

of Ms. Eshoo’s bill. The only difference between them is whether 

there is a grandfather clause or not, whether you allow some entities, some local governments and so forth that have imposed taxes 

to keep them or not. Other than that they are identical; the spirit 

of them is identical. And frankly, although I would prefer the 

grandfather clause be removed, the important thing is that we 

make sure that from now, going forward, we don’t impede the 

growth of the Internet; and I think that is really what we are talking about. 

The Internet has been a tremendous vehicle for explosive growth 

both in the economy and in the ability of everyday people to access 

information and services that they, prior to the Internet, never had 

the opportunity to access. 

9 

Let me explain what both of these bills—and I will speak of them 

as a single unit at this point—what they don’t do. And what they 

don’t do is, they do not restrict the ability of States and local governments to impose regular taxes that are imposed on other transactions, whether they are on the Internet or not. They do not restrict the ability of States and local governments to impose, for example, sales taxes on transactions over the Internet. Those sorts of 

taxes that are independent of whether the triggering mechanisms 

on the Internet or not are not impeded by this bill. 

What it does say is that you cannot impose a discriminatory tax. 

So you cannot have a sales tax on Internet transactions that are 

higher than a sales tax that that same jurisdiction imposes on a 

transaction at a brick and mortar facility. So it does say that. 

What it also says, as my colleague from California pointed out, 

is that you can’t impose a tax on access to the Internet. And that 

is the important thing here, because access to the Internet has become largely free, and as I will explain in a moment, is going to 

become freer. And it wasn’t that long ago when most people paid 

$10, $15, $20 a month for access to their Internet service provider. 

Now, virtually all of those are entirely free. And so more and more 

people are able to access this tremendous source of information and 

opportunity without charge. 

Now, can you imagine if some jurisdiction decides to put on 

something and says, well, we are going to charge you for each email you send, or, well, we are going to charge you for the amount 

of time you are on the Internet, how that is going to restrict use 

of the Internet, both for individuals and how it will restrict the 

growth of commerce that has occurred over the Internet. 

And that is what this bill is trying to say, that the marketplace 

is moving for the Internet to become freer and freer and freer; and 

let us not have government go in and start making it less and less 

and less free, and restricting the ability of people to get on and do 

what they want to do. 

Now, in my home county of Orange County, CA, the city of Anaheim is in the process of putting together, and I believe they advertise that they will be the first city to do this, to have complete, public, free Wi-Fi throughout the entire city. So anyone with a computer, with Wi-Fi, who is anywhere in the city of Anaheim will be 

able to access the Internet, and since Internet service providers are 

basically free, they will have complete, total free access if you are 

in the city of Anaheim. 

I know there are a bunch of other cities now in other localities 

that are looking at this sort of thing. So when I say that it is free 

and getting freer, that is what I mean, that increasingly the benefits of eCommerce and the benefits of being able to access the 

Internet are outweighing the necessity or the ability of charging for 

e-mail addresses or for e-mail access or for access at all. So the last 

thing in the world we ought to be doing is restricting that by taking that and adding some kind of a tax or some kind of a charge 

at the city or local level. 

So that is really what this bill is about, what these bills are 

about, what the spirit of these bills are about. And the benefits are 

both that—for both commerce and the fact that people will be able 

to access, have freer access to more information and more comVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6601 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
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merce and more things that they have never been able to do, in the 

future. 

And as my colleague from California said some years ago, very 

few of us, certainly not me, but I think the ones who did anticipate 

where the Internet was going to be have a whole lot more money 

than any of us do at this point. 

But—it is hard to anticipate where it will be 10 years from now, 

but the one thing we do want to do is make sure that we don’t 

stand in the way of this great engine of growth, opportunity and 

access growing to wherever it may grow. 

And it is great to be with you and I will yield back Madam 

Chairwoman. 

[The bill, H.R. 1077, follows:] 

11 


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HR1077-2.eps
13 

Ms. SA ́ NCHEZ. I thank Mr. Campbell for his testimony. 

We do have very few questions, so we are actually going to proceed under unanimous consent. I am going to ask unanimous consent to grant Mr. Cannon 3 minutes to ask a couple very quick 

questions. And I understand Ms. Lofgren will have a couple of 

quick questions as well. 

Without objection, Mr. Cannon. 

Mr. CANNON. Thank you, Madam Chair. 

And I want to thank my two friends for being here and taking 

the initiative on this topic that is so very important. 

I just wonder, and I don’t know if you have even thought about 

these things, but associated issues are whether or not we are going 

to tax telephone numbers. If we do that, we are going to be regulating the Internet. When some people are talking about funding 

the universal service done by taxing telephone numbers, of course, 

that means to me that people will move away from telephone numbers and these other forms of identification. 

But if you have thoughts about that, or also about whether municipalities ought to have the ability, whether we ought to preempt 

the laws that prohibit municipalities from building out fiber-optic 

networks as opposed to wireless networks, like you talked about in 

Anaheim, Mr. Campbell. 

So if either of you has thoughts on either of those issues, I would 

love to hear them. 

Ms. ESHOO. Well, I think we are at a juncture right now between 

what is—you know, all of the services that are merging, telephones 

have been taxed forever, telephone service has. 

Now we are moving—we had a little conversation when we first 

came into the room about this. Now we are in an era where we are 

racing forward again, where so many services are merging. So all 

of that is going to have to be considered. 

And you have to take a look at the services. I mean, myself, what 

I pay just monthly for all these different services, these get to be 

kind of expensive utility bills. I mean, there is a real investment 

in all of this. 

So the Committee is going to have to make some kind of decision 

on that. I don’t know whether it is sooner or a little farther down 

the road. 

There is something that I failed to mention in my opening testimony, and that is the whole issue of broadband. You are going to 

have to consider broadband in this because it is part of the issue. 

Are we going to—as a Nation, we are now ranked, the latest data 

for our country is that we rank 24th in the world in broadband 

penetration. American people don’t like that. We like being first, 

not 24th. And we continue to slip. 

Now, what kind of an effect is this taxation issue, or not having 

a moratorium or permanent moratorium, what kind of effect is that 

going to have on broadband penetration in our country? So it is 

something else to be considered. 

Mr. CAMPBELL. I agree with those comments. I will just add that 

I think some of those questions, as you say, have to do with the 

convergence of all these technologies, which really are outside the 

scope of this particular bill. Because now, as you know, you can get 

Internet on your cable TV and you can get telephone on your InterVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
14 

net; and as all of these converge, then I think there are questions 

relative to that. 

But I think what this bill is saying is that—don’t tax the access 

of that Internet. You may tax things that you get from the Internet, like purchases, et cetera, et cetera, but don’t tax the ability to 

get it in the first place. 

And I think that is where we are coming from. 

Mr. CANNON. Madam Chair, just a quick follow-up. When you 

say what you get on the Internet, that is like maybe a magazine 

or a pair of shoes, but if the service is bits and bytes, you don’t 

want to tax that, right? 

Mr. CAMPBELL. No, clearly you don’t. 

Mr. CANNON. So if those bits and bytes happen to be voice in a 

communication that is similar to a telephone, I take it your view 

is that should not be taxed. 

Mr. CAMPBELL. I think you can actually have a view either way 

on that. But as long as you are not taxing the bit and the byte. 

If you are taxing the fact that there is a telephone there, I suppose 

that is something you can do; just don’t tax the access to it. 

Ms. SA ́ NCHEZ. The Congresswoman’s time has expired. I would 

ask unanimous consent that Ms. Lofgren be granted 3 minutes for 

questioning without objection. 

Ms. LOFGREN. Thank you. And I really appreciate it; I know how 

we are all busy and that the two of you would take time to share 

your thoughts here today really is important to me and to the 

whole Committee. And I am proud that the main authors are Californians because certainly high technology is very much associated 

with our State. 

I just had two quick questions. The first has to do with definitions. And when we started this process in—I think it was the 

105th—Commerce, the definition wasn’t a major issue because we 

thought we knew. But, of course, things have morphed and converged, and I am proud to be a cosponsor. 

But I am wondering whether we should have a further discussion 

to broaden the access, because when we look at our need to support 

the free flow of information in all the bits and bytes and data, you 

know, I think the broadest definition of access should be our guide. 

And I wonder if the two of you agree with that. 

Ms. ESHOO. Well, it is certainly my intent as the author. But 

that is why we have hearings, that is why Members have discussions with each other when we go to the floor. All of that interaction, all of this interaction is very important. 

I have tried, in many situations—and I don’t think there is a set 

recipe for this; sometimes the language needs to be so broad because you don’t want to get into definitions and hamper things. On 

the other hand, some bills really call for high definition. So I am 

open on that. 

I think that, again, this is why we are here, why there is a discussion. I would like the principle set down by the Congress. We 

are having a great debate right now, so is the FCC, on spectrum. 

And this happens once every decade or less; and it is going to define, it is going to define the next, perhaps the first half century 

of the 21st century. 

15 

So this is a big decision of how we are going to move forward. 

So I am open to it. I mean, you are going to come up with ideas, 

and we will discuss them. I think the principle of the legislation 

is what I am the most concerned about keeping intact. 

Mr. CAMPBELL. The same here; I agree with my colleague from 

California. 

And the only thing I will just add is, again anticipating where 

this is going to go. You know, sending e-mails, sending a letter 

costs money, making a phone call costs money, sending an e-mail 

is free. Why is that? 

Because of the advertising and other opportunities, there is a lot 

of money being made on the Internet now with free services because of advertising and other things that are going on. As we see 

these things, something goes up on YouTube and a million people 

look at it in 12 hours or so forth; as you see that kind of opportunity to get to people, there are going to be more things that now 

cost on the Internet or cost to get to that I think are going to increasingly be free because there is going to be so much opportunity 

to make money in other ways, because there are a million people 

looking at it. 

So that is why I agree with you, the broadest definition possible, 

because I think that some things that now, just like before, where 

if you had said 10 years ago, you are going to be able to send an 

e-mail and it is going to be free. Are you nuts? 

But I think there are things now that are going to be freer as 

time goes on. And that is where the broader the definition, the 

more opportunity we have for those things to grow that way. 

Ms. LOFGREN. Just noting, Congresswoman Eshoo and I were 

both in local government. As a matter of fact, she was on the Board 

of Supervisors in San Mateo County at the same time I was on the 

Board of Supervisors in Santa Clara County, right next door. And 

we both understand the need for an adequate revenue base for 

local government and for States. And I am actually quite passionate about county government, as I know Ms. Eshoo is. 

Having said that, the consequence of impeding the development 

of telecommunications is dire for the economy and ultimately will 

hurt the economy of the local government. So I am wondering—and 

this is just to Ms. Eshoo, because it is a Democratic question. We 

adopted as a caucus policy something called the Innovation Agenda. You and I were very intimately associated with the crafting of 

that Innovation Agenda, and it is a policy of the Democratic Caucus. That is our guide. 

I went back and looked to see if there was a specific reference 

to this bill, and there isn’t. But I believe that this issue is encompassed by that broad language of the Innovation Agenda. As one 

of the co-authors of that, I wonder if you have an opinion. I didn’t 

tell you I was going to ask you this, so if you want to think about 

it, that would be fine. 

Ms. ESHOO. I am so glad that you did. As a matter of fact, when 

I was preparing for this late last evening, I had that in there, but 

I needed to cut back on my—believe it or not, I did cut back on 

my comments. 

16 

But we spoke very specifically in the Innovation Agenda, as a full 

caucus policy position, on broadband. And that is, it is a huge consideration for both parties, for the Congress of the United States. 

This is something that really can fully democratize the Internet. 

When you have a deep broadband penetration in a country, it 

serves everyone with a small ‘‘d’’. And when you look at—all you 

have to do is look at our competitors in the world and what they 

have done and what we are not doing. I mean it is a stark contrast; 

there is a reason why we are 24th. 

So the concentration that we brought to designing those public 

policy goals in our Innovation Agenda, the principles of this, are 

embedded in it. Does it say specifically Internet access and taxation 

and that? No. We didn’t drill down with language like that. It is 

up to us as legislators to enact the principles of it. 

But thank you for raising it. 

Ms. LOFGREN. Thank you very much, Madam Chairwoman. 

Ms. SA ́ NCHEZ. We have also been joined by Mr. Conyers, a distinguished Member of the Subcommittee and the Chairman of the Judiciary Committee, of the whole Committee. I would ask unanimous consent to grant Mr. Conyers such time as he may consume. 

Mr. CONYERS. I just wanted to say good morning to Anna Eshoo 

in public; and Broderick Johnson I see over there, who has worked 

with the Committee on and off across the years; and my colleague, 

Mr. Campbell. This is—well, if you were one, like me, who hadn’t 

heard the testimony, it sounds like just about everybody is in 

agreement, mostly, that we have got to extend the moratorium and 

perhaps make it permanent. 

Is that too simplistic? 

Ms. ESHOO. No. I think—I am not going to add to that. I think 

you have an excellent impression, Mr. Chairman. 

Thank you for your warm welcome and for the work that the 

Committee does. 

Mr. CAMPBELL. And we should do it by November 1 because time 

is of the essence. 

Mr. CONYERS. It expires, right? 

Well, that takes care of Conyers this morning. 

Ms. SA ́ NCHEZ. I think the briefest Member on this panel. I thank 

you for that, Mr. Chairman. 

With that, I would like to thank the first panel for their testimony and excuse you to run off no doubt to more duties that you 

have as Members of Congress. Again, I want to thank for your time 

and for your thoughtfulness. 

We will take a short recess to allow the second panel to get settled in. So if the second panel would please do that. 

[Brief recess.] 

Ms. SA ́ NCHEZ. The Subcommittee will now come to order for our 

second panel of witnesses. I am pleased to introduce the witnesses 

of our second panel for today’s hearing. 

Our first witness is Meredith Garwood, Vice President of Tax 

Policy for Time Warner Cable. Ms. Garwood represents Time Warner Cable in national and State tax organizations and projects and 

serves on the Tax Policy Committee for the Council on State Taxation. 

17 

Prior to joining Time Warner Cable, Ms. Garwood was the Senior 

Director of Tax with AT&T Wireless. 

We want to welcome you today. 

And our final 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. 

We want to welcome you both. 

And at this time, I would invite Ms. Garwood to please begin her 

testimony. 

STATEMENT OF MEREDITH GARWOOD, VICE PRESIDENT, 

TAX POLICY, TIME WARNER CABLE 

Ms. GARWOOD. Chairwoman Sa ́nchez and Members of the Subcommittee, thank you for this opportunity to testify on an issue of 

real and growing importance to millions of consumers and businesses in the United States. 

I also want to thank Representatives Eshoo and Campbell for 

their earlier testimony and for their leadership. 

My name is Meredith Garwood, and I am the Vice President of 

Tax Policy for Time Warner Cable. I am responsible for pursuing 

Federal and State legislative tax initiatives that ensure fair and 

nondiscriminatory taxation for consumers of our services. I appear 

today on behalf of a broader coalition of Internet service providers, 

Internet backbone providers and Internet application and content 

providers. Our coalition is known as Don’t Tax Our Web. On behalf 

of that coalition, let me extend our appreciation to Madam Chairwoman and to you Ranking Member Cannon for today’s hearing. 

Unless Congress acts, the Internet Tax Freedom Act will expire 

on November 1, 2007. This morning I would like to focus on three 

points. First, I urge Congress to make the moratorium permanent. 

Second, the moratorium should be clarified once and for all to prevent taxation of the transport component of Internet access, including the Internet backbone. Finally, the moratorium should be extended without any further extensions of existing taxes on Internet 

access that were grandfathered in 1998 and again in 2004. 

H.R. 743 and H.R. 1077 encompass these objectives, and we 

strongly support both bills. 

With regard to making the moratorium permanent; at a time 

when economic development experts are calling for increased deployment of broadband, new taxes on Internet access, including 

taxes on transport used to provide that access, will greatly increase 

the cost of that deployment. 

It is hard to imagine that at some point in the future it will 

make sense to allow access to the Internet to be taxed by thousands of taxing jurisdictions. Indeed, even with the moratorium in 

place, companies in our coalition have had to deal with consequences of contrived loopholes in the Internet Tax Freedom Act— 

litigation, audit risk and class action lawsuits—but it is our strong 

position that access to the Internet should be available, as availVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
18 

able, as affordable, as possible; and therefore we continue to seek 

a permanent ban. 

That should be our permanent national policy. It is important 

that we make unmistakably clear that the moratorium applies to 

all Internet transport, including the Internet backbone. 

The amendments to the Internet Tax Freedom Act in 2004 had 

two main objectives, one, to treat all technologies similarly, and 

two, to ensure that the Internet backbone remained free of tax. 

Many States like Massachusetts and North Carolina acted appropriately in issuing rulings consistent with the Federal law and 

Congress’ intent that the Internet not be burdened by hidden taxes. 

Unfortunately, a few States, none of which were original grandfathered States, chose to ignore the changes made by the Congress 

in 2004. The actions of these States must be addressed because 

they undermine the moratorium, circumvent the will of the Congress and put pressure on other States to sidestep the moratorium. 

From an economic standpoint, taxes on the transport components 

of Internet access are indistinguishable from taxes on Internet access. Both put the same upward pressure on end users’ cost of service, deterring growth of Internet access subscribers. Additionally, 

new language to clarify this issue is important because we currently have companies facing class action lawsuits filed by their 

customers because the companies followed the rulings issued by 

these States. 

Our coalition has been working with the Federation of Tax Administrators and with the National Governors Association in an effort to make unmistakably clear that the Internet backbone and 

other components of Internet transport are covered by the moratorium. We have also worked with the States to address their concerns that the definition of Internet access could unintentionally include products other than Internet access. 

Our discussions with the States have led to an agreement between our coalition and both FTA and NGA on the definition of 

Internet access. We believe that our joint proposal will ensure that 

consumers do not bear the burden of taxes directly, as part of the 

price of Internet access, or indirectly, through unwarranted taxdriven increases in the price Internet access providers must pay for 

transport. 

I want to express my appreciation to David Quam and to Harley 

Duncan of FTA for their constructive approach to this very challenging issue. 

We must end the grandfathering of taxes on Internet access. In 

1998 and again in 2004, Congress grandfathered taxation of Internet access in several States. Consumers in those States were deprived to the benefits of the lower-priced access to the information 

superhighway. Nearly a decade after a handful of States were 

grandfathered, it is time to bring these limited, temporary exceptions to a close and fulfill the original objective of a national policy 

against taxing Internet access. 

Now is not the time to allow regressive new taxes to reverse the 

progress we are making in the Nation. Congress should ensure that 

all consumers in all States benefit from the moratorium. 

19 

Madam Chairwoman and Members of the Subcommittee, thank 

you again for this opportunity to testify; and I look forward to your 

questions. 

Ms. SA ́ NCHEZ. Thank you, Ms. Garwood. 

[The prepared statement of Ms. Garwood follows:] 

20 

PREPARED STATEMENT OF MEREDITH GARWOOD


MG0001.eps
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24 

Ms. SA ́ NCHEZ. Mr. Quam, would you please begin your testimony. 

STATEMENT OF DAVID C. QUAM, DIRECTOR OF FEDERAL 

RELATIONS, NATIONAL GOVERNORS ASSOCIATION 

Mr. QUAM. Gentlewoman Sa ́nchez, Congressman Cannon, Ms. 

Lofgren, thank you very much for having us back to talk again on 

this important issue. 

I hate to upset the apple cart that has been by the other witnesses, but it may come as no surprise that the National Governors 

Association, joined by the National Association of Counties, the 

Conference of Mayors, the National League of Cities and other 

State and local government groups oppose a permanent moratorium. 

However, the good news: We are maybe not all on the same page, 

but we are all reading from the same book; and that is that the 

NGA is calling for a reasonable extension of the current moratorium, which will preserve some of the provisions regarding discriminatory taxation, multiple taxation, and continue the moratorium, but do it in a more reasonable manner. 

Since we are focused on legislation, let me talk about principles 

for legislation that are important to the governors. First, and I 

mentioned these before, be clear. Definitions matter. 

Second, be flexible. A temporary solution is better than permanent confusion. 

And do no harm. Congress should continue to grandfather protections to preserve existing States authority and revenues. 

These principles are not reflected in the bills that were discussed 

earlier today, and therefore we oppose making the current moratorium permanent. 

A couple of the problems with those bills: First and foremost is 

the definition. Those bills rely on the existing definition, which is 

a 1998 definition of the Internet that, frankly, just does not apply 

to the Internet of 2007. I think everyone would agree that there 

have been significant changes to what constitutes Internet access; 

and therefore, governors are calling for a precise definition, because 

Congress is preempting State and local taxation. And when Congress preempts State authority, particularly with revenues, it 

should be precise, it should be limited and it should be clear. 

Second, those bills upset the balance between Federal authority 

and State sovereignty that was struck by the original moratorium 

by making the bill permanent and, of course, ending the grandfather provisions. A better alternative can be found in Senate bill 

S. 1453, that was introduced by Senators Carper, Alexander, Feinstein, Voinovich and Enzi. That bill alters the definition of Internet 

access to ensure that it is clear and precise and does not make 

services unrelated to Internet access tax free. It also honors State 

authority by continuing the original 1998 grandfather clause and 

sunsets the moratorium in 4 years. 

Now, fortunately, as Meredith said, we have some good news; 

and that is, since the last time, we met industry and representatives of State and local government have been in discussions. We 

both are looking for an extension of the moratorium, and frankly, 

we both have issues with the current definition. 

25 

And so, working together, we have an agreement on a definition 

of Internet access that is much more of a rifle shot than the shotgun approach of the existing bill. Following largely on the CarperAlexander model of being more precise, the definition is more clear 

and specific. It says that Internet access is a service that enables 

a user to connect to the Internet. It would include incidental services like e-mail under the definition of the moratorium. It maintains a lot of the telecommunications language and even clarifies 

it from the last extension on the moratorium. And it makes it explicit that just because a service uses the Internet does not mean 

that that service had become part of the moratorium. 

This more improved definition, however, does not justify making 

the moratorium permanent. In fact, keeping the moratorium temporary is vital to continuing to honor State and local sovereignty 

with regard to this issue. A temporary moratorium allows Congress, who is the only arbiter of this moratorium, to return to the 

issue and make sure that we have gotten it right. 

I wish I could say that we have gotten the definition right, but 

we have had changes for the last several years every time we reauthorize this bill. The Internet is ever-changing. I thought Congressman Campbell said it well, we don’t know what the Internet will 

look like in 10 years. 

Finally, the grandfathers are also critical. It is the principle of 

‘‘do no harm.’’ States are collecting some taxes. The original grandfather States are collecting upwards of $150 million. But that 

grandfather clause was also an important safety net for other 

taxes. 

Although there are some exemptions for taxes listed currently in 

the definition, I do not believe that that list is exhaustive nor protects all the State and local taxes and fees that apply to Internet 

service providers. That safety net must be preserved on a going-forward basis, and the grandfather clause did that. 

We would encourage this Committee to join us in the collaborative effort that we have forged with the definition, but then continue by extending this on a reasonable basis, which means keeping the grandfathers and doing so on a temporary basis so Congress can return to the issue. 

Madam Chairwoman, thank you. 

Ms. SA ́ NCHEZ. Thank you, Mr. Quam for your testimony. 

[The prepared statement of Mr. Quam follows:] 

PREPARED STATEMENT OF DAVID C. QUAM

Chairwoman S ́nchez, Ranking Member Cannon, and members of the Subcommittee, thank you for inviting the National Governors Association (NGA) to testify today. 

My name is David Quam, and I am the Director of Federal Relations for 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 (the ‘‘ITFA)’’. 

The bottom line regarding the ITFA 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. 

BACKGROUND

Although the U.S. Constitution grants Congress broad authority to regulate interstate commerce, the federal government, historically, has been reluctant to interfere 

26 

1 Response of Kevin J. Martin, Chairman, Federal Communications Commission, to pre-hearing questions asked by the House Committee on Energy and Commerce, February 7, 2007. 

with states’ ability to raise and regulate their own revenues. State tax sovereignty 

is a basic tenet of our federalist system and is fundamental to the inherent political 

independence and viability of states. For this reason governors generally oppose any 

federal legislation that would interfere with states’ sovereign ability to craft and 

manage their own revenue systems. 

The 1998 Internet Tax Freedom Act, which imposed a moratorium on state or 

local taxation of Internet access, is one exception to longstanding congressional forbearance when it comes to state tax issues. Designed to help stimulate this new 

technology by making access to the Internet tax free, the moratorium included three 

important restrictions to protect states: 

1. The moratorium applied only to new taxes—existing taxes on Internet access 

were grandfathered; 

2. The definition of ‘‘Internet access,’’ while broad, excluded telecommunications 

services; and 

3. The moratorium expired after two years to allow Congress, states and industry the opportunity to make adjustments for rapidly developing technologies 

and markets. 

In 2000 the original moratorium expired, but was extended through November 1, 

2003, with its protections for states still in place. In 2003, and 2004, Congress debated bills that targeted state protections by proposing to eliminate the grandfather 

provision, modify the telecommunications exclusion to address tax disparities between telecommunications broadband services and those of the cable industry, and 

make the moratorium permanent. Fortunately, the final bill retained several of the 

original state protections including the grandfather clause, an exception for taxes 

on voice-over-internet-protocol (VOIP) services, and an expiration date of November 

1, 2007. 

As Congress begins to consider changes to the ITFA, governors recommend that 

members examine the scope of the moratorium in light of technological advancements; update the ITFA’s definitions to ensure they reflect congressional intent and 

do not unnecessarily interfere with state taxing authority; extend the moratorium 

on a temporary basis to respect state sovereignty and the ever-changing nature of 

the Internet; and retain the original grandfather clause to preserve existing state 

and local tax revenues. 

CONGRESS SHOULD CLARIFY THE DEFINITION OF ‘‘INTERNET ACCESS’’ 

A core concern for states is the potential breadth of the ITFA’s definition of ‘‘Internet access.’’ The current definition of Internet access states: 

‘‘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. Such term 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.’’ (Emphasis added) 

The first sentence of the definition has not changed since 1998 and allows a provider of Internet access to bundle ‘‘proprietary content, information, and other services’’ together with access to make the entire offering tax free. NGA believes that 

the unlimited ability of providers to bundle together content and ‘‘other services’’ 

into a single, tax-free offering represents a loophole that could have the unintended 

effect of exempting content, information or services from otherwise applicable taxes 

merely because they are delivered over the Internet. 

The risk of states losing significant revenues from this provision has grown significantly as broadband connections have become more common and companies have 

altered business plans to deliver more services over the Internet. Since 2001, the 

number of high speed lines in the United States has risen from more than 9 million 

to nearly 65 million with high-speed connections in the United States growing by 

52 percent in 2006 alone.1 Governors support the deployment of broadband services 

because they increase the ability of citizens to utilize the vast array of services and 

information available online and are critical to our nation’s economic growth and 

competitiveness. 

As more consumers move online, Internet protocol technology is also making more 

services available over the Internet. For example, a key issue of the 2004 ITFA deVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
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2Telecommunications Industry Association’s 2006 Telecommunications Market Review and 

Forecast, February 27, 2006. 3 Harris, Jan, ‘‘IPTV subscription to grow 92% year on year,’’ Platinax Small Business News, 

April 10, 2007. 4The State of Retailing Online 2007, Shop.com/Forrester Research Study, May 14, 2007. 5Online Clothing Sales Surpass Computers, According to Shop.org/Forrester Research Study, 

viewed at www.nrf.com (May 17, 2007). 

bate centered on whether VOIP would become a viable alternative to traditional 

phone service. Unlike traditional telecommunications services, VOIP uses the Internet to transmit voice communications between computers, phones and other communications devices. Today, analysts project that VOIP subscriptions will top 18 million in 2009, a dramatic rise from VOIP’s 150,000 customers in 2003.2 The concern 

in 2004 was what would happen to the $23 billion state and local tax base for telecommunications services if VOIP replaces telecommunications services and were allowed to be bundled with Internet access into a tax-free offering. Congress’ solution 

during the last ITFA extension was to specifically exempt VOIP from the moratorium. This solution, however, did not solve the problem of the underlying definition. 

The next major service moving to the Internet is video programming. Known as 

Internet-protocol television (IPTV), this service represents another technological 

leap for industry and challenge for the ITFA. Worldwide, the annual growth rate 

of IPTV is projected to exceed 92 percent, rising from 3.9 million subscribers in 2006 

to 103 million in 2011. The service brings together voice, Internet and entertainment services in a bundle marketed by some as a triple-play.3 Much like VOIP in 

2004, if a service like IPTV is packaged with Internet access and exempted from 

applicable taxes, it would create tax disparities for competitors offering similar services and undermine existing state and local revenues. 

The emergence of services such as VOIP and IPTV underscore the need to clarify 

the definition of what constitutes ‘‘Internet access’’ so that the taxability of a good 

or service is not determined by whether it can be bundled with Internet access and 

delivered over the Internet. Although NGA supports having the moratorium apply 

to services related to providing access to the Internet such as email, Congress 

should close the bundling loophole by specifying that the definition of ‘‘Internet access’’ applies only to those services necessary to connect a user to the Internet. 

ANY EXTENSION SHOULD BE TEMPORARY

When the ITFA became law in 1998, it was passed as a temporary measure to 

assist and nurture the Internet in its commercial infancy. The Internet of 2007 is 

far different. It is a mainstream medium that has spawned innovation, created new 

industries and improved services. What started as primarily a dial-up service available through a handful of providers, today is available through thousands of internet service providers using technologies ranging from high-speed broadband cable 

or Digital Subscriber Line services, to wireless, satellite and even broadband Internet access over power lines. 

Commercial transactions over the Internet have also exploded. A recent study by the National Retail Federation concluded that Internet sales grew from $176 billion 

in 2005 to $220 billion in 2006, a 25 percent jump that outpaced projections.4 The 

survey projects online sales for 2007 will jump 18 percent to $259 billion. According 

to one of the survey’s senior analysts, ‘‘[t]his strong growth is an indicator that online retail is years away from reaching a point of saturation.’’ 5

The rapid pace of innovation in the Internet and telecommunications industries 

makes it difficult to define accurately these complex and ever-changing services. 

Congress made the original moratorium temporary in part for this reason: to provide Congress, industry and state and local governments with the ability to revisit 

the issue and make adjustments where necessary to accommodate new technologies 

and market realities. With continued questions as to the scope of the moratorium, 

the ongoing evolution of the Internet and its developing role in commerce, a temporary extension of the moratorium remains the best way for Congress to avoid any 

unintended consequences that may arise from a permanent moratorium. 

Another reason to support a temporary extension is that making the moratorium 

permanent would establish a troubling precedent that distorts the state-federal relationship. As mentioned previously, governors generally oppose federal efforts to 

interfere with state revenue systems because such interference undermines a states 

sovereign authority to provide government services. A more immediate consequence 

of a permanent ban on state taxes is the increased pressure Congress would receive 

from other industries seeking similar preemptions of state laws. Legislation to impose a moratorium on state and local cell phone taxes and efforts to dictate state 

nexus standards for business activity taxes are recent examples of the types of preVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
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6Mazerov, Michael, ‘‘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. 

emptions strongly opposed by state and local governments that would be bolstered 

by passage of a permanent moratorium. 

CONGRESS SHOULD MAINTAIN THE MORATORIUM’S ‘‘GRANDFATHER’’ CLAUSE

NGA recommends that any extension of the moratorium preserve existing state 

and local revenues by continuing the so-called grandfather clause for taxes imposed 

prior to 1998. The grandfather clause serves two purposes; first, as a protection for 

existing state and local tax revenue; and second, as a means to preserve other state 

and local taxes not specifically mentioned by the ITFA. 

Today only nine states have direct taxes on Internet access that qualify for the 

protection of the 1998 grandfather clause. Those states include Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin. According to Congressional Budget Office estimates from the 2004 ITFA extension, eliminating the grandfather clause will cost those states between $80 million and $120 million annually. While these amounts may seem insignificant in 

terms of federal dollars, balanced budget requirements at the state level require 

that any unanticipated loss of revenues must be made up by either cutting services 

or raising revenues. These losses also are high enough to make the elimination of 

the grandfather clause an unfunded federal mandate under the Unfunded Mandate 

Reform Act. Any extension of the moratorium should therefore preserve the grandfather clause so as not to reduce existing state and local tax revenues. 

The grandfather clause also serves as an important protection for all state and 

local taxes that indirectly affect providers of Internet access. Under the ITFA, a ‘‘tax 

on Internet access’’ means: 

[A] tax on Internet access, regardless of whether such tax is imposed on a provider of Internet access or a buyer of Internet access and regardless of the terminology used to describe the tax.’’ 

Because a tax on Internet access includes both taxes on users and Internet access 

service providers, some experts interpret the moratorium as applying to both direct 

taxes on Internet access and indirect taxes such as business taxes on a provider of 

Internet access. In fact, the pre-1998 versions of the moratorium expressly excluded 

certain indirect taxes such as income and property taxes from the moratorium. That 

language was later dropped because the grandfather clause applies to all taxes on 

Internet access in force before October 1, 1998.6 Although the 2004 extension does 

preserve the ability of states to impose a tax ‘‘levied upon or measured by net income, capitol stock, net worth, or property value,’’ this list is not exhaustive. Preservation of the grandfather clause is important because it allows Congress to avoid 

having to define those direct taxes subject to the moratorium and any other taxes 

that lie outside the scope of the moratorium. 

S. 1453, the ITFA Extension Act of 2007 

Contrary to H.R. 743, the Permanent Internet Tax Freedom Act of 2007, or H.R. 

1077, the Internet Consumer Protection Act of 2007—bills that would make the existing moratorium permanent—S. 1453, a bipartisan bill introduced by Senators 

Carper, Alexander, Feinstein, Voinovich and Enzi, best reflects the principles for reform set forth above. 

First, S. 1453 maintains the balance between federal authority and state sovereignty by preserving the original grandfather clause and extending the moratorium for four years. 

Second, the bill specifically defines ‘‘Internet access’’ as a service that ‘‘enables 

users to connect to the Internet.’’ The bill includes in its definition of access incidental services such as electronic mail or instant messaging. It also recognizes the 

change to the treatment of telecommunications used to provide Internet access that 

was part of the last extension. Finally, it makes it clear that just because a service 

can be provided over the Internet does not mean that the service becomes part of 

the moratorium. The definition in S. 1453 is specific and clear and cures many of 

the problems that exist with the current ITFA definition of Internet access. 

CONCLUSION

Governors remain steadfast in their insistence that decisions regarding state and 

local taxation should remain with state and local officials. The independent and sovVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
29 

ereign authority of states to develop their own revenue systems is a basic tenet of 

self government and our federal system. 

NGA has been working collaboratively with industry to address state and industry concerns with the ITFA. Those talks have helped state government and industry 

representatives more specifically define what should constitute Internet access in 

2007. Like the definition in S. 1453, the new definition is more specific and clear 

and addresses the uncertainties raised by both industry and states. This improved 

definition, however, does not justify making the ITFA permanent. Instead, Congress 

should continue to honor state sovereignty by building upon government and industry’s collaborative efforts, incorporate the new definition of Internet access into a 

temporary extension of the moratorium, and preserve the original grandfather 

clause. 

Ms. SA ́ NCHEZ. We will now begin a round of questioning, and I 

will begin by recognizing myself for the first 5 minutes. 

Mr. Quam, what effect would either H.R. 743, the ‘‘Permanent 

Internet Tax Freedom Act of 2007,’’ or H.R. 1077, the ‘‘Internet 

Consumer Protection Act of 2007,’’ the two bills that were discussed 

in the previous panel, have on State and local revenues if either 

of those were passed? 

Mr. QUAM. If either of those are passed, the concern is that on 

an ongoing forward basis, there is a lot of risk placed on States. 

The current definition and the definition that would be used under 

either bill would include the ability to package other services with 

Internet access and make the entire package tax free. 

This was the key issue back in 2004 when this bill was last authorized; and during that time the question was, what would happen to voiceover Internet services? VOIP ultimately was specifically 

exempted out of fear that all telecommunications taxes could be 

lost under that broad definition. 

Because that definition has not been fixed, Congress has a 

choice. It can keep it and continue to exempt just whatever the 

next technology that is going to move over the Internet is, or it can 

precisely define what the Internet access is and limit the scope of 

this too-early Internet access. 

The fear ultimately would be, the next VOIP may be Internet 

protocol television. And that is a lot of the, say, franchise fees are 

earned under cable. As television moves to an Internet protocol, if 

that was bundled up with Internet access, it would make the entire 

thing tax free. Under a permanent bill, that is much more likely. 

Ms. SA ́ NCHEZ. Okay. And if Congress decided to eliminate the 

grandfather protection for those States that had already imposed 

Internet access taxes, as of 1998, what would be your suggestion 

as to the best way to minimize the effect on State and local government revenues? 

Mr. QUAM. I am not sure I like the premise of the question, but 

for the Chairwoman, I will go with it. 

Ms. SA ́ NCHEZ. Assume a hypothetical. 

Mr. QUAM. Fair enough. 

The most important thing is to recognize the safety—in your hypothetical is to recognize the safety net that the grandfather clause 

put in place. When this was originally drafted in 1998, there had 

been a provision to try to list all the different taxes that should not 

be part of the moratorium. Ultimately, that was taken out of the 

1998 bill, what became the 1998 law, because you had the safety 

net of the grandfather clause protecting all those taxes, so it was 

redundant. 

30 

If the grandfather goes away, that safety net is important. Unless Congress believes that all taxes should fall under this moratorium with regard to providers of Internet access—and, again, the 

definition of tax is quite broad; there are a few exceptions—then 

a safety net has to be there so that Congress tells States and, 

frankly, companies exactly what it means—what taxes can be applied, what taxes cannot be applied even to a business that is offering Internet access. 

Ms. SA ́ NCHEZ. Okay. 

Ms. Garwood, State advocates whom we heard from have indicated that the loss of the grandfather protection would cause about 

$150 million revenue loss and that this loss would affect local government’s ability to hire, for example, more police officers and fire 

fighters, pay for road improvements and fund other community 

projects. 

How do you respond to those legitimate concerns of State and 

local governments? 

Ms. GARWOOD. Congress adopted a national policy in 1998, and 

we are a decade later, and States have known that this is an issue. 

If the grandfather continues, then we allow disparity between consumers from one State to another; and the consumers that are in 

the States that have been grandfathered have not had the benefit 

of Internet access without tax on it. It is now the time and there 

has been a lot of warning coming forth that these grandfathers 

would need to go away. 

On the point that David raised about the definition of tax, we 

disagree on the impact of the grandfather being eliminated on that. 

The definition of tax was an issue for 2004. There was a lot of work 

put around it to get a clear definition, and I think the logic doesn’t 

hold true in that many States have put in new taxes since 1998 

not related to Internet, and this definition of taxes have not protected that. 

So we think there is a clear definition of tax on Internet access, 

and we think the removal of the grandfathers does not create an 

issue. We can’t allow the definition of tax to be manipulated in a 

way that it will undermine the intent of the moratorium. So we 

have those concerns. 

Ms. SA ́ NCHEZ. Thank you. 

My time has expired, so I would invite Mr. Cannon for 5 minutes 

of questions. 

Mr. CANNON. Thank you. 

Ms. Garwood, When Mr. Quam was talking about negotiations, 

you were nodding; and that didn’t get in the record. You nodded 

again. Would you mind just saying—let me just ask the question. 

You are discussing these issues, industry is discussing these issues, 

and we have advanced in actually redacting something that will 

work. 

Ms. GARWOOD. Yes, we do have an agreed-upon definition between FTA, NGA and the Coalition. It addresses the concerns of 

the Coalition related to the taxation of the backbone of the Internet. And while we believe the 2004 bundling language that was put 

in addressed the States’ concerns, we did agree to work with the 

States to further define Internet access in a way where they are 

comfortable, the Coalition is comfortable, and we have language. 

31 

Mr. CANNON. This is an extraordinarily complex process. 

I note that Mr. Watt was here earlier, and we worked very closely together on many of these issues last time around, and I think 

for a long time we actually had hopes that we would be clear on 

VOIP. But that came to a dramatic stop or halt in the other body. 

So, recognizing the complexity, we are working together with you 

on that, my staff and the Committee staff and the Chair staff; and 

we are hopeful that we can get a bill that will actually advance the 

clarity on this issue so that we can move forward. 

Mr. Quam, I would like to ask you a question. Thank you for 

being back. We appreciate your involvement and work and perspicacity on this issue. 

But one of the things that I think is amazing is that we have 

got State and local revenues going through the stratosphere here 

recently. That in significant part is due to e-commerce and the new 

economy largely driven by the Internet but also by technological 

advances of computers. You would agree with that—— 

Mr. QUAM. The Internet has certainly been a boom to the economy, no question. 

Mr. CANNON. I had this discussion with the bricks and mortar 

guys and how they are doing better and how the fact that the 

Internet works is driving that to some degree. 

For purposes of taxation, we do have now some distance and 

some perspective that we didn’t have in the past. Over the last 10 

years, L.L. Bean, for instance, which was a catalog company at one 

point—I don’t know. I haven’t looked at the statistics. They are all 

over Utah. My guess is they are a national company, and there are 

virtually no States that can tax them because they already have 

nexus. 

What I would like from you here is a little perspective on what 

the States ought to be doing to encourage the kind of growth that 

happens because you get a multi-channel distribution and therefore 

the ability to tax and why that is good for the economy and then 

why we ought to be careful as we think about what we tax on the 

Internet. Do you have thoughts? I know you have thoughts. Would 

you mind sharing them with us on that? 

Mr. QUAM. Thank you, Congressman. You are right. These are 

very complex issues. 

As you well know, here we are talking about tax of Internet access, and too often that does get confused with other transactions 

over the Internet. The sales tax issue—I am sure if Mr. Delahunt 

was here, he would speak about the streamlined sales tax initiative 

and how that is a proactive way in which States have tried to address that national issue to really minimize the difference between 

bricks and mortar and Internet stores. You do talk about a recent 

phenomenon just in the last 5 years of what we call bricks and 

clicks, where all of a sudden bricks and mortar stores are going on 

line and where you might order on line but then you go to the store 

to pick it up, maybe you go to the store to get it serviced. And that 

largely has been read to create the type of nexus where sales tax 

can be collected. 

Mr. CANNON. May I interrupt your thoughts to direct it particularly? What we are talking about here is access to the Internet, and 

that is the most foundational tax and, therefore, it seems to me the 

32 

tax we need to be most careful about constraining. And in particular that is what I would like your thoughts on. 

Mr. QUAM. Again, we have come up with an extension of the 

moratorium. So those protections will remain in place. 

With regard to the Internet itself—and I think we talked about 

this a little bit in May—there is a couple of studies that said that 

tax on Internet—and we happen to have a laboratory here since we 

have nine States who kept it. But the GAO and a study out of the 

University of Tennessee said those taxes had no bearing on 

broadband penetration. And as a matter of fact, the recently report 

out of the Center on Budget and Policy Priorities listed the tax 

rates for all those countries ahead of the United States. 

Mr. CANNON. My time has expired. Madame Chair, may I ask 

unanimous consent just to refine the question? 

Ms. SA ́ NCHEZ. Without objection. 

Mr. CANNON. The issue is not so much broadband penetration. 

We have sort of been over that and the effect. It is the chilling of 

the larger environment that I would like you to respond to. In 

other words, the fact that we have grandfathers, the fact that we 

don’t have a permanent Internet moratorium in some way—it obviously chills. 

I don’t think there are any quantitative studies out there that 

deal with this, but one looks at the economy that is booming and 

says, what are the little impediments out there? You can’t identify 

their total effect. But is there an effect by these little impediments 

like a grandfather or like the fact that it is not permanent? 

Mr. QUAM. I think those studies show for those grandfather 

States this has not been an impediment to people getting on the 

Internet. 

Mr. CANNON. You are right in the answer, and what you said is 

correct, but I don’t think that is responsive to the question. But I 

see my time has expired and will yield back, Madame Chair. 

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

At this time, I would like to recognize the congresswoman from 

California, Ms. Lofgren, for 5 minutes of questions. 

Ms. LOFGREN. Thank you, Madame Chairwoman. 

I don’t have probably 5 minutes of questions, but I do want to 

make sure that whatever discussions have occurred between the 

various interested parties, make it very clear that the Internet 

backbone is not subject to taxation. I mean, I think it ought to be 

much broader than that personally, but that would be a disaster. 

Do both of you feel confident that we are going to avoid the taxation of the backbone in whatever language you guys are looking 

at? 

Ms. GARWOOD. We have language that does that. It is a very 

strong point that we had, because we do have States from the 2004 

amendments that have taken aggressive positions that they continue to tax the Internet backbone. We think it is important to once 

again make it very clear that that cannot continue, and the language that we have we think accomplishes that. 

Ms. LOFGREN. I do agree. That is good news. 

I can recall, as I mentioned to our first panel of witnesses, being 

in local government; and it is oftentimes a tough position, especially in California. You really don’t have an ability to do—I mean, 

33 

since Prop. 13, property taxes are simply—you could have a hundred percent vote of your electorate and you can’t do anything. 

So I do understand there is a revenue need and there are important services. But it is easy to feel the pressure of needing to raise 

the funds for essential services and to lose sight of the broader economic value of the Internet in telecommunications, because I really 

believe that the prosperity that has lifted up our Nation is so much 

related to the development of technology, and our future, really, 

our prosperity is going to be tied to that as well. 

So I think, to make sure that this is not tempting to States and 

localities, it is an obligation that we have to preserve our opportunity to develop our high-tech sector; and I hope that we can have 

the broadest definition and a permanent moratorium. I think that 

would be the best service we could do for all our States, all our 

counties and cities and for the economic future of the country. 

So I thank the Chairwoman. 

Ms. SA ́ NCHEZ. Thank you, Ms. Lofgren. 

At this time, I would like to recognize the gentleman from Tennessee, Mr. Cohen. 

Mr. COHEN. Thank you, Madame Chair. 

First, I have got a question; and I am not sure if I should address 

it to the lady from Time Warner or to our friend from the Governors Association. But is there any Federal law on taxation of 

cable television services or is that strictly up to the States? 

Ms. GARWOOD. The States. 

Mr. COHEN. Strictly? 

Ms. GARWOOD. Uh-huh. 

Mr. COHEN. Let me ask you this. I am a sponsor of the bill that 

says there should be a permanent moratorium. I agree with Congresswoman Lofgren. I think that access to communications and 

speech should not be taxed, and I just wonder why—and it would 

probably be difficult politically—but why the Federal Government 

hasn’t had some limitation on the State and localities’ ability to tax 

cable television, at least to the basic service rate. 

Has that, to the best of your knowledge, never come up? What 

do you think about that? What is the difference in the Internet and 

cable TV basic service as far as the right of people to be able to 

get ideas and to have access to certain news and information? 

Ms. GARWOOD. I would agree with your theory, and I would say 

that some States do not tax basic service cable for that reason. And 

it has been a State decision. It has not been something that has 

been federally preempted at this time. 

Mr. COHEN. And I know that Mr. Quam—is there any tax at all 

that the Governors don’t like? 

Mr. QUAM. Congressman, raising taxes is just as difficult on Governors as it is on Congressmen. So I would disagree with your assessment that somehow Governors like all taxes. 

I think the key part here is that State and local revenue systems 

need to be designed and operated by State and local officials, not 

by the Federal Government. 

Mr. COHEN. I understand and appreciate that position; and many 

times I am a States’ rights person, thinking you get better response 

on a local level. But I was a State senator for 24 years. I was a 

progressive one, however. Most Governors and legislators like the 

34 

most regressive tax because it is the easiest thing, is to tax the 

people—don’t tax me, don’t tax me, tax that guy behind that tree. 

That is their philosophy. 

So if the Federal Government can put some progressivity into the 

tax structure and say we think the people should have an access 

to information, which the Internet—it is the worldwide Internet. It 

is not New Mexico’s or Tennessee’s or Los Angeles’s. It is the 

worldwide Internet. I would think we ought to go further and look 

at prohibiting the States and localities from taxing basic cable. 

We didn’t tax when you plugged in your TV and you watched 

Chet and David. We didn’t tax that. But now you have got it coming through the cable, and the States benefit in a regressive way 

so that the people in the lower income levels have to pay, you 

know, this regressive tax. It doesn’t seem fair, does it, Mr. Quam? 

Mr. QUAM. That authority has got to remain with the State and 

local officials. If the citizens don’t like the tax that is applied by 

State and local officials, then there are elections for that. 

I have had Governors say before the most important thing in 

them running their States is really for the Federal Government, especially in revenue systems, to stay out of the way and they can 

do the right thing. The characterization may be accurate from your 

experience. However, I think a lot of Governors would disagree in 

that State and local officials really are interested in doing the right 

thing. 

In the hearing before, Congressman Cannon, we talked about, 

last year, what is the most important thing that States could do 

or that the Federal Government could do with regard to communications taxes in general. My answer at that time is the same as 

it is today, and it is don’t impede the State’s ability to modernize 

their own tax systems. 

If Congress steps in and interferes, that actually hinders the 

ability of State and local governments to make other choices and 

to modernize some of the tax systems that are old. 

Mr. COHEN. But if you were progressive, as I am, and you had 

a ban on basic cable television service, that would force the Governors and the legislators—and many of them are wonderful people 

and good progressives and even good nonprogressives, regressives, 

so to speak—that they would then be forced to have a more humane and progressive tax system because this easy one would be 

taken away from them. 

Mr. QUAM. I think you would also have a very serious problem, 

especially at the local level, where a lot of those taxes—and this 

goes to the principle of do no harm. When Congress acts under the 

commerce clause authority, there are real consequences at the 

State and local level, in particular because cable franchise fees are 

a more local issue than anything else. But that is starting to 

change in some States. 

You are talking a significant tax base that goes to fund some of 

the basic services of government. So running those governments 

into a cliff and saying, well, we are going to take that one away 

from you actually hurts the basic services of government. That is 

why those decisions must remain at the State and local level. 

Ms. SA ́ NCHEZ. The time for the gentleman has expired. 

35 

Mr. COHEN. As I have learned, when the time expires I yield 

back the remainder of my time. 

Ms. SA ́ NCHEZ. And, of course, we have saved the best for last. I 

would at this time like to recognize the gentleman and all-around 

wonderful colleague from Massachusetts, Mr. Delahunt, who has 

been patiently waiting to be recognized for his questioning. 

Mr. DELAHUNT. Well, thank you so much for your kind observations, inaccurate as they may be. 

Mr. CANNON. The minority endorses that recommendation, by 

the way. 

Mr. DELAHUNT. Well, if I can take those words and use them 

sometime in a different form, I will remember them. 

We have been dealing with these issues now for an extended period of time; and I tend to agree in principle with my dear friend 

and colleague to my left, Congresswoman Lofgren. But the reality 

is we have a significant problem. 

And I heard your testimony. I was watching you, Ms. Garwood, 

on TV; and you really didn’t respond to a previous question about 

what do we do about the loss of revenue for the States. I mean, it 

really presents an incredibly serious problem. Because what we do 

when we support the moratorium, whether it be permanent or temporary, whether it eliminates the grandfathered taxes, you know, 

on the States that currently have them, we have to address it. I 

think it is a responsibility by this Congress if we are going to limit 

the options of the individual States. 

My proposal has been the adoption of the SST, the streamlined 

sales tax issue; and I am pleased to note that the Chair of this particular Subcommittee has indicated that she will hold a hearing on 

that issue. And there is a nexus between those two. 

Let me pose a question to Mr. Quam. I think your testimony was 

that the loss of revenue to the States, if the grandfathered taxes 

were eliminated, would be in the neighborhood of $150 million. Is 

that accurate? 

Mr. QUAM. Yes, for the original grandfather States, yes. 

Mr. DELAHUNT. Yet, in 2008, it is estimated by the Center for 

Business and Economic Research located at the University of Tennessee that the loss of revenue in terms of the sales tax in 2008 

would be somewhere between $22 billion and $34 billion. I mean, 

in the sense of proportionality, the States have a much more significant interest in resolving that particular issue. Is that a fair 

statement? 

Mr. QUAM. It is. 

Mr. DELAHUNT. I mean, it is clear and obvious. And while I don’t 

think there is anybody that doesn’t support e-commerce and it is 

the wave of the future, I also have a concern about mom and pop, 

those small businesses that for whatever reason don’t have the resources or the infrastructure, the capital, the talent and the expertise to sell their products and services on line. They are at a competitive disadvantage. 

And it is more than just dollars and cents, from my perspective. 

I mean, many of those small businesses really are an integral part 

of the fabric of a community. 

You know, I always use the example of the independent drugstore where you could, you know, go in when you were a child comVerDate Aug 31 2005 11:06 Nov 25, 2008 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 H:\WORK\COMM\072607\37009.000 HJUD1 PsN: 37009
36 

ing home from school and the proprietor would be the sponsor of 

your little league team and knew your family. You don’t do that at 

CVS. 

So there are a lot of issues here. How do we make up for that 

lost revenue? Ms. Garwood? Yeah, go. 

Ms. GARWOOD. My position would be that there is no evidence of 

States that don’t tax Internet access struggle with revenue to pay 

for schools and roads. 

Mr. DELAHUNT. Let us understand that we are just a bit off that 

right now. We are talking about the collection of the sales tax 

through e-commerce. How do we make up the $22 billion or the $33 

billion? Do we just ignore it and pretend? Do we just continue to 

focus in on the—I am with you. I am with you on the moratorium. 

I am with you on this. What do we do? Tell us what we do to make 

up the revenue loss. 

Ms. GARWOOD. Well, I would say our Coalition has a varied 

group of companies, some supportive of streamline, some not. And 

our position is that, while we understand what you are—— 

Mr. DELAHUNT. What you are telling me is that you don’t have 

any sense of—the Coalition that you represent—I am not saying 

they don’t care—— 

Ms. GARWOOD. It is not that we don’t care. 

Mr. DELAHUNT. But they don’t care. 

Ms. GARWOOD. With the Internet tax moratorium, we have a 

deadline. We have November 1, 2007, upon us quickly. And we 

think this bill, the Internet Tax Freedom Act bill, it is very important for it to be a clean bill and that attaching streamline or other 

kinds of—— 

Mr. DELAHUNT. And we can handle that sometime in the future. 

Ms. GARWOOD. Well, I am just saying I don’t think we will meet 

the deadline of moving this forward if we attach other issues to the 

Internet tax moratorium. 

Mr. DELAHUNT. How would you make up the loss of revenue as 

far as the loss of sales tax revenue? 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

Mr. DELAHUNT. Can I ask for unanimous for another minute? 

Ms. SA ́ NCHEZ. Without objection. 

Ms. GARWOOD. I don’t have a solution to your problem. I 

can’t—— 

Mr. DELAHUNT. See, it isn’t my problem. That is the point that 

I am making. 

Ms. GARWOOD. The point you are making—— 

Mr. DELAHUNT. The problem is it is the local communities that 

will have to raise the property tax in Massachusetts, for example, 

or in Florida. These are States with a significant portion of their 

revenue from sales tax. It is all of our problem. 

I mean, I understand you are here, you are paid by the Coalition, 

and you are doing an excellent job representing their position. But 

I think we make a mistake not to examine the context and to understand our collective responsibility to assist the States and local 

governments in meeting this shortfall. Otherwise, we are going to 

have layoffs, and it is going to be everybody’s problem. Because our 

children will suffer as a result of layoffs of teachers and police and 

37 

fire and all of those services that directly impact the citizens that 

we all represent. 

Ms. SA ́ NCHEZ. The time of the gentleman has once again expired. 

Mr. CANNON. Madame Chair, I would like to ask unanimous consent to include in the record that Wall Street Journal—I think this 

is an online article—dated June 11, 2007, which points out that 

State tax collections were $1.1 trillion in 2005, 81⁄2% higher than 

in 2004. 

I think the resolution of the gentleman’s problem is increased 

revenues, not grasping at every source, but helping—and this is 

where Mr. Quam and I have disagreed with great regularity; and 

I think I have been proven right despite the particular studies. 

We have a remarkable economy. We ought not kill the golden 

goose. At least at the minimum what we need to do is make sure 

we don’t—— 

Mr. DELAHUNT. Would my friend yield? 

Ms. SA ́ NCHEZ. The gentleman has asked unanimous consent to 

enter something into the record. Without objection, the article will 

be entered into the record. 

[The information referred to follows:] 

Ms. SA ́ NCHEZ. Does Mr. Delahunt seek unanimous consent? 

Mr. DELAHUNT. I seek unanimous consent for just an additional 

minute to respond. 

I want the economy to improve. I am glad when I see the revenues increase so that we can afford better schools, better 


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38 

healthcare, et cetera, et cetera. But we have had a pretty good run, 

and I understand that right now the States and local governments 

in some cases are doing well and in other cases aren’t doing so 

well, depending on what part of the country and what economic 

group is represented in particular communities. 

But let me tell you, when the economy starts to tank and—turn 

on the news today. The market is down again, and we are going 

to have real serious issues. And if you are in favor of raising property taxes, then don’t do anything in terms of the collection of sales 

taxes. That, in my opinion, will be the most logical outcome. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

I think, Mr. Cannon, we have some work to do in terms of working out a workable solution, but I am hopeful that that can happen. 

I want to thank the witnesses for their testimony today. 

Without objection, Members will have 5 legislative days to submit any additional written questions which we will forward to the 

witnesses and ask that you answer as promptly as you can to be 

made a part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any additional materials. 

Again, I want to thank the witnesses and everybody on the Subcommittee for their time and patience; And this hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 11:34 a.m., the Subcommittee was adjourned.] 

(39) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

40 

RESPONSES TO POST-HEARING QUESTIONS SUBMITTED BY THE HONORABLE LINDA T. 

SA ́ NCHEZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND

CHAIRWOMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW, TO

MEREDITH GARWOOD, VICE PRESIDENT, TAX POLICY, TIME WARNER CABLE


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41 

f 


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RESPONSES TO POST-HEARING QUESTIONS SUBMITTED BY THE HONORABLE LINDA T. 

SA ́ NCHEZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND

CHAIRWOMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW, TO

DAVID C. QUAM, DIRECTOR OF FEDERAL RELATIONS, NATIONAL GOVERNORS ASSOCIATION


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f 


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PREPARED STATEMENT OF JOE HUDDLESTON, EXECUTIVE DIRECTOR, 

MULTISTATE TAX COMMISSSION


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45 


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46 

Æ 


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