Advisory Commission

on Electronic Commerce

September 14-15, 1999

New York City, New York

Executive Summary

- The Commission met in New York City on September 14, 1999, at the Millennium Hotel, 145 West 44th Street, and on September 15, 1999, at the Global Community Sandbox, 55 Broad Street. The meeting Oct. 14 was audio webcast; the Oct. 15 meeting was audio and video webcast.

September 14, 1999

- Representatives from the Committee on State Taxation; the Progress and Freedom Foundation; the Small Business Survival Committee; and GTE addressed the Commission. Discussion followed concerning broadband Internet access; telecommunication rates; and the digital divide.

- Mr. Norquist asked the Commission to consider his resolution on international tariffs the next day. He also withdrew two other resolutions on telecommunications taxes and Internet access taxes and asked that the substance of them be included in the formal report to Congress. He said he had received indications of support for that action from a majority of Commissioners.

- The Commission took up administrative issues, approving the Williamsburg minutes and the Operating Rules and Charter, as amended. The Commission voted to accept an in-kind contribution from the Commonwealth of Virginia for virtual office software. The budget was approved after discussion of various line items and future funding sources. The Work Plan was adopted, and the Commission voted to establish a Report Drafting Subcommittee.

September 15, 1999

- The Commission heard short presentations from representatives from the New York New Media Assn.; Illinova Power; Multistate Tax Commission; CommerceNet; Federation of Tax Administrators; Ernst and Young; Direct Marketing Assn.; Council of State Governments; International City and County Management Assn.; National Conference of State Legislators; National Assn. of Counties; NationalGovernors Assn.; National League of Cities; U.S. Conference of Mayors; U.S. Chamber of Commerce; National Council of State Legislators; Apple Computer; California Taxpayers Assn.; National Tax Assn.; and the Center on Budget and Policy Priorities.

- A discussion of international tariff issues was deferred to the meeting in San Francisco in consideration of an approaching storm.

- After the presentations and a description of a proposal by Mr. Andal, the Commission discussed the following: potential technological solutions to sales taxing problems and their impact on policy options; the actual size of the tax impact on states; the cost to business of collecting and forwarding of taxes; telecommunications taxes; nexus standards; the actual impact of a lack of Internet transaction taxation on Main Street merchants; and the impact on buyers in a destination-based sales tax system.

- The Commission passed a resolution in support of the Clinton Administration's position on a standstill on tariffs on international electronic commerce.

- Considerable time was devoted to a proposal by Governor Leavitt that the Commission consider tax plan proposals from outside groups. The Commission discussed criteria that any such taxation proposal should take into consideration, agreed to allow supplements to the criteria after the meeting and voted to invite interested parties to submit proposals.

Minutes of the Meeting of the

Advisory Commission on Electronic Commerce

September 14, 1999

Millennium Hotel

145 West 44th Street New York, New York

The following members were present: The Honorable James S. Gilmore, III (Chairman); Mr. Dean F. Andal; Mr. C. Michael Armstrong; Mr. Joseph H. Guttentag; The Honorable Paul C. Harris; Ms. Delna Jones; The Honorable Ron Kirk; The Honorable Michael O. Leavitt; Mr. Gene N. Lebrun; Mr. Grover Norquist; Mr. Robert Novick; Mr. Richard Parsons; Mr. Robert Pittman; Mr. John W. Sidgmore; Mr. Stanley S. Sokul; and Mr. Theodore Waitt. The following members were absent: The Honorable Gary Locke and Mr. David Pottruck. Mr. Andrew Pincus was represented by Ms. Mary Streett.

The Chairman called the meeting to order and welcomed Commissioners, guests and the Internet audience listening to the meeting via the audio webcast on the Commission's Web site. He thanked all Commissioners for the hard work that led to the New York meeting and expressed the Commission's appreciation to those who helped make the meeting possible, especially Bill Rudin of 55 Broad Street, the New York New Media Association and New York Governor George Pataki.

The Chairman called attention to the agenda and introduced four speakers who would each make a five-minute presentation following which time would be allowed for questions and answers and discussion.

The first speaker was Annabelle Canning, Vice President for the Committee on State Taxation (COST). Ms. Canning presented the highlights of COST's study on taxes and administrative burdens imposed on general business and telecommunications providers. The study concluded that the tax system is burdensome and no longer manageable. The study proposes simplification options including tax streamlining, uniform rules, avoidance of multiple taxation and simplification of tax administration through unified filing and audits. Ms. Canning urged the Commission to consider the concerns raised in the COST study as it formulates its recommendations.

The second speaker was Jeffrey Eisenach, President of the Progress and Freedom Foundation. He spoke of the study conducted by his organization and noted that some $45 billion in telecommunication taxes were being levied annually. This, he said, amounts to a central and meaningful impact of taxes on the Internet. Mr. Eisenach indicated tax collection was relative simple when there was only one phone company. With hundreds of providers, the administrative problems become more substantial, he said. Taxes, he also said, price some165,000 households out of the broadband market and denied households are disproportionately low-income and rural. Mr. Eisenach concluded by saying that the Commission ought to be as concerned about telecommunication taxes as with interstate taxation of Internet sales.

Ray Keating, Chief Economist with the Small Business Survival Committee (SBSC), spoke of the involvement of small businesses with the Internet. He said bad public policy is the major obstacle to continued robust growth in eCommerce. The SBSC believes efforts to tax and regulate the Internet are recipes for disaster and that government should reduce taxes and regulations across the board on Internet- and non Internet-based companies. He said his research indicates state and local governments do not need more revenue and that trying to tax the Internet would carry significant costs for a relatively small payoff. He said the Commission should focus on lifting government burdens on information technologies. SBSC suggests pro-growth tax measures such as a permanent prohibition against new Internet taxes and elimination of capital gains taxes.

Ed Shimizu, Director, National Regulatory Relations, GTE, addressed the second generation of Internet on-ramps. He said that broadband on-ramps can come in the form of improved phone lines or DSL lines, which are known as an open network, or via major television cable companies and cable modems. When these cable modem services are bundled with affiliated Internet service providers, they are said to be closed systems. Mr. Shimizu said the number of homes with broadband access is forecast to grow from 1 million in 1998 to 60 million in 2008. One analyst speculated that the access would be roughly split between DSL and cable models. He concluded by urging the Commission to take up the policy question of what the split should be between open and closed systems.

The chairman thanked the presenters for their remarks. He then called Commissioners' attention to a letter from the Congress. Addressed to the Chairman and signed by 35 members of Congress who supported the Internet Tax Freedom Act of 1998, the letter gave guidance to the Commission concerning where the Members believe the Commission's focus should be. The Members noted that news reports they had seen indicated the Commission's first meeting focused on how rather than whether to tax the Internet. [Emphasis in the original.] The letter urged the Commission to address other issues within its charter and noted Members would oppose any new taxes on the Internet.

Chairman Gilmore then noted that a number of Commissioners had responded to his call for questions that the Commission should consider. The Chairman asked if a list existed of taxes already applied to the goods and services necessary for the Internet to function as it is. Ms. Canning from COST indicated her study had a comprehensive list. Mr. Shimizu said a complete list probably could not be created because of the speed with which taxes are changing. A discussion ensued about the disparity of various taxes and the issue of open and closed broadband access. Mr. Parsons questioned whether the issue of open and closed access was properly before the Commission. Chairman Gilmore said he did not believe broadband access was considered within the purview of the Commission.

Mr. Keating commented on the general area of business friendly communities and said his annual "Small Business Survival Index" rated states on their public environment for entrepreneurship. He said that the locations that keep their taxes low and are very friendly are creating jobs and growing. He said competition is the answer rather than Congressional mandates. Mayor Kirk questioned whether the studies looked at other parameters like investment and work force quality and higher education as opposed to just taxes. Mr. Keating said he would get a copy of his study to Commissioners.

Discussions continued among Commissioners and with presenters concerning the general issue of telecommunications taxes and the issues of broadband access, types of broadband services and the relative advantages of open and closed providers. Mr. Armstrong indicated he believed open architectures would prevail if for no other reason than the self-interest of cable or telephone providers whose interests lie in enlarging their subscriber bases. Mr. Sidgmore said that a direct correlation exists between the amount of competition in a country and the cost of access facilities and the growth of the Internet. He also asked Mr. Shimizu what GTE favored in terms of unfettered, unbundled access to homes. Mr. Shimizu said GTE favored simple depackaging so consumers could choose among services they wish to purchase.

Ms. Jones asked the panelists what they wanted the Commission to recommend to Congress in the way of telecommunications. Mr. Eisenach said he favored repealing the federal excise tax on telecommunications because localities should look for ways to shift their tax burdens away from industries that are driving economic growth. A discussion ensued between Mr. Eisenach and Mayor Kirk regarding the telecommunications industry. Mr. Lebrun asked what would replace revenues if telecommunications taxes were reduced or eliminated. Mr. Eisenach said that municipalities should focus on efficient structures for tax systems and effectiveness across geographical areas for new business. He said that telecom taxes once met those standards, but do not now.

Mr. Norquist asked how the present level of cable and telecommunications taxes affects the digital divide. Mr. Eisenach said broadband Internet access services are very price sensitive and that 165,000 households with 107,000 children now do not have broadband access because of taxes on telecommunications. He estimated, by 2002, that 1.2 million households with 800,000 children would be denied broadband access due to taxes. Mr. Keating, speaking to the question of making up lost revenues, said information technology increases economic growth so much that revenue feedback comes from other taxes. He also said that state and local revenues have increased 297 percent in real terms from 1962 to 1996. Mayor Kirk questioned the numbers, citing his experience in Dallas, and that of other cities. Mr. Keating said the figures came from the Commerce Department.

Mr. Sokul asked how U.S. tax rates compare with other countries. No one had data, but Mr. Eisenach speculated that taxes in other countries would be higher. Mr. Sokul asked what conclusions should be drawn for recommendations to Congress. Mr. Keating said that the Commission should recommend permanent restrictions on Internet access taxes and tight control of other taxes so the market and competition have a chance to work. Mr. Norquist said the Commission should stand firm against tax policies that restrict public access to the Internet and impact the digital divide. Mr. Pittman said that simplicity would be the key in the administration of any taxing proposal because the resources that businesses focus on taxation could otherwise be used to grow business. Mr. Eisenach said taxes on telecommunications were going to get higher as the telecom industry becomes a multi-product marketplace. He said taxes have gone up 62 percent in 15 years and would get higher. Mr. Andal discussed state-specific telecommunications taxes and said he favored a law that would require a level playing field with other businesses. Ms. Canning said differences from one jurisdiction to another regarding service definitions are complicating factors.

Ms. Jones said, in her experience, federal authorities have not been in a better position than state and local officials to make good tax policy. She asked if the Commission wanted to recommend that the federal government should be in charge of tax policy, and she asked if a consensus existed among Commissioners to what can and what cannot be taxed.

A discussion ensued among Commissioners about telecommunications competition, the diversity of services, variety of new business in the field, and the complication this presents for tax policy formulation. Mr. Keating said he favored the general principles of low taxes fairly applied to everyone.

The Chairman then asked Mr. Norquist to present his resolutions. Mr. Norquist said he submitted three resolutions. One dealt with support for the Clinton Administration's opposition to international tariffs on electronic commerce. The second called for abolition of the three-percent telecommunications tax, originally imposed to fund the Spanish-American War, and the third called for abolition of all Internet access taxes. He said he would ask for a vote on the international issue the next day when the general subject of international taxation was on the agenda. He said he had received indications that a majority of Commissioners supported his other two resolutions, and he asked that the gist of them be included in the final report.

Mr. Parsons questioned the numbers Mr. Eisenach cited for the impact of telecommunications taxes on the ability of households to afford broadband Internet access. Mr. Eisenach repeated the figures above including the estimate that, presently, 165,000 households now did not have broadband access due to taxes. Mr. Parsons then asked if he could conclude that, if the access fee were lowered by, for example, $1, that 165,000 more households would immediately sign on. He also asked if Mr. Eisenach had information about the economic strata of those households. Mr. Eisenach said that people are more sensitive to price changes at lower income levels. He also said access is more expensive to provide to rural areas and, therefore, there is a disproportionate impact there.

Further to the digital divide, Mayor Kirk said that the Center on Budget and Policy Priorities and the Urban League and others had looked at the issue and the advantages that higher income citizens have over lower income citizens by virtue of their access to the Internet. One analysis showed that families earning more than $80,000 annually were seven times more likely to have a computer than families earning $20,000 or less. He said that has the potential for creating an environment in which higher income people have the access to a tax-free environment because of their ability to buy goods and services over the Internet.

Mr. Sokul asked if Mr. Eisenach had figures for households that didn't purchase narrowband Internet access versus broadband access. Mr. Eisenach said he didn't have those figures with him, but he provided other data about the price sensitivity of second line usage, which he related to narrowband access, and said it was not as high as for broadband access, but was higher than the price sensitivity for single lines.

The Commission then agreed to continue with substantive matters the following day and to take up administrative issues.

The Chairman called for a motion to approve the minutes. Mr. Andal so moved, and Ms. Jones seconded the motion. The minutes were approved by voice vote.

The Chairman then called on the Commission's Counsel, Tom Griffith, for a discussion of changes in the Operating Rules. Mr. Griffith elaborated on two technical amendments suggested at the Williamsburg meeting. The first dealt with the process by which the Commission closes its deliberations, and the second makes clear that subcommittees have the power to conduct their business by telephone. A subsequent change to the first technical amendment calls for identification and statement of the reason when there is a call for the Commission to convene in closed session. The Chairman then called for a motion to approve the Operating Rules as amended. Mr. Lebrun so moved, and Mr. Sidgmore seconded the motion. The motion carried.

The Chairman then called for final approval of the Commission's Charter. Mr. Griffith indicated only stylistic and editorial changes had been made since the document was first considered. Mr. Andal moved that the Commission approve the Charter. Ms. Jones seconded the motion. A voice vote was taken, and the motion carried.

The Commission then took up its budget. The Chairman of the Funding Subcommittee, Mr. Armstrong, reported that interim financing had been secured in the amount of $450,000 from the Commonwealth of Virginia and the six corporate members of the Commission. He also said that the Subcommittee had submitted a letter to Congress requesting a federal appropriation and noted that the Subcommittee had proposed a 13-month Commission budget. He said Mr. Novick had advised him that the Administration representatives to the Commission had some issues with the budget that they wished to bring before the Commission.

Prior to recognizing Mr. Novick, the Chairman proposed that the Commission accept the in-kind contribution from the Commonwealth of Virginia for usage of a virtual office software program, which will save the Commission $105,000 that it had budgeted for related software. Mr. Parsons moved that the Commission accept the donation. Ms. Jones seconded the motion, and it carried.

Discussion ensued about the status of funding for the Commission. The Chairman indicated that the Commission's request had been forwarded to Congress and that he believed an appropriation would be forthcoming. He said that Mr. Armstrong and the Funding Subcommittee would be approached about options if the Congress did not provide funding.

Mr. Novick then commented that he believed the budget should be reviewed differently if funding is provided by Congress. He specifically called attention to various in-kind contributions that the Commission has received that were proposed for reimbursement if Congressional funding were provided. He said that he believed the Commission should look at ways to minimize the expenditure of taxpayer funds and said the government could make office space, research assistance and legal services available. He also said the salary of the executive director was higher than that of many senior government officials and out of line with the most recent advisory commission position. He said the Executive Branch representatives on the Commission could not support that level of salary. He recommended that the Funding Subcommittee review the line items in the budget with a view to seeing whether expenditures can be reduced such that the burden on taxpayers is reduced.

Mr. Sokul then moved that the budget be approved as recommended. Mr. Parsons seconded the motion.

Discussion of the budget then continued. Mr. Sokul commented on the Administration's position, and Mr. Lebrun spoke in favor of the budget as presented. Ms. Jones commented on the budget and compared the salary of the Executive Director with the breadth of her responsibilities. Governor Leavitt asked if the Commission should set trigger points that would relate the level of funding with the level of spending. Mr. Armstrong discussed a substitute motion that would authorize the Funding Subcommittee to negotiate with the Administration and, potentially, the Congress for an acceptable level of funding. Governor Leavitt expressed concern that the Commission not enter into contracts or otherwise obligate funds based on a $2 million budget until there is an assurance that the funding will be provided. The Chairman indicated that Commission would not obligate beyond its resources. The Chairman then called for a vote to approve the budget as presented. Messrs. Novick and Guttentag and Ms. Streett voted no; the remainder of the Commissioners voted yes, and the motion carried.

Mayor Kirk questioned if the motion just approved included Mr. Armstrong's recommendation that the Funding Subcommittee be empowered to continue work with the Congress and Administration concerning the budget. The Chairman said that it was always contemplated that the Subcommittee would conduct such discussions, and he ruled that a motion was not necessary to give it that authority.

The Commission then moved to consider adoption of the Work Plan. The Chairman noted that interest had been expressed in a drafting committee to begin the process of a final report. He proposed a five-person committee composed of Messrs. Parsons, Pottruck, Andal and Pincus and Governor Locke with all Commissioners and staffs fully engaged and interacting with the members of the subcommittee.

The Chairman then moved for the Commission to adopt the Work Plan. Mr. Parsons seconded the motion. In discussion, Governor Leavitt suggested that three drafting subcommittees be appointed to correspond with the three major areas of the Work Plan. The Chairman said he had considered that approach, but believed the best alternative was one subcommittee. Ms. Jones commented that she did not believe local government was adequately represented in the make-up of the proposed subcommittee. Mr. Novick said the Administration would concur with the three-subcommittee approach. Mr. Lebrun reflected on his tenure with the Uniform Law Conference and suggested that a drafting subcommittee could be given authority to appoint a task force that could include Commissioners not on the subcommittee.

The Chairman then recapped the actions on the table: his motion for a five-member subcommittee — modified with the addition of two members — Ms. Jones and Mr. Norquist; Mr. Novick's motion for three different subcommittees; and Mr. Lebrun's substitute motion for a single subcommittee with authority to appoint task forces. Governor Leavitt asked if it were contemplated to have subcommittees work on substance within the three broad areas of exploration in addition to the drafting subcommittee. Mr. Novick said that the three subcommittees he proposed would look at each area substantively and, therefore, would logically be the entity to draft information about them. Governor Leavitt then seconded Mr. Novick's proposal after which Mr. Lebrun said he would withdraw his substitute motion pending a vote on Mr. Novick's motion. Mr. Armstrong suggested that a compromise might be for the single subcommittee to have nine members. The Chairman then called for the Commission to vote yes for three separate committees or no for a single, expanded committee. The Commission voted six yes and 11 no, thereby approving a single Report Drafting Subcommittee.

The Chairman then called for a vote on acceptance of the Work Plan. The Commission unanimously approved the plan, after which several Commissioners volunteered to serve on the Report Drafting Subcommittee. The Chairman deferred an announcement of the composition of the Subcommittee until the next day.

The meeting was then adjourned.


Minutes of the

Advisory Commission on Electronic Commerce

September 15, 1999

Digital Community Sandbox

55 Broad Street, New York, New York

The following members were present: The Honorable James S. Gilmore, III (Chairman); Mr. Dean F. Andal; Mr. C. Michael Armstrong; Mr. Joseph H. Guttentag; the Honorable Paul C. Harris; Ms. Delna Jones; The Honorable Ron Kirk; The Honorable Michael O. Leavitt; Mr. Gene N. Lebrun; Mr. Grover Norquist; Mr. Robert Novick; Mr. Richard Parsons; Mr. Robert Pittman; Mr. David Pottruck; Mr. Richard Parsons; Mr. Andrew Pincus; Mr. John W. Sidgmore; Mr. Stanley S. Sokul; and Mr. Theodore Waitt. The following member was absent: The Honorable Gary Locke.

The Chairman called the meeting order and introduced Brian Horey from the New York New Media Association. The Chairman then recapped the proceedings of the Commission from the previous day and commented on the work of the Funding and Work Plan Subcommittees. He noted that the approaching hurricane would be a factor in the day's schedule, thanked the owners of the facility at 55 Broad Street for making it available to the Commission and then introduced Mr. Horey for welcoming comments.

Mr. Horey welcomed the Commission to New York and provided data about the New York New Media Association, Silicon Alley, and the commitment of New York to the promotion of cyber-entrepreneurial activities.

The Chairman then outlined the schedule for the remainder of the day and indicated that all presenters would be invited to make remarks, one after another, with a five-minute-per- person limit after which Commissioners would be able to question them and discuss issues among themselves.

The first speaker was Charles Bayless, the Chairman, President and CEO of Illinova Power. Mr. Bayless spoke about changes in the electric power industry related to deregulation and how industries that are not usually thought of as electronic commerce industries are beginning to "explode into electronic commerce" in the near term.

Dan Bucks, the Director of the Multistate Tax Commission, said it was time to bring to a close the 40-year battle of where sales and use taxes should be collected on remote sales at the time sales are made. The cost of indecision, he said, is an erosion of the tax base that will impact on the ability of taxing jurisdictions to continue to provide services. He said what is needed is: a system that provides for tax collection on remote sales at the time of sale; a system that places minimal or no burden on remote sellers; and a request to technology companies to assist local officials in collecting taxes. The plan would combine advanced technology with a willingness from local governments to pay for the cost of collection.

Kay Caldwell of CommerceNet said the issue is whether the nation should promote a robust, national, electronic marketplace or allow states to impose protectionist tax systems that discriminate against interstate commerce. She endorsed Mr. Andal's proposal which says that states should tax sales taking place within their borders regardless of the location of the delivery of the product and tax the purchase at the rate of the buyer's state. States would collect taxes from sellers and reconcile accounts with other states as necessary. She also urged Congress to take three steps: provide redress for multi-state taxpayers that have unconstitutional taxes imposed on them; create a federal multi-state taxpayer advocate; and make it clear to states that they cannot impose tax collection obligations extraterritorially.

Harley Duncan, the Director of the Federation of Tax Administrators, said that there are several software packages available now that deal with much of the complexity of collection of sales and use taxes on electronic transactions. He said states are also providing a foundation for a 21st century tax system that would deal with eCommerce but noted that technology alone would not be a sufficient answer. Ways to simplify the system are also needed so that sellers can operate at reasonable cost. He urged the Commission to develop a system that adapts both strategic simplification and advanced technologies that would have a goal of a third-party situation where the states and sellers are involved but where the seller is taken out of the collection responsibility entirely.

Jim Eads, a partner with Ernst and Young, made the point that it is too complex to overlay the current sales and use tax system on electronic commerce. He said the cost of collecting sales tax, which falls on retailers, is out of line with the revenue produced. Simplification is necessary, he said, and Congress, not just state and local governments, should promote it. Sufficient lead-time to accommodate changes in tax rates and compensation for retailers who collect the taxes is also necessary, Mr. Eads said.

George Isaacson, the Tax Counsel for the Direct Marketing Association, spoke next. He said that information technology and electronic commerce have been the greatest economic engines of the 20th century and that a healthy economy is good for state revenues. He said that existing constitutional standards are both fair and good national policy. Mr. Isaacson said small merchants would suffer if their access to the electronic highway were an obligation to collect taxes on behalf of 7,000 jurisdictions. He said state tax systems should be simplified before those systems are imposed on remote retailers.

Commissioner Randy Johnson, the Chairman of the Hennepin County, Minnesota, Board spoke along with Councilman Joseph Brooks of Richmond, Virginia, on behalf of the Council of State Governments, the International City and County Management Association, the National Conference of State Legislators, the National Association of Counties, the National Governors Association, the National League of Cities and the U.S. Conference of Mayors. Mr. Johnson spoke of four principles: there should be a level playing field in commerce; the federal government should enable and not impede efficient enforcement of the laws on sales taxes; governments closest to the people govern best, but they need revenue to operate; and sales taxes can be calculated with software that exists today. He concluded by saying state and local governments do not create poor people by collecting taxes; it is inconsistent to give state and local governments responsibilities and not give them the ability to pay for carrying them out. He also said it is unfair for Congress to intervene in the marketplace and create an elite class of merchants because they use the Internet for some part of their transactions.

Mr. Brooks made three points in his presentation. He said that a permanently tax-free electronic marketplace would have a significant impact on the ability of state and local governments to provide essential public services. He also said that giving online vendors a competitive advantage over local merchants is unfair. Thirdly, he said it would be unreasonable to suggest that software to deal with 7,400 taxing jurisdictions could not be created.

Bruce Josten, the Executive Vice President for Government Affairs at the U.S. Chamber of Commerce, spoke next. He urged creation of a simpler, fairer tax system with minimal compliance costs. The Internet has made recent strong economic growth possible. Taxing this wellspring, Mr. Josten said, may not be the best way to raise revenue. With surpluses now and strong growth projections, states will be able to increase tax revenues substantially, he said. He also noted that the current tax system is a mess, and even if a decision were made to tax the Internet, its nature raises questions whether it could be taxed due to privacy and verification issues. Now is a chance to rethink the way we tax, he said. The Internet provides an opportunity for creation of a new tax system for a new economy, one that is not only consistent with economic growth but also conducive to that growth.

Matthew Kisber, is a member of the Tennessee House of Representatives and Chairman of the Finance and Ways and Means Committee. He and Illinois State Senator Steven Rauschenberger, Chairman of the Illinois State Appropriations Committee, spoke next on behalf of the National Council of State Legislators (NCSL). Mr. Kisber said that state lawmakers are concerned about the impact an inability to collect eCommerce taxes will have on state revenues and the unfair competition burden it could place on Main Street businesses. He outlined six NCSL tax reform principles he said should govern tax reform: treatment of market participants in a competitively neutral manner; preservation of state sovereignty; no eCommerce preferential treatment; simplification to reduce administrative burden; remote sellers, regardless of physical presence, to collect and remit taxes; cooperative efforts among states to simplify sales and use taxes.

Senator Rauschenberger endorsed the NCSL principles and said that states should move to a zero-burden collection system and rate and definition standardization. He said he believed state taxation should be broad based and low rate and that the public would not stand for a two-tiered treatment of transactions over time whereby electronic commerce would not be taxed the same as other forms of commerce. He also recommended that the Commission: treat equitably all participants in electronic commerce; provide reasonable timelines for state and local reforms; define the scope of acceptable burdens on remote sellers; and specify standardized rates and definitions.

Terrance Ryan is the Director of State and Local Taxes for Apple Computer. He said any taxing plan should be: simple; scalable; harmonious with other industrialized nations; and should retain the physical presence standard. An origin-based system is the only one that meets theses tests, he said. The system he proposed would require sellers to collect taxes at the rate charged at their location. He said he did not believe sellers moving to a low or no tax area should be a concern.

Fran Smith from Consumer Alert spoke next. Ms. Smith discussed how individual community characteristics impact decisions people make about where to live. She mentioned varying jurisdictional tax rates, policies and public services and noted consumers were free to take these issues into consideration as they weigh the relative desirability of different communities. She said Consumer Alert supported this creative tension. She also spoke about the government's collection of personal banking information and said it concerned many people. She urged the Commission to make consumer privacy issues paramount.

Gregory Turner from the California Taxpayers' Association was the next speaker. He said his organization promotes business and electronic commerce in particular. He said the record surpluses in California of the past few years could be attributed to growth in electronic commerce. One of the biggest problems facing business now is differing interpretations of Supreme Court cases by independent jurisdictions, Mr. Turner said.

Gary Cornia and Kendall Houghton, co-chairs of the National Tax Association's (NTA) Communication and Electronic Commerce Tax Project, spoke next. Mr. Cornia introduced the statement and called on Ms. Houghton to continue via amplified telephone connection. Technical problems prevented Ms. Houghton from finishing her statement, and Mr. Cornia completed it. He said that the NTA's discussion of sales and use tax rates focused on the challenges of developing one rate per state applicable to all commerce involving taxable goods and services within a state and, secondly, ensuring the protection and equitable distribution of revenue to local jurisdictions. The project examined how the sales tax system could be made less complex and, in general, concluded that many improvements could be made in the current system. He said that improvements might include a uniform process of vendor registration, uniform sales and use tax returns and uniform laws regarding bad debt, among others. Mr. Cornia also said that, as central working tenet, the NTA Project believed that nothing is agreed to until everything is agreed to. Therefore, he said that several consensus viewpoints from the Project should not be viewed in isolation or represented as a conclusion of the study as they were tentative and preliminary conclusions. He said he believed the NTA project was an excellent first step toward meaningful exploration and potential resolution of numerous electronic commerce tax policy issues, and he encouraged the Commission and others to determine whether and how to implement the various proposals presented in the NTA project.

Michael Mazerov is a Senior Policy Analyst with the Center on Budget and Policy Priorities, an organization that studies government programs and public policy issues that impact low-income Americans. He said the issue to be resolved is whether the physical presence nexus standards were to be preserved or whether a compromise could be reached between the Internet industry and remote sellers and state and local governments to trade abandonment of the nexus standard for substantial simplification and standardization. He said the Internet tax exemption is a loophole that has three negative impacts on low-income Americans. First, he said, they will continue to pay a disproportionate amount of sales tax because of a lack of resources or desire to shop online. Second, governments will try to preserve a target level of sales taxes as the sales tax base erodes and the disproportionate share of sales taxes paid by the poor will increase in absolute terms. Lastly, he said state and local governments will lose up to $15 billion annually in sales taxes on catalog and Internet sales, which will impair the ability of some jurisdictions to meet demands for educational funding and other services. Therefore, he urged the Commission to consider whether, as a matter of policy, the nexus standard, which, he said, permits the de facto Internet tax exemption, should be preserved.

After a break, the Chairman announced that the schedule for the remainder of the day would be abbreviated due to the approaching hurricane. The decision was made to defer discussion of international issues to the Commission's meeting in San Francisco.

The Chairman then introduced all Commissioners for the benefit of the Internet broadcast audience. He then recognized and introduced the panel of experts who had been invited to attend. They were Larry DeFranco, InContext; Peter Grey, Internet Consumers Association; Walter Hellerstein, the University of Georgia School of Law; Jim Johnson, EIKON Strategies, Inc.; Aaron Lukas of the CATO Institute; Peter McGeough, Seaman Furniture Company, representing the National Home Furnishings Association; Charles McLure of the Hoover Institution; Brian Hanson of Hanson Brothers Fresh Seafood; Mark Nebergall, Software Finance Executive Council; Mark Rhoads, U.S. Internet Council; Frank Shafron, National Governors Association; Joseph Taricani, Interstate Solutions, LLC; Oren Teicher, American Booksellers Association; and Bill Townsend, Holland and Knight, LLP.

The Chairman then began focusing on questions prompted by the group of presentations.

The Chairman asked if there were any satisfactory answers to the question of electronic commerce taxation, given that the National Tax Association (NTA) studied the problem for two years and failed to resolve any issues. Mr. Andal responded to the question by summarizing his proposal. He said that it was a myth that sales taxes across the board are declining and services are affected as a result of electronic commerce. He also said that the situation in the future would not likely change. Citing California, he said that his auditors check on the collection of use taxes; most Internet transactions are business to business; half the remainder is stock purchases or airplane tickets not subject to traditional sales taxes; and that motor vehicles and airplanes are taxed when they are registered. He said the remainder amounts to modest numbers that are not worth collecting. He doesn't see the issue as a problem now or in the future. nexus confusion, litigation and administrative costs is the other large area of concern, he said. Mr. Andal said there were three alternatives to this: trying again, in a Commission/Congressional recommendation to get consensus on the seller's duty to collect and remit taxes; doing nothing and letting the costs and confusion continue; or adopting his plan, which merges the Supreme Court Quill case and Public Law 86272, which refers to income tax apportionment.

Governor Leavitt commented that the themes he heard recurring among presenters were: simplicity; no new net taxes; no burdensome requirements on sellers; no compromise to purchaser privacy; regarding states as sovereign entities; and no special classes of taxpayers. He said the Commission should see if a system that incorporates those features would work and, if not, find an alternative that does.

Ms. Caldwell said she did not believe that a technological solution would work; infrastructure concerns are a problem; and a "level playing field" must consider the exemptions given to local merchants.

Concerning the NTA study, the Chairman said he was struck by one of its positions that nothing is decided until everything is decided. He said that may be too high a standard in the Internet taxation debate.

Mr. Bayless from Illinova Power said that he foresaw a time when millions of people could log on the Internet and buy power. He said his industry had no position on Internet taxation, but would not want to have to deal with more than 7,000 different jurisdictions.

Mr. Pottruck disagreed with Mr. Andal that the problem is small and sill remains so. He said he remembered Governor Leavitt mention in Williamsburg that there is a point in time where a problem is big enough to see, but small enough to solve. He said competition and innovation are creating the economic boom in America with the Internet being a vehicle. He said we should seize on the benefits of competition and innovation and use that as an opportunity to fix the tax system.

Mayor Kirk said those who say that states are flush with cash should ask what those states' unfunded needs are. He also noted that the needs of local jurisdictions will continue, and he said that electronic purchases of real goods need to be delivered to purchasers in some way using facilities provided by local governments. He also expressed concern about the ability of local districts to maintain the quality of education that provides the intellectual fuel for the cyber industry.

The Chairman said that is important to remember, as the issue is debated, that consumers, not business, would be paying any sales taxes, but that there is a cost of compliance to business of any taxing system that might be imposed.

Mr. Norquist commented on the taxes that are imposed on the telecommunications industry and noted that part the Commission's job is to focus on the present level of taxes. He urged the nation's political leadership to reduce state, local and federal telecommunications taxes. He also urged states to agree on a uniform sales tax law.

Mr. Harris commented on themes he said he heard mentioned by panelists and noted that the digital divide is a matter of concern that should be addressed. He cautioned that any recommendations should not exacerbate the divide.

The Chairman then said that the lack of collection of taxes on catalog sales has not had a major impact on municipalities. He asked if a lack of tax on Internet sales in the future would have the same impact. He also asked, if a national system were set up, what would prevent sellers from going offshore to avoid U.S. taxes.

Governor Leavitt asked if the Commission views its role in part to determine if a sales tax system can work technologically. If it cannot, then a separate set of problems needs to be addressed, he said. If it can, then policy questions about whether to apply the system are in order.

Ms. Jones commented on the complication of differing state rates and who pays them and when. Some have said the Internet would be a benefit to local retailers because of their involvement in it, while others have said they will suffer due to the competition. She said she had not heard an actual retailer describe the actual impact. She asked how many sellers today are collecting taxes even though they are not required to do so.

Mr. Guttentag commented on the NTA's study and asked if a way could be found to take advantage of the process they went through so the Commission could be apprised of areas on which the Project could and could not reach agreement.

Mr. Brooks advised the Commission to concentrate on issues that are solvable. He echoed a statement from the Commission's first meeting and advised it not to let the desire for perfection destroy that which is good. He said that all segments of the economy are not participating in growth at the same level. He gave the example of the City of Richmond's growth, which lags the Commonwealth of Virginia.

Ms. Caldwell said the NTA's study focused almost exclusively on what it would take to make a universal obligation to collect taxes by all business workable. She said she thought that was the primary reason why the Project was unable to come to a resolution with which all could agree. She said the Commission should look at other possibilities. She urged consideration of Mr. Andal's proposal.

Mr. Parsons commented on the debate and questioned whether the nexus standard could be used as a basis for taxing remote sales. He said he would like to hear discussion whether taxing eCommerce was really a sensible thing to do. He noted that cattle aren't taxed any longer because it no longer makes sense, and there may be similarities with eCommerce.

Mr. Pittman said he wanted to hear a discussion of the distinction some have drawn between Main Street merchants and eMerchants because he said, in his experience, many of the Main Street merchants have Web sites and it would be interesting to hear from them concerning how much of their business today is electronic and their projections. He also commented on the issue of technological solutions to tax collection and said he had not seen any examples.

Mayor Kirk said that the U.S. Conference of Mayors had distributed information yesterday that listed several software packages that are currently available.

Mr. Sokul said the best signal the Commission could send to Congress is that saving a Depression Era tax system and trying to impose it on a 21st century economy is not the way to go. He said the NTA proposal to overturn Quill in a trade for simplification would have to happen over the objection of state and local officials who for 30 years have favored Quill standards. He said there is no incentive to simplify because the collection burden is not on the tax authority and the people who created the system do not have to deal with. Mr. Sokul also posed a question for NTA Project members concerning the ability of business to recover from states even if they succeed with rulings concerning the constitutionality of tax laws.

Mr. Pincus said he would be interested in hearing from Main Street businesses if, indeed, they exist as a differentiated category. The Chairman identified Peter McGeough of the Seaman Furniture Company as a representative who would be invited to speak after lunch.

Mr. Armstrong then responded to Governor Leavitt's question about the workability of a technical system. He said it could work and it would surely be simpler than the work involved in AT&T's completion of some 40,000 tax forms. He also said that the estimated 35-percent tax burden on telecommunications service was not fair to the consumer, and he also said that the present tax system was too costly for the seller/retailer.

Mr. Sidgmore said he agreed with Governor Leavitt that the primary focus of the Commission should be to determine whether there is a practical solution to the tax problem, since, if there is no practical solution, debate about policy would simply be an ongoing process. He said he believed there would be a technical solution if tax simplification is a given. Then the question becomes, he said, whether it is practical to achieve tax simplification. If it is, then options are available; if it is not, then there is no practical option.

Mr. Norquist disagreed that the question devolves to technicality. He said the question of whether a state should be permitted to levy taxes on people in another state is a political question.

Mr. Sidgmore responded that the arguments against taxation revolve around its practicality. He favored a determination of the practicality first, after which policy could be debated.

The Chairman said he believed questions about practicality were legitimate because the answers may impact on policy choices.

The Commission took a brief lunch break in consideration of the approaching hurricane.

After lunch, Mr. Sokul asked Mr. Isaacson to comment on the issue of remedies for a business from a state when a tax is judged unconstitutional and to comment on the impact of software tax collection systems on the poor and elderly who pay for purchases by check.

Mr. Isaacson said, in a destination-based system, those paying for catalog orders by check would have to compute the tax and fill out a form, which, he said, would be very complicated. Mr. Isaacson then dealt with the issue of tax collection by states. He said the NTA proposed that states audit businesses in their states for collection of taxes in all states. State representatives said this would be impossible, but this, Mr. Isaacson said, is what is being suggested electronic merchants do. Lastly, he elaborated on the theory and practice concerning legal remedies for businesses when state laws are ruled unconstitutional.

Chairman Gilmore then introduced Peter McGeough from the Seaman Furniture Company who represented the view of Main Street retailers concerning taxation issues. Mr. McGeough said that his brick and mortar company could not compete with Internet furniture sellers who are able to undercut him by the amount of the sales tax or more in an industry with profit margins in the high single digits. He said a level playing field is needed and a solution where Internet sellers do not pay taxes is not acceptable to brick and mortar retailers.

Mr. Andal questioned whether the shipping costs for an Internet seller might offset any tax savings making the price to the consumer the same. Mr. McGeough said that eMerchants could have distribution points at various locations. Mr. Andal then asked if that did not make them liable for taxes in the sates where warehouses were located. Mr. McGeough said that would be the case, but another option, he said, would be for manufacturers to drop ship directly to consumers. He said it simply was not as easy for a furniture company to operate a Web site for the sale of goods as it might be for other retailers because of the handling involved and the small profit margins.

Governor Leavitt then spoke of his experience at the recent National Governors Association (NGA). Thirty states expressed interest in sending experts to a meeting where the technical questions would be examined related to making a sales tax system work for the 21st century. This was much more interest than he had expected. He moved that the Commission take 30 minutes to hypothesize what an ideal system might look like. The criteria would then be given to the NGA, which would be asked to report at the San Francisco meeting. Mayor Kirk seconded the motion. In discussion that followed, Mr. Norquist suggested that the Commission deal with the motion he presented regarding international issues. Governor Leavitt offered to withdraw his motion and reintroduce it or to permit the Commission to deal with the resolutions first. The Chairman opted to take up the resolutions.

Mr. Norquist called attention to the copy of his resolution, that had been provided to each Commissioner. The resolution is a statement of support for the Clinton Administration's advocacy of a standstill on tariffs on the Internet.

Mr. Norquist also referenced two other resolutions that he had presented that called for repeal of the three percent federal tax on telecommunications and a prohibition of taxes on Internet access charges. He deferred discussion of these until a later time.

Mayor Kirk seconded Mr. Norquist's international tariff resolution. Ms. Jones questioned the amendments to the resolution suggested by Mr. Novick. Mr. Norquist said they were accepted as friendly amendments. Mr. Novick said the Administration would normally be concerned about the Commission adopting resolutions that it hadn't studied, but he supported this resolution as consistent with a long-standing U.S. government position. Mr. Lebrun said he did not think it was the role of the Commission to take positions on such resolutions. He indicated he would vote against this resolution as a mater of objection to the policy it supported. Mr. Norquist spoke in favor of his resolution as a correct and good position that the U.S. government is taking.

The Chairman then called for a vote. All Commissioners present voted for the resolution except for Mr. Lebrun.

The Commission then returned to a discussion of Governor Leavitt's proposal.

Mr. Norquist questioned the appropriateness of the involvement of the NGA. Governor Leavitt described the setting for the discussions to which he was referring and said that it would be logical, given the subject matter, to turn to people who run the systems of state taxation because they understand the policy issues and technical challenges involved. He proposed that the Commission say to the states that they have to solve the problem, given a set of criteria. He offered the following criteria for eCommerce taxation proposals as a starting point: radical simplification; no new taxes imposed on the Internet itself; removal of financial and logistical burdens from sellers; no compromise of purchaser privacy; acknowledgement of the states as sovereign taxing authorities; a level playing field with tax treatment of purchases as close to equal as possible with no discrimination of how people buy, but if they buy. Governor Leavitt said he would be open to changes in these criteria or the addition of others. Mayor Kirk suggested that technological feasibility be added to the list.

Mr. Pottruck said asking only state tax collectors to submit a plan would create a closed loop, and he suggested that other people might want to comment on taxing feasibility. He also suggested that perhaps a group of Commissioners would like to volunteer to make a recommendation that would be in accordance with the criteria list. Governor Leavitt said he would make such an amendment to his proposal if the Commission were so inclined.

Mr. Sokul echoed Mr. Pottruck's concerns about only hearing only from state tax representatives with a protectionist interest. He also suggested that international scalability/effect on global competitiveness be added to the criteria list. Governor Leavitt agreed that this was a good addition.

Mr. Parsons summarized Governor Leavitt's recommendation and suggested the list of criteria be developed and offered to at least the NGA group and, perhaps, others to see if they could suggest a proposal that would be attractive or at least evaluatable.

Mr. Lebrun spoke in support of Governor Leavitt's proposal. He said that any Commission recommendation would have to be acceptable to Congress and to state and local governments.

Governor Leavitt said that the criteria could be fixed and that some number of groups could be approached and invited to propose plans.

Mr. Pottruck suggested adding to the criteria list a requirement that the system avoid discriminating against out-of-state business that cannot defend themselves and that a safe haven be provided from oppressive auditors. Governor Leavitt suggested that an additional criterion should be elimination of multiple audits, to the extent possible.

Mr. Pottruck then suggested a modification of the various proposals under discussion and recommended that the Commission challenge any organization to put a plan together that meets the criteria. He also suggested technical requirements for submissions and recommended that the support of several Commissioners be required.

Mr. Waitt then spoke in favor of Governor Leavitt's proposal as modified by Mr. Pottruck.

Mr. Armstrong also spoke in favor of the proposals under discussion, but recommended the Commission take 48 hours to conclude and confirm the criteria. He also suggested that the criteria include common definitions, a requirement for a simplified tax structure, an efficient collection framework and a specified timeframe for implementation.

Mr. Sokul agreed that a general call should go out for proposals, but he recommended that the Commission let those submitting proposals determine the criteria.

Mr. Novick suggested that the Work Plan and the proposal on the table were complementary. He recommended that the list of criteria be an evolving list to which additional criteria could be added.

Mr. Norquist said he favored the idea of seeking comment from governors and other parties. He said he believed the criteria were still being determined, and he recommended that they include a requirement for constitutionality, preservation of Native American sovereignty and a requirement that plans call for no net tax increase nationally. He also asked that a criterion be reduction in state and local taxes on telecommunications.

Mr. Pottruck said that he believed that the discussion about criteria and the process for inviting proposals fell within the Work Plan. The Chairman concurred.

Mr. Sokul suggested, as an amendment to Governor Leavitt's proposal, that a panel on this subject be on the agenda for the San Francisco meeting. Governor Leavitt said he hoped substantial time in San Francisco would be devoted to reviewing submitted proposals. The Chairman, in the absence of objection, said that this proposal was adopted.

The need for a formal vote on the criteria was then discussed. Governor Leavitt asked the Chairman if a vote were needed. The Chairman said he did not think one was necessary and asked if there were objections. Mr. Norquist said he understood that the list Governor Leavitt put forth was an informal list on which a vote had not been taken. Governor Leavitt said he believed the Commission needed to establish formalized benchmarks that would be subject to change at any time so that any group preparing a proposal would have guidelines for development of their submission. Mr. Norquist said he would insist on a vote on the "no net tax" provision. The Chairman said he would not be in favor of voting to establish the position of the Commission reflected in a list of criteria based on the previous discussion. Mr. Norquist argued that the criteria list be kept open. Mr. Armstrong said he understood that the Commission could take a couple of days to refine the criteria and noted Governor Leavitt's comment about his openness to supplements to the criteria.

The Chairman moved to formalize Mr. Armstrong's recommendation as a motion to amend Governor Leavitt's motion such that the Commission would take a couple of days to a week to deal with the criteria in a more thorough way. Mr. Norquist seconded this amended motion.

Mr. Parsons asked if Governor Leavitt could review the proposal before the Commission.

Governor Leavitt said he was proposing that the Commission establish, at least as a beginning position, subject to change, criteria for evaluation by various groups that would be invited to provide submissions to the Commission. The criteria he listed were radical simplification; no new taxes; removal of the burden from sellers; no compromise of purchaser privacy; acknowledgement of the sovereign role of states as taxing entities; transparency as to purchasers; avoidance of out-of-state discrimination; international scalability (Mr. Norquist added: "and not adverse to local competitors"); elimination of multiple audits; (Mr. Norquist requested the addition of a reduction in overall taxation of telecommunications — Governor Leavitt said that suggestion may run to a different issue.) Mayor Kirk requested the inclusion of Mr. Pottruck's recommendation of safeguards against out-of-state discrimination — both for audit and oversight and Mr. Armstrong's suggestions of common definitions and a reasonable time frame for development and implementation. Governor Leavitt recommended combining common definitions within the broader call for simplification, and Mr. Armstrong agreed. Mr. Norquist added constitutionality and preservation of Native American sovereignty.

Governor Leavitt recommended that there be an authorization for Commissioners to add to or discuss the list over the next few days.

The Chairman then called for the Commission to vote on a general call for submissions from interested parties within the confines of the discussion. The submissions would go to the Report Drafting Subcommittee, which would review them. The Commission voted in favor of the proposal.

The Chairman then listed the members of the Report Drafting Subcommittee and said the Subcommittee would be receptive to anyone's ideas. The members are the Chairman, Governor Locke, Ms. Jones and Messrs. Andal, Parsons, Pottruck, Pincus, Pittman and Sokul.

The Commission then voted to adjourn.