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Second Meeting: Transcript of September 15

previous transcript (September 14)


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       7      ADVISORY COMMISSION ON ELECTRONIC COMMERCE

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      18                  New York, New York

      19                 September 15, 1999

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       1                 P R O C E E D I N G S

       2               CHAIRMAN GILMORE:  Welcome to the second

       3     full meeting of the Advisory Commission on

       4     Electronic Commerce here in New York City.

       5     It's a pleasure to be with all of you, and

       6     I'm pleased to introduce Brian Horey.  Where

       7     is Brian?  Is he here in the room?  Yes, sir.

       8     A member of the New York New Media Association.

       9     I'm going to call on him in just a moment for

      10     some opening remarks, but first let me say a

      11     few words if I could.

      12               We had our opening session

      13     yesterday in which we had an opportunity to

      14     deal with some of the telecommunications

      15     access issues, and I think we had a good and

      16     fair discussion under the format that we have

      17     been working, and I'm pretty happy about

      18     that.  Just to sum up where we have been, the

      19     first meeting of course was held in

      20     Williamsburg, Virginia.  In that meeting we

      21     went through many of the organizational

      22     issues at length.  We had the opportunity to









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       1     listen to a broad range of policy data

       2     together with written materials which we have

       3     had now for several months, and that laid a

       4     foundation.

       5               Since that time we've had a work

       6     plan subcommittee headed by David Pottruck

       7     who is here with us today.  David, thank you

       8     very much for your work on that.  Two

       9     subcommittee meetings were held by

      10     teleconference very successfully.  The work

      11     plan has come forward which has defined

      12     what we're doing here today.

      13               We've also had an extensive work

      14     going on by the financing subcommittee headed

      15     by Mike Armstrong.  That I think has made

      16     considerable progress, and we're very hopeful

      17     that the Congress will come forward and

      18     appropriate for us the funds that we need to

      19     keep going.

      20               Otherwise, we will do what we have

      21     been doing, and that is rely upon the good

      22     offices of certain members of the Commission









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       1     who have come forward to keep us moving

       2     ahead.  As I said yesterday afternoon, we had

       3     the opportunity to deal with the issues on

       4     access and telecommunications, access type of

       5     issues.  There was a full discussion.

       6               Now, the format that we have agreed

       7     to under our work plan is to ask our

       8     presenters to present in 5 minutes.  The

       9     reason of this is that it is the will of this

      10     Commission that we do most of our business,

      11     or virtually all of our business by way of

      12     interaction with you and with each other so

      13     that we can argue back and forth, we can

      14     discuss the issues in a debate type of

      15     fashion, and particularly utilize our

      16     speakers in a capacity that I think is

      17     constructive.

      18               Now, we have that process that is

      19     available.  I might mention that everyone in

      20     the room is aware that we have a major

      21     hurricane that is approaching the coast of

      22     the United States.  I in Virginia have









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       1     declared a disaster declaration there, a

       2     state of emergency, if you will.  Excuse me.

       3     Not a disaster declaration.  State of

       4     emergency in preparation for this storm which

       5     is already beginning to create some rain in

       6     the Commonwealth, not to mention the states

       7     south of us which is a matter of some

       8     concern.

       9               Many of the Commissioners have

      10     expressed to me that they may have to get out

      11     in time to be able to get back down into the

      12     Washington area, the Virginia area, and so

      13     on, and this is a significant issue for us

      14     today and we should remember that as we go

      15     on.

      16               Just a couple of housekeeping

      17     things.  I will call time pretty close on

      18     the 5 minutes as we go through the day, and

      19     that maximizes the opportunity for the debate

      20     format to go on.  We would ask that each

      21     person identify themselves.  This is being

      22     Webcast and transcribed, and we would ask









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       1     that each person that speaks here today

       2     identify themselves for the record.  I know

       3     that when we get into the give and take it's

       4     hard for us, the Commissioners to do that,

       5     but do the best you can.  Meanwhile, the

       6     presenters should always give us your name

       7     and who you're with before you proceed on and

       8     that way we have that.

       9               Just a small little housekeeping

      10     thing, if everybody can remember to turn

      11     these off when you're done speaking, it'll

      12     help a lot with the Webcast and with other

      13     types of the difficulties of the Webcast

      14     efforts that we're working on.  These are

      15     small matters, but they help us all a great

      16     deal.

      17               I want to thank the Commission.  I

      18     certainly want to express my appreciation to

      19     the fine owners of this building here for

      20     providing us the space for the eCommerce

      21     Commission to meet.  Now we shall turn our

      22     attention to Mr. Brian Horey who is a board









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       1     member of the New York New Media Association, and

       2     one of our hosts for this meeting for some

       3     opening remarks.  Mr. Horey?

       4               MR. HOREY:  Thank you.  On behalf

       5     of the New York New Media Association I would

       6     like to welcome Governor Gilmore, the members

       7     of the Commission, and our distinguished

       8     speakers and guests to Silicon Alley.

       9     For those of you watching and

      10     listening in cyberspace, we are in real space

      11     at the Global Digital Community Sand Box

      12     at the New York Information

      13     Technology Center at 55 Broad Street in Lower

      14     Manhattan.

      15               We are pleased that these important

      16     topics are being debated here in New York and

      17     feel that it quite appropriate that these

      18     discussions take place here.  In the last 5

      19     year, New York has emerged as a leading

      20     center of Internet activity.  Silicon Alley

      21     is now home to over 2,000 new media companies

      22     with an employee base approaching 100,000









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       1     people, and e-commerce is the primary focus

       2     of many of these companies and their

       3     employees.  Silicon Alley is showing

       4     unmistakable signs of success.

       5               In the last year, New York has had

       6     more Internet-related IPOs than any other

       7     city in the country, and these newly public

       8     companies have created over $35 billion of

       9     wealth in the process.  The rate of new media

      10     company formation in New York has accelerated

      11     in the last year, ensuring a steady stream of

      12     future IPO prospects down the road.

      13               While the entrepreneurs of New York

      14     have been busy building their companies, the

      15     State of New York has taken a leadership

      16     position in the area of Internet taxation.

      17     Or I should say, the lack thereof.  Thanks to

      18     the efforts of Governor Pataki and the State

      19     Legislature, New York was the first state to

      20     create a sales tax exemption specifically for

      21     ISP services.

      22               Additional tax incentives for the









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       1     new media industry were enacted this year,

       2     putting New York in the vanguard of

       3     legislative efforts to support the industry.

       4               The New York New Media Association

       5     is very pleased to play host for these

       6     hearings.  The association was formed a

       7     little over 5 years ago to foster the growth

       8     of the new media industry in New York and to

       9     serve the entrepreneurs and creative and

      10     business professionals that comprise the new

      11     media community here.  From an initial

      12     gathering of 20 people at our first cybersuds

      13     event, the association has grown to become

      14     the largest new media trade association in

      15     the country with over 5,200 members,

      16     representing 1,900 companies, and Blue Chip

      17     corporate sponsors including IBM, Sun Micro

      18     Systems, Intel, Lucent, and Microsoft --

      19     supports a wide range of programs including

      20     panel discussions, an annual trade show, an

      21     annual venture capital conference, an angel

      22     investor program, internships, industry









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       1     surveys, state and local lobbying, and work

       2     shops for entrepreneurs.  You can learn more

       3     about NYNMA at www.nynma.org.

       4               Let me conclude by thanking on

       5     behalf of Silicon Alley the members of the

       6     Commission and their staff for taking on the

       7     important issues surrounding electronic

       8     commerce and taxation.  Your deliberations

       9     and conclusions will have a lasting effect on

      10     the industry, and we look forward to

      11     supporting your efforts to create a robust

      12     e-commerce marketplace.  Thank you, Governor.

      13               CHAIRMAN GILMORE:  Thank you, Mr. Horey.

      14     As I've said, this meeting is Webcast and

      15     transcribed.  We have microphones throughout

      16     the room for people who are presenters or any

      17     experts that want to speak.  You just have to

      18     remember to get to a microphone at all times

      19     when you're speaking.

      20               Today we are listening to

      21     presentations on the central issue

      22     surrounding the Commission; by no means not









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       1     the only issue, but certainly a central

       2     issue, and that is regarding local, state,

       3     and federal tax issues associated with

       4     electronic commerce.  After the presentations

       5     we'll being our deliberations and questioning

       6     of the speakers and members of the expert

       7     panel.

       8               This ought to go until about 3:30

       9     this afternoon, including a break in the

      10     middle for about an hour and a half for

      11     lunch.  Following that topic, the Commission

      12     will hear from speakers concerning

      13     international taxes and tariff issues, and

      14     there are some resolutions involved with that

      15     as well.  My best guess is that that may not

      16     take the full time, and that's considering

      17     that we have to get out because of the storm

      18     situation.

      19               That's not necessarily a bad thing,

      20     and we find an opportunity I think to address

      21     that in more depth at a later time.  We have

      22     limited presenters on that issue anyway.









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       1               So, we're I think prepared to

       2     proceed.  We have many interesting and

       3     knowledgeable speakers who are here today who

       4     will make presentations and talk with us.  We

       5     would ask the speakers, when we get through

       6     the speakers, we would you go stand by nearby

       7     though.  We have more speakers on this issue

       8     than we typically would, and more have been

       9     offered by members of the panel than were on

      10     any of the other issues.

      11               So, we have broadened this out

      12     considerably, and we would ask you all to

      13     stand by nearby in case there are questions

      14     to be had from the Commission after your

      15     presentations.

      16               We are interested not only in

      17     hearing from as many organizations as

      18     possible, but also of course debating and

      19     discussion of these issues among ourselves.

      20     Following the speakers, we'll open up the

      21     discussion for deliberation just as we did

      22     yesterday.  I thought it was a format, ladies









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       1     and gentlemen, that worked pretty well

       2     yesterday.

       3               We'll break this into several

       4     panels because of space concerns, of course.

       5     The first panel that is here with us today is

       6     Charles Bayless Dan Bucks, Kaye Caldwell, and

       7     Harley Duncan.  We'll begin with Mr. Bayless.

       8     I understand you are the president and CEO

       9     of Illinova Power.  Is that correct?

      10               MR. BAYLESS:  Yes, sir.  That is

      11     correct.

      12               CHAIRMAN GILMORE:  Please proceed.

      13               MR. BAYLESS:  Thank you.  I have a

      14     presentation which I hope will be appearing

      15     on the screens in just a minute.  The main

      16     purpose of my topic today is to tell you that

      17     there are many industries out there that are

      18     not what are normally considered e-commerce

      19     industries -- beginning to explode into

      20     electronic commerce in the next couple of

      21     years.

      22               On the way down here I just was









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       1     reading a couple of magazines.  I always

       2     throw my magazines under the desk and read

       3     them on airplanes.  "Utility Business," the

       4     lead article, "The Approaching Internet Tidal

       5     Wave": "By the year 2003, only one other

       6     major sector of the economy, computers and

       7     electronics, will be more Internet dependent

       8     than utilities."  "American Gas," two

       9     articles, one entitled, "The Mighty Mouse,"

      10     "The Internet now offers natural gas

      11     customers a new way to pay their bills."  So,

      12     our industry is going to explode.

      13               Historically, our industry was made

      14     up of four segments: generation;

      15     transmission; distribution; and customer

      16     service.  Two of these are being deregulated,

      17     generation and customer service.  Customers

      18     will have the opportunity to choose their

      19     generation supplier, and local facilities

      20     will still perform transmission and

      21     distribution.  Now, this is going to lead to

      22     Internet -- it's one of those unintended









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       1     consequences, but it will.  Electricity is

       2     the ultimate commodity.  It is totally

       3     indifferentiated.  If the president of

       4     Consolidated Edison were here today, he could

       5     not tell you where the electricity in this

       6     building is coming from.  It is coming from

       7     every supplier in the Eastern United States.

       8               The transmission system is like a

       9     large lake.  There are a couple thousand

      10     electric plants pouring electric into the

      11     lake; there are millions of customers taking

      12     electric out of the lake.  You cannot tell

      13     which water or in this case electric

      14     molecules are going to which customer.  It's

      15     totally indifferentiated.  It goes into a

      16     common carrier, and who knows what comes out

      17     the other end.

      18               All we can do is an accounting

      19     treatment that we call ACE.  ACE stands for

      20     area control error.  It's really a fairly

      21     simple concept.  We put a boundary around our

      22     service territory and every transmission line









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       1     that come in, we meter it, and we meter

       2     everything.  We monitor about 2,000 data

       3     points a second to look at ACE.  We take our

       4     generation plus our imports, that's what

       5     we've got available.

       6               We support from that our load, our

       7     losses, our exports.  That's what we're

       8     using.  They better be equal.  As long as

       9     every utility keeps ACE equal, then the

      10     system is balanced.

      11               We can buy power from New York.  If

      12     we buy power from New York, Con Ed simply

      13     raises their generation 100 megawatts and

      14     their raise their exports 100.  The PJM,

      15     Pennsylvania, Jersey, Maryland, raises their

      16     imports 100, raises their exports, 100.

      17     Everybody does that down the way.

      18               It finally gets to Illinois.  We've

      19     got our 100.  There aren't line losses.  Did

      20     we actually get that power?  No.  No way.  No

      21     one knows where the power went, but it's

      22     accounted for that way.









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       1               Now, you notice in there that I

       2     said load.  You notice that blue dot.  That's

       3     where the Internet comes in.  Right now we

       4     measure load at major substations, and we may

       5     measure load going out of a substation and

       6     there may be 10,000 customers on that line,

       7     but they're all hours.  So, we can measure

       8     that one load point.  At Illinois Power we

       9     only monitor about 800 load points

      10     for 550,000 customers.  You can see that in

      11     the next graph, that pink dot.  That's all we

      12     have to do is measure there.

      13               In this graph, I've shown that new

      14     energy ventures, Con Ed, Duke -- we can no

      15     longer measure at the pink dot.  We now have

      16     to go right to the customer to measure the

      17     load to see what every person is using.  So

      18     they have a computer system.  We are

      19     currently in the process of installing

      20     real-time reporting meters that will report

      21     back every 15 minutes to Illinois Power what

      22     every customer is using.









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       1               People are using Internet for this.

       2     NEV uses Internet.  They're using radio;

       3     they're using telephone; they're using

       4     anything you can think of.  One that NEV, for

       5     instance, new energy ventures data gets back

       6     to our computer, we will have to aggregate

       7     that and send the packet to NEV to say here's

       8     what you're using in our territory at this

       9     time.  Then they have to schedule that much

      10     in so that they have enough power in our

      11     territory.

      12               You'll notice I've drawn the

      13     packets differently.  Everybody wants

      14     different information so we're going to have

      15     to go to something like XML so we can tag the

      16     data and say this is first name, this is last

      17     name, we want this, you want that, here it

      18     is.

      19               So once this connection is made,

      20     then it's a two-way connection.  The next

      21     step which many are already doing is that a

      22     customer in Montana for instance will be able









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       1     to log onto a supplier's server, Duke in

       2     North Carolina, and say that looks good.

       3     I'll buy that 100 megawatts or I'll buy

       4     that 10 megawatts or whatever.

       5               The Duke computer in North Carolina

       6     will then tell the local utility in Montana

       7     this is my customer.  I'm selling at 100

       8     megawatts.  You note that in your ACE to keep

       9     track of it, and we're going to be getting

      10     hundreds of such messages.  The local utility

      11     in Montana will do that.

      12               They'll also notify the existing

      13     supplier, I'm taking over, you're out.  Sort

      14     of like if AT&T/MCI.  There has to be a

      15     cutoff point so that they'll know when to

      16     stop reading the meter every 15 minutes for

      17     Duke.

      18               CHAIRMAN GILMORE:  Mr. Bayless, I think

      19     this is it.  But what we'll do is come back

      20     to you for some questions and answers and go

      21     ahead and pursue this a little bit further.

      22               MR. BAYLESS:  Thank you.









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       1               CHAIRMAN GILMORE:  But we appreciate

       2     very much your insight.

       3               MR. BAYLESS:  Thank you.

       4               CHAIRMAN GILMORE:  The second speaker is

       5     Mr. Dan Bucks.  He is the director of the

       6     Multi-State Tax Commission.  Appreciate your

       7     initial presentation before Q&A, Mr. Bucks.

       8               MR. BUCKS:  Mister Chairman and

       9     members of the Commission, it is indeed a

      10     pleasure and an honor to be here.  I want to

      11     thank you very much for this opportunity.

      12     The issue of the sales and use tax collection

      13     on remote sales at the time of sale has been

      14     a matter of controversy and conflict for

      15     over 40 years.

      16               If you look back at this period of

      17     time which stretches over really a fifth of

      18     this nation's history, you can think about

      19     the other kinds of conflicts that have been

      20     resolved in this period of time.

      21               President Nixon went to China, and

      22     today China is a major trading partner.  The









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       1     Cold War is over, the Berlin Wall fell, and

       2     Germany was reunited; and Israel has signed

       3     peace treaties with Egypt and Jordan and the

       4     Palestinians; and yet we're here in the

       5     United States in this period of time still

       6     arguing about whether or not the sales and

       7     use tax will be collected on remote sales at

       8     the time that the sales are made.  It's time

       9     to bring this conflict to an end, and it's

      10     possible to bring this conflict to an end,

      11     and this Commission, your Commission, can

      12     play a critical role in finally bringing

      13     this 40-year battle to a close.

      14               Now, the costs of conflict have

      15     been very high.  It's included local

      16     businesses closed because of unfair

      17     competition from those who do not collect the

      18     tax.  It includes public dollars spent on tax

      19     audits and litigation and costly after-sale

      20     methods of collecting use taxes.  It includes

      21     money spent by remote sellers on endless

      22     legal advice and limitations on their









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       1     business flexibility in efforts to try their

       2     way through NEXUS mind fields so that they

       3     don't have to collect the tax.  It includes

       4     reduced customer satisfaction because

       5     businesses restrict the way they serve

       6     consumers, again, to avoid the taxes.

       7               These costs have been high, but

       8     they will get higher still if the problem is

       9     not resolved.  The costs won't rise so much

      10     in the next couple of years, but out there

      11     further, 5, 10, 12 years out, if e-commerce

      12     sales continue to grow and if they begin to

      13     erode the sales and use tax base, states are

      14     going to be faced with difficult choices.

      15               Now, please remember that the sales

      16     tax raises a lot of revenue.  The amount of

      17     state sales taxes alone is nearly equal to

      18     all state aid to elementary and secondary

      19     education, about 93 percent in 1997.  It

      20     exceeds the total amount spent by states on

      21     higher education.

      22               It's two-and-a-half times that









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       1     which has been spent on roads and highways by

       2     states.  So, you can a measure of the size of

       3     this tax.  If it begins to falter, states

       4     besides being faced with choices about

       5     cutting services may also be looking at

       6     shifting taxes to production taxes on

       7     business income or property taxes that

       8     disproportionately affect certain business

       9     sectors such as manufacturing and natural

      10     resource sectors that require high physical

      11     capital inputs.

      12               The costs are going to rise if this

      13     problem is not solved, and this Commission

      14     though can play a critical role in bringing

      15     the conflict to an end and can play the role

      16     of peacemaker.  I suggest you can do so in

      17     very simple ways:  By following a strategy, a

      18     general approach, of asking the warring

      19     parties here to resolve the conflict on the

      20     basis of goals that you set for those

      21     parties.

      22               I would suggest in particular, and









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       1     this could be part of a resolution that,

       2     number one, you declare both sides to be

       3     right.  It's not fair that the tax is not

       4     collected on sales at the time of sale.  It's

       5     not fair to the local business.  So, that

       6     side is right.  The other side is also right,

       7     that it costs too much under current

       8     arrangements and it's too burdensome to

       9     collect the tax on remote sales.

      10               So, what is needed is a system of

      11     tax collection that places minimal burden, if

      12     any burden at all, on the remote seller,

      13     which leads to the second step:  Ask state

      14     and local officials to develop a plan

      15     precisely to meet that goal, to collect the

      16     tax without placing a burden on remote

      17     sellers.

      18               Third, ask technology companies to

      19     assist state and local officials in

      20     developing that plan if state and local

      21     officials ask that it be done.  Fourth, the

      22     further steps will fall into place after the









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       1     plan is developed, because I think that there

       2     are fair-minded people in both the public and

       3     private sectors who will support the kind of

       4     plan that meets the goal of collecting the

       5     tax at the time of sale without placing a

       6     burden on remote sellers.

       7               The plan will be a combination of

       8     advanced technology.  There's already a

       9     system like this operating in Europe

      10     developed by a major U.S.  Corporation.  It

      11     will be a combination of advanced technology

      12     of certain strategic simplifications in state

      13     and local taxes combined with a willingness

      14     by state and local governments to pay for the

      15     cost of collection.  That's the outlines of

      16     the solution, and the leader though for this

      17     would rest with the Commission.  Thank you

      18     very much for the opportunity to address you.

      19               CHAIRMAN GILMORE:  Mr. Bucks, thank you

      20     very much, and we'll be coming back to you

      21     also in a little while I think to examine

      22     some of those premises.  We appreciate it.









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       1     The next person who is going to speak to us

       2     is Kaye Caldwell of CommerceNet.

       3     Ms. Caldwell, thank you very much for being

       4     here.

       5               MS. CALDWELL:  Thank you very much.

       6     I certainly appreciate this opportunity to

       7     present our views on this subject.

       8     CommerceNet is a nonprofit organization of

       9     about 200 companies with the goal of

      10     promoting the growth of electronic commerce.

      11     CommerceNet's written comments which I think

      12     you have either before you or in the

      13     materials somewhere are much more extensive,

      14     but today I'd like to focus on the need to

      15     solve our state and local tax collection

      16     problems without subjecting millions of small

      17     and medium businesses to thousands of tax

      18     collecting jurisdictions.

      19               Today I'm hearing this week that

      20     over half U.S. small businesses are now on

      21     the Internet in some form or another.

      22               Both history and recent events have









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       1     shown that when states can discriminate

       2     against interstate commerce, they'll do it.

       3     In fact, it was the extensive array of state

       4     lawyers that arose under the Articles of

       5     Confederation, not 40 years ago, but 225

       6     years ago, that was the motivation for

       7     including the Commerce Clause in the U.S.

       8     Constitution.

       9               More recently, when states have

      10     been granted the right to regulate certain

      11     areas of interstate commerce, they've

      12     continued to create both taxed-based and

      13     nontax trade barriers.  Details of these

      14     barriers can be found in our written comments

      15     and in the documents that are cited in those

      16     comments.

      17               So, the real issue before the

      18     Commission is whether or not this country

      19     should continue to ensure the existence of a

      20     robust national marketplace accessible by all

      21     businesses and consumers alike or, rather,

      22     instead, we will now allow the states to









                                                             28
       1     impose protectionist tax systems that

       2     discriminate against interstate commerce.

       3               Even today, multi-state taxpayers

       4     are routinely subjected to unconstitutional

       5     discriminatory taxes for which there is

       6     really no effective remedy except perhaps 10

       7     or 20 years of litigation, all the way to the

       8     U.S. Supreme Court.

       9               It would be extremely unwise to

      10     subject the millions of small and medium

      11     businesses in the new Internet marketplace to

      12     taxing jurisdictions where they have no

      13     governmental representation.

      14               Furthermore, if we require every

      15     business in the United States to register as

      16     a tax collector in every state and local

      17     jurisdiction, there is nothing to stop those

      18     jurisdictions from imposing all kinds of

      19     additional taxes on them.

      20               Instead of abandoning our national

      21     marketplace to the whims of the states,

      22     Congress should protect our national









                                                             29
       1     marketplace by taking three steps.  First of

       2     all, Congress should provide a timely and

       3     effective mechanism for redress for

       4     multi-state taxpayers that have

       5     unconstitutional taxes imposed on them.

       6     There are several suggested mechanisms for

       7     doing this in our written comments.

       8               Secondly, in 1998 Congress

       9     strengthened the role of the national

      10     taxpayer advocate within the IRS.  It may be

      11     time to create a position in the federal

      12     government of a multi-state taxpayer advocate

      13     to provide for federal oversight of state tax

      14     policies that affect interstate commerce.

      15               Finally, Congress should redirect

      16     the states to a workable solution for the

      17     collection of use taxes on transactions in

      18     interstate commerce by making it clear that

      19     the states will not be allowed to impose tax

      20     collection obligations extraterritorially.

      21     Fortunately, the Commission has before it an

      22     excellent proposal by Commissioner Andal that









                                                             30
       1     would redirect the states to find a workable

       2     solution for the collection of these use

       3     taxes.

       4               Mr. Andal's proposal would not

       5     prevent the states from imposing use taxes on

       6     transactions in interstate commerce.  It

       7     would merely require the states to find other

       8     ways of collecting those taxes besides

       9     imposing tax collections on businesses that

      10     have no governmental representation in their

      11     jurisdiction.

      12               While there are several possible

      13     mechanisms that the states could use, one of

      14     them has already been proven to work.  That

      15     mechanism is that the states could collect

      16     sales taxes on all the retail sales that take

      17     place within their borders regardless of

      18     whether the product is delivered in the state

      19     or out of the state, setting the tax rate to

      20     the same rate as that of the buyer's state.

      21     Essentially, this means the states could

      22     repeal their export exemptions from sales









                                                             31
       1     tax.

       2               Sellers could the remit all the tax

       3     they collect to their own state, and the

       4     states would be free to agree with other

       5     states to exchange that tax money collected

       6     on those sales to those states' residents.

       7               The system has already been proven

       8     to work.  We have a working example of this.

       9     It's the International Fuel Tax Agreement.

      10     There a similar system was created that

      11     currently collects fuel use taxes for all the

      12     continental states from multi- state

      13     truckers.  Further details on this system is

      14     available in our written comments.

      15               The American economy, fueled by the

      16     efficiencies technology has brought us is the

      17     envy of the world.  Let's not jeopardize our

      18     continued success by choking small and medium

      19     businesses with tax burdens that threaten

      20     their new-found access to national

      21     marketplaces that the Internet gives us.

      22               The three actions mentioned above









                                                             32
       1     would ensure that the U.S. maintains and

       2     further promotes a free, open marketplace

       3     that benefits both businesses and consumers

       4     in all areas of our nation.  I'd like to

       5     thank the Commission again for this

       6     opportunity to speak, and I would welcome

       7     questions on this.

       8               CHAIRMAN GILMORE:  Ms. Caldwell is very

       9     effective and efficient, and I appreciate it

      10     very much.  Each of the Commissioners, by the

      11     way, has had an opportunity to offer

      12     presenters to this panel, and we have

      13     accommodated to the greatest extent to

      14     eliminate duplication, but basically to

      15     accommodate every Commissioner.  We haven't

      16     said which Commissioner is offering which

      17     person, but Dean, I think you might have

      18     blown your cover on this one.

      19               MS. CALDWELL:  I don't think that's

      20     true.

      21               CHAIRMAN GILMORE:  But nevertheless,

      22     this was very, very effective, and we thank









                                                             33
       1     you.

       2               MR. ANDAL:  I thought she was very

       3     effective.

       4               CHAIRMAN GILMORE:  Yeah.  I thought you

       5     might.  The next speaker is Harley Duncan.

       6     He is the director of the Federation of Tax

       7     Administrators.  Mr. Duncan?

       8               MR. DUNCAN:  Thank you, Mister

       9     Chairman and members of the Commission.  My

      10     name is Harley Duncan.  I'm the executive

      11     director of the Federation of Tax

      12     Administrators which is an association of

      13     state tax administration agencies in the 50

      14     states, the District of Columbia, and New

      15     York City.

      16               It's a pleasure to be here with

      17     you.  The work that you have before you on

      18     the application of sales and use tax to

      19     electronic commerce as well as other state

      20     and local taxes is of profound importance to

      21     the states.

      22               Based on estimates of electronic









                                                             34
       1     commerce that reach consumer sales, using

       2     electronic commerce and the Internet of $100

       3     billion by the year 2003, we estimate that

       4     the revenue consequences to the state of

       5     uncollected use tax could reach as much as $4

       6     billion in that year alone of 2003.  When

       7     combined with other direct marketing, could

       8     reach as much as $10 billion in the 5-year

       9     period.

      10               That's of course of great

      11     importance to state and local governments,

      12     and we're willing and pleased to work with

      13     you in trying to address that particular

      14     issue.

      15               I was asked and will direct my

      16     comments particularly to technologies that

      17     are used today to help administer sales and

      18     use tax and simplify sales and use tax

      19     administration at the seller level.  I think

      20     the punch line is essentially this, that

      21     there are several technologies and software

      22     packages that are used today that can









                                                             35
       1     effectively deal with much of the complexity

       2     that is there.

       3               The states are also taking steps to

       4     help reduce use technology to reduce that

       5     complexity, and that they provide a

       6     foundation for which we can build what some

       7     would refer to as a 21st century tax system

       8     to deal with electronic commerce.

       9               Technology alone is not a

      10     sufficient answer.  There's no sense of just

      11     automating the complexity.  We really do need

      12     to think about ways to simplify the system so

      13     that sellers can operate at a reasonable cost

      14     and that there are strategic simplifications

      15     that are necessary.

      16               The final point is that I think the

      17     leadership of this particular Commission can

      18     get us to a system that adapts both strategic

      19     simplifications and advanced technologies to

      20     reduce the burden and, hopefully, as much as

      21     possible, take the seller out of the

      22     collection responsibility entirely.









                                                             36
       1               When one looks to existing

       2     technologies, there are at least three firms

       3     out there today that purport to have a

       4     comprehensive system of sales tax

       5     administration that they offer.  Their

       6     publicly available information talks about

       7     their ability to make taxability

       8     determinations by product; to make tax rate

       9     determinations by location; to deal with

      10     exempt questions of exempt uses, exempt

      11     products, and exempt entities; as well as to

      12     offer filing and returns and remittance

      13     services.

      14               In the area of assigning tax rates,

      15     these packages generally work from an

      16     individual address, add to it some public

      17     information from the Postal Service, and then

      18     are required to use proprietary techniques

      19     and software to get to an actual tax rate

      20     determination.  In the area of exemptions,

      21     they deal with certificates, the processing

      22     and administration of those, as well as









                                                             37
       1     product codes to deal with exempt products.

       2     As far as returns and remittances, they all

       3     have a fairly robust package of those.

       4               States are taking steps in each of

       5     these areas as well of using geographic

       6     information systems to assign tax rates; of

       7     offering electronic filing alternatives,

       8     electronic payment alternatives; and other

       9     approaches to it.

      10               As I said, technology alone is not

      11     the only answer.  We need to deal with

      12     simplifications.  There are two types that I

      13     would suggest.  Rates and exemption

      14     administration are exceedingly important.

      15     Most importantly, we need to really re-look

      16     at the relationship between the seller and

      17     the state and offer hold harmless and safe

      18     harbor so that good- faith efforts to comply

      19     with the tax law aren't unreasonably

      20     penalized, and if you take steps to do it

      21     right, you're not punished on audit.

      22               I think if we could combine these









                                                             38
       1     simplifications along with advanced

       2     technologies, we can develop a system that

       3     really does take the seller out of it and

       4     deal with it in a third-party situation where

       5     the states are involved and the sellers are

       6     involved, but take the seller out of it.

       7     It's really the political leadership of this

       8     group and the technology leadership of this

       9     group that can us there.  Thank you very

      10     much.

      11               CHAIRMAN GILMORE:  Mr. Duncan, thank you

      12     very much, and I think there will be

      13     extensive questions and answers and

      14     interactions with you all as we proceed on

      15     further.  The will of the Commission is to

      16     get through the presenters first and then

      17     leave a broad amount of time for the rest of

      18     the day to in fact interact with you and with

      19     each other.

      20               So, thank you very much.  Please

      21     standby not too far away, and we then move to

      22     our second panel, and they are Jim Eads,









                                                             39
       1     George Isaacson, Randy Johnson, and Joe

       2     Brooks.  If you would all please come forward

       3     and take your seats, and we will begin.

       4               Gentlemen, welcome to the second

       5     panel to be presented today.  We appreciate

       6     your willingness to be here at the call of

       7     the Commission, and we're looking forward to

       8     this.  The first presenter on our second

       9     panel, second group that is coming forward,

      10     is Jim Eads.  He is a partner Ernest & Young.

      11     Mr. Eads, thank you very much.

      12               MR. EADS:  Thank you, Mister

      13     Chairman.  I appreciate the invitation to

      14     appear before you today.  As you have

      15     indicated, I am Jim Eads.  I am a partner

      16     with the public accounting firm of Ernst &

      17     Young.  I practice in the area of state and

      18     local taxes dealing with telecommunications

      19     and electronic commerce.

      20               I know we have a brief period of

      21     time to present to you today, and so I would

      22     like to begin by no doubt dealing with an









                                                             40
       1     issue that's uppermost in your mind, that

       2     being highway safety.

       3               As you know, there are accidents

       4     occurring on the streets and highways of this

       5     country every day that cause death and

       6     destruction.  State and local governments are

       7     attempting to ameliorate that by passing laws

       8     and having enforcement agents out there, but

       9     they're not able to do it completely.

      10               So perhaps one solution to that

      11     problem could be to require every seller of

      12     automobiles everywhere in the country to know

      13     what the speed limit is wherever the buyer is

      14     going to garage that car and install a device

      15     on that vehicle so that it doesn't exceed

      16     that posted speed limit.

      17               Now, if you think that is an

      18     impractical solution, my purpose in using

      19     that analogy is to suggest to you that the

      20     imposition of the current sales and use tax

      21     system to electronic commerce in remote sales

      22     makes as much sense as that analogy.  It is









                                                             41
       1     simply too complex to overlay that system

       2     onto the kind of commerce in this country

       3     today.

       4               You asked me in your invitation to

       5     come to you with a solution.  Obviously, my

       6     solution depends upon how I define the

       7     problem.  I have defined the problem as you

       8     might expect to be the complex state and

       9     local tax system that exists today that

      10     encourages avoidance of tax collection

      11     responsibilities and places an unreasonable

      12     burden on all forms of interstate commerce.

      13               My solution:  Simplify, simplify,

      14     simplify.  Pervasive simplification of the

      15     state and local tax system is necessary if

      16     this Commission is to be successful in

      17     achieving its mandate and is an essential

      18     prerequisite to all of your discussions of

      19     all of the issues that you're going to

      20     debate.

      21               The issue that I am going to

      22     discuss is not whether or not certain things









                                                             42
       1     should be taxed, and not whether or not

       2     governments have a need for revenues to

       3     provide essential services to citizens, but

       4     the cost and the process by which those taxes

       5     are collected and the persons on whom those

       6     costs fall.  You have in your packet of

       7     materials a study that Ernst & Young has

       8     recently done measuring the cost of

       9     compliance of sellers.

      10               The primary conclusion of that

      11     study is that the cost of collecting sales

      12     tax falls on retailers, small business,

      13     medium size, and large, and is a cost that is

      14     out of line with the amount of revenue that

      15     has actually been collected.

      16               To address the question of whether

      17     or not simplification is within your purview,

      18     it clearly is within the purview of the

      19     Commission to suggest these areas.  Not only

      20     that.  It is clearly within the purview of

      21     Congress to take some action in response to

      22     recommendations that you might make.  You









                                                             43
       1     heard yesterday about the 4-R Act (Railroad Revitalization and Regulatory Reform Act of 1976  prohibited states from taxing railroad property more heavily than other industrial and commercial property)

       2     You heard yesterday about Public Law 86272.

       3               Congress has acted in the past to

       4     circumscribe the instances of state and local

       5     taxation when it determined that state and

       6     local taxation constituted a burden on

       7     interstate commerce.  I suggest to you that

       8     the complexity of state and local sales and

       9     use taxes today constitute that kind of

      10     burden and is a legitimate issue for this

      11     Commission to address, and for Congress in

      12     turn to act.

      13               It is not to say that there not

      14     worthy efforts going on in the state area

      15     dealing with simplification.  Certainly, in

      16     Utah, and Washington, and Idaho, there is a

      17     three-state effort going on to try to

      18     simplify taxes in those jurisdictions for

      19     multi-state sellers.  Other studies are

      20     underway in individual states to deal with

      21     that.

      22               But I suggest to you that









                                                             44
       1     simplification cannot be left to state and

       2     local governments alone.  Guidance must come,

       3     first, from this Commission, and I think

       4     ultimately from Congress.

       5               The complexity of state taxes has

       6     already been recognized.  I have read an

       7     interview given by Governor Leavitt in which

       8     he uses a wonderful illustration about taxing

       9     peanuts and how the sale of peanuts is taxed

      10     in the different state and local

      11     jurisdictions.

      12               I have read comments from

      13     Mr. Pottruck about the complexity of this

      14     system that he did not realize existed prior

      15     to his service on this Commission.  I know

      16     that of course Mr. Armstrong's comments in

      17     his opening remarks at the first Commission

      18     meeting in which he noted that the AT&T

      19     enterprise is forced to file 39,812 state and

      20     local tax reports a year.

      21               I've done that math on that.  If

      22     you divide that number of returns









                                                             45
       1     by 52, 40-hour weeks, it's a state and local

       2     tax report every 3.12 minutes.  That

       3     constitutes my definition of a burden on

       4     interstate commerce.

       5               Now, as to the suggestions you've

       6     already heard, I think some very meaningful

       7     comments from the earlier panel, but clearly

       8     a single rate per state would go a long way

       9     towards addressing some of these problems.  I

      10     think also there needs to be a sufficient

      11     amount of lead time when changes are made.

      12     One of the difficulties of interstate

      13     businesses today is knowing when changes

      14     occur.

      15               If a city council acts tonight in

      16     its meeting to change a tax rate, how is a

      17     multi-state business across the country to

      18     know when that happened, when it's effective,

      19     and what they should do to comply.  Quite

      20     frankly, forcing retailers to collect the tax

      21     is an act that requires some compensation.

      22     Retailers are absorbing a great deal of









                                                             46
       1     governmental cost in order to do this, and

       2     they should be compensated for that.

       3               Finally, I should say that there

       4     are issues of sovereignty obviously in this

       5     matter.  What I suggest to you is that no

       6     state or local government can act alone.

       7     They need to see their tax law as a part of a

       8     cumulative burden, and this Commission, if it

       9     is to fulfill its mandate, should recommend

      10     simplification.

      11               CHAIRMAN GILMORE:  Mr. Eads, thank you

      12     very much.  We appreciate that.  The next

      13     speaker is George Isaacson from the Direct

      14     Marketer's Association.  Mr. Isaacson?

      15               MR. ISAACSON:  Thank you, Governor

      16     Gilmore.  My name is George Isaacson.  I'm

      17     tax counsel for the Direct Marketing

      18     Association.  I was a member of the NTA

      19     project steering committee, and also a member

      20     of its drafting committee.  Perhaps,

      21     Governor, one of the advantages of being in

      22     the second wave of speakers is that I can









                                                             47
       1     focus my remarks on some of the issues which

       2     my good friends from the state side of this

       3     issue presented in the first wave.

       4               If you listen to state and local

       5     government speakers on this subject, you

       6     would believe that there are basically two

       7     problems that we have in this country.  One

       8     of them is the United States Constitution,

       9     and the other is electronic commerce.  I'm

      10     concerned that this is a great misperception

      11     of the issue.

      12               It's a frequent that the Commerce

      13     Clause is presented as being an anachronism,

      14     a constitutional loophole.  Much the

      15     contrary, the Commerce Clause of the

      16     Constitution was the Founding Fathers'

      17     efforts to create a common market among the

      18     states, and they did so 200 years before the

      19     Europeans got the idea.  Perhaps the best

      20     example of the success of that common market

      21     has been electronic commerce.

      22               The fact that a merchant anywhere









                                                             48
       1     in this country with a good idea can have the

       2     temerity to believe that he can market to

       3     America is made real because of the Commerce

       4     Clause.  I think it would be very dangerous

       5     for us to sweep Commerce Clause protections

       6     aside because we think that they interfere

       7     with state tax administration.

       8               The second issue that would seem to

       9     be the problem in listening to my friends on

      10     the state and local side is electronic

      11     commerce.  The growth of electronic commerce

      12     is going to hinder the states in their tax

      13     collection efforts, and there was the

      14     suggestion during the first wave of speakers

      15     that somehow schools will go unfunded.

      16               The fact of the matter is that

      17     information technology and electronic

      18     commerce have been the greatest economic

      19     engine of the 20th century.  It has created a

      20     rising tide in which not only the American

      21     economy has prospered, but state revenues

      22     have prospered.









                                                             49
       1               USA Today reports that the states

       2     can't spend fast enough as they racked up $33

       3     billion in surpluses this year.  The fact of

       4     the matter is that a healthy economy is good

       5     for state revenues, and there would probably

       6     be no faster way to arrest the growth of

       7     electronic commerce than to remove

       8     constitutional protections and impose tax

       9     collection obligations for 7,000 different

      10     sales and use tax jurisdictions on remote

      11     sellers.

      12               The important issue I think that's

      13     presented for this Commission is separating

      14     fact from reality, and that's why in my

      15     written submission to the Commission which is

      16     entitled "Exploding NEXUS Myths," why

      17     existing constitutional standards are both

      18     fair and good national policy, I attempt to

      19     walk through what I think are the mythical

      20     elements.

      21               For example, there's this notion

      22     that there's not an even playing field, that









                                                             50
       1     somehow there is unfair competition in the

       2     marketplace because of current constitutional

       3     standards, and that it's the fault of

       4     electronic commerce.  Well, in fact, local

       5     merchants, Main Street merchants, have been

       6     riding the electronic highway.  It is the

       7     Internet which has made it possible for

       8     small, regional merchants to access a

       9     national market, to do so quickly, and to do

      10     so in an unfettered fashion.

      11               It is going to be small companies,

      12     it is going to be local merchants, who are

      13     hampered if their ticket to that electronic

      14     highway is an obligation to collect taxes on

      15     behalf of 7,000 jurisdictions, or even on

      16     behalf of 45 jurisdictions.  The current

      17     economic reality is that the electronic

      18     highway is good for the states, it's good for

      19     small merchants, and it's good for national

      20     merchants.

      21               Now, I was encouraged by Mr. Bucks'

      22     and Mr. Duncan's suggestion that the first









                                                             51
       1     order of business really needs to be to have

       2     substantial simplification of existing state

       3     sales and use tax systems and, in fact, even

       4     the suggestion that there may be

       5     technological alternatives that could take

       6     the merchant out of the process altogether.

       7     Those are constructive and positive

       8     statements.

       9               The reality is that that plan has

      10     not taken shape.  Despite the fact that the

      11     National Tax Association Project spent more

      12     than 2 years on it, we were not able to

      13     discover any existing technology that

      14     resolves that issue.  We were not able to

      15     discover a format yet that takes the merchant

      16     out of the process.

      17               So, the real question is what's the

      18     first order of business, and I believe that

      19     the first order of business is to reform

      20     existing state tax systems before we talk

      21     about expanding or exporting those tax

      22     systems across state boundaries.









                                                             52
       1               It's important for the members of

       2     this Commission to recognize that the sales

       3     and use tax system that we have in this

       4     country was developed during the Depression.

       5     It was developed at a time when because of

       6     massive unemployment and bankruptcies, state

       7     income taxes did not produce sufficient state

       8     revenue in order to support government

       9     services.  It was developed at a time when

      10     the customer, the retailer, the product, and

      11     the cash register were all at the same place

      12     at the same time in conducting a transaction.

      13               It was conducted at a time when the

      14     average tax rate was 1 or 2 percent.  The

      15     notion of taking this antiquated tax system

      16     and exporting it across state boundaries and

      17     imposing it on a new technology and believing

      18     that that can be done so in an innocuous and

      19     harmless fashion is unrealistic.

      20               CHAIRMAN GILMORE:  Thank you,

      21     Mr. Isaacson.  We'll be back to you in the

      22     immediate future, and we appreciate this.









                                                             53
       1     The next person to speak is Commissioner

       2     Randy Johnson.  He is the chair of the

       3     Hinnepin, Minnesota County Board.

       4     Mr. Johnson?

       5               MR. JOHNSON:  Thank you, Mister

       6     Chairman, and thank you for this opportunity.

       7     As you said, I chair the Hinnepin County,

       8     Minnesota, Board of Commissioners, that's

       9     Minneapolis and suburbs.  I'm also the past

      10     president of the National Association of

      11     Counties.

      12               Mr. Isaacson on behalf of the

      13     Direct Merchants said that state and local

      14     government officials seem to see two problems

      15     with society today, the U.S. Constitution and

      16     e-commerce.  I think he has it backwards.

      17     The e-merchants seem to see two problems in

      18     society today as perhaps two opportunities.

      19               One, they would see the U.S.

      20     Constitution as an opportunity to shield them

      21     and make them a special class of merchants

      22     selling.  Second, they see the Internet as









                                                             54
       1     such a magical, mystical tool that they can

       2     use that as another way to make them a

       3     special class of merchants.

       4               I'm going to read my remarks.

       5     You've all received them.  There are four

       6     principles.  Number one is there should be a

       7     level playing field in commerce.  The federal

       8     government should not create an elite class

       9     of merchants that Congress exempts from

      10     collecting transaction taxes just because

      11     some part of that transaction takes place on

      12     the Internet, and it really is that simple.

      13               Second, the federal government

      14     should enable and certainly should not impede

      15     efficient enforcement of the existing laws on

      16     taxes on sales.  One of the great myths about

      17     the Internet, it's an urban legend now and

      18     I'm sure we'll hear it over and over again

      19     here and you've all heard it over and over

      20     again, that myth is that the Internet

      21     transactions are tax free, and some merchants

      22     perpetuate that myth over and over and over









                                                             55
       1     again with the slogan and the seductively

       2     simplistic idea, "Don't tax the Internet."

       3     Wrong.

       4               Every state that has a general

       5     sales tax also has a use tax to cover

       6     purchases of the goods and services from

       7     out-of-state merchants.  But use taxes are

       8     costly and inefficient, and inefficient to

       9     collect, but it can be done.

      10               Use taxes can be collected, and if

      11     Congress should persist in protecting

      12     Internet merchants, there are other ways of

      13     collecting use taxes.

      14               For example, those who deliver

      15     goods using state and local roads and

      16     highways and facilities could become the tax

      17     collectors.  Is that inefficient?

      18     Absolutely.  Is it constitutional and legal?

      19     You bet.  Is that right route to go?  I don't

      20     think so.

      21               Now, because I'm a conservative and

      22     a Republican, I believe that the government









                                                             56
       1     that's closest to the people generally

       2     governs best, but local government and state

       3     government cannot run on an empty tank.

       4     There are only three real sources of revenue:

       5     Taxes on property; taxes on income; and taxes

       6     on sales.  As a conservative, I don't like

       7     taxes on income.

       8               I believe people ought to be

       9     encouraged to work and keep the fruits of

      10     their labor.  Property taxes are almost

      11     inherently regressive and have little to do

      12     with the value of services delivered.

      13     However, taxes on sales, even though I don't

      14     like any kinds of taxes, if we want to tax

      15     behavior we want to discourage and not tax

      16     behavior we want to encourage, well, it's

      17     been a long time since anybody has said

      18     Americans consume much too little and save

      19     far too much.

      20               The fourth principle of sales taxes

      21     can be calculated with the software that

      22     exists today.  It's a myth that it can't be









                                                             57
       1     done.  Mr. Duncan who spoke who earlier, the

       2     director of the Federation of Tax

       3     Administrators, explained what can be done.

       4     It can be updated.  It can deal with special

       5     situations.  It's a myth that it can't be

       6     done.

       7               In conclusion, let me just say

       8     state and local governments do not create

       9     poor people by collecting taxes.  That's a

      10     myth.  That's some sort of nostalgic,

      11     romantic nonsense.

      12               Second, it is very inconsistent, it

      13     is very inconsistent, to devolve

      14     responsibilities to state and local

      15     governments and then remove the ability of

      16     these governments to pay for the

      17     responsibilities that have been devolved unto

      18     them.  You can't have it both ways.

      19               Third, it just plain unfair for

      20     Congress, the federal government, to

      21     intervene in the marketplace and create an

      22     elite class of merchants just because those









                                                             58
       1     merchants happen to use the Internet for some

       2     part of their transactions.  It's that

       3     simple.  It's that fair.  We can use

       4     e-commerce, we can use this great economic

       5     engine, and we can use it without reducing

       6     state and local governments.  Thank you.

       7               CHAIRMAN GILMORE:  Thank you,

       8     Mr. Johnson.  Very effective.  I appreciate

       9     that.  The next speaker is Councilman Joe

      10     Brooks.  He is representing the Council of

      11     State Governments, the International and

      12     County Management Association, the National

      13     Conference of State Legislators, the National

      14     Association of Counties, the National

      15     Governor's Association, the National League

      16     of Cities, the U.S. Conference on Mayors.  By

      17     coincidence, he is from my hometown,

      18     Richmond, Virginia.  Welcome, Mr. Brooks.

      19               MR. BROOKS:  Thank you, Governor.

      20     In additional to the list that the Governor

      21     has listed, we do have letters of support

      22     from the National School Boards Association,









                                                             59
       1     the American Association of School

       2     Administrators, and the American Book

       3     Seller's Association.

       4               Mister Chairman and members of the

       5     Commission, it is an opportunity that I have

       6     should I say looked forward to speak to you

       7     today.  Isn't it wonderful to be a locally

       8     elected official at a time like this?  You

       9     just really enjoy being involved in this kind

      10     of discussion.

      11               Combined as a group of people who

      12     represent states, cities, and counties of all

      13     sizes, we represent thousands and thousands

      14     of elected and appointed officials who run

      15     these governments.  Let me assure you that

      16     the work of this Commission is and will

      17     continue to be our highest joint priority for

      18     the immediate future.

      19               The recommendations that you make

      20     to the Congress next spring will have an

      21     enormous impact on our ability as locally

      22     elected officials to deliver public services









                                                             60
       1     to our shared constituencies.  You definitely

       2     have our undivided attention.

       3               In addition to serving as a council

       4     member in Richmond, I chair the National

       5     League of Cities Finance, Administration, and

       6     Inter-Governmental Relations Committee which

       7     has been charged with developing the National

       8     League's policy on remote commerce.

       9               Also I represented NLC on the

      10     National Tax Association, Communications and

      11     Electronic Commerce Tax Project.  In the

      12     past, I was chairman of the Finance Policy

      13     Committee for the Virginia Municipal League.

      14     So, my public service has involved me a great

      15     deal in the financial area of local

      16     government.

      17               You have a copy of the state and

      18     local association statement of principles for

      19     marketing, for making electronic commerce

      20     fair, and modernizing the state tax system.

      21     I will not repeat what is in that statement,

      22     but I will emphasize three key points that I









                                                             61
       1     hope will help shape your thinking on this

       2     important issue.

       3               First point, a permanently tax-free

       4     electronic marketplace would have a

       5     significant impact on our ability to deliver

       6     essential public services.  We are not

       7     talking about singling out the Internet for

       8     additional taxation or adding new tax burdens

       9     to the American consumer.

      10               As other speakers have said, we are

      11     talking about collecting legally due sales

      12     and use taxes on goods and services based on

      13     existing law regardless of how those

      14     purchases are made.  We believe the lost

      15     revenue from tax-free online shopping will be

      16     material.  That has already been alluded to.

      17               In Richmond, the state-shared

      18     revenue from sales tax comprises 6.84 percent

      19     of the general fund budget of the city of

      20     Richmond.  It comprises 8.83 percent of our

      21     school budget.  The state-shared portion of

      22     sales tax.  If our sales tax basis shrinks









                                                             62
       1     dramatically or even disappears because of

       2     tax-free online shopping, we will be forced

       3     to seek revenues, and I like to think in

       4     terms of revenues because taxes carries a

       5     connotation, but it includes taxes in other

       6     areas to provide essential public services

       7     like police, fire protection, public

       8     education.

       9               No elected official wants to raise

      10     taxes, increase user fees, or eliminate

      11     fundamental services because of a reliable

      12     and reasonably well- accepted revenue source

      13     is shut down.

      14               Point two.  Giving online vendors a

      15     competitive advantage over local merchants is

      16     just plain unfair.  I hope you read the story

      17     in the June 27th edition of "The New York

      18     Times" about the River Gate Books in

      19     Lambertville, New Jersey.  Closed after 10

      20     years because the owner says she could not

      21     compete with online book sellers.

      22               Yes, it is only one book store, and









                                                             63
       1     it might have happened anyway because of the

       2     convenience of online shopping.  But this

       3     Commission should not endorse actions that

       4     will make it even easier for amazon.com and

       5     other online sellers to overwhelm the Main

       6     Street merchant or the Main Street business

       7     because online sellers offer consumers a tax

       8     break.

       9               The third point is dealing

      10     with 7,400 taxing jurisdictions with

      11     different bases and rates will be challenging

      12     to national vendors, but the software to do

      13     the job has already been alluded to and it's

      14     already available.  It is unreasonable to

      15     suggest that the high-tech minds that have

      16     made it possible to buy anything anytime from

      17     anywhere online could not design software to

      18     apply state and local taxes to those

      19     purchases.

      20               We know of many vendors who've said

      21     they can provide the resources to online

      22     businesses at reasonable prices to minimize









                                                             64
       1     the burden of collecting legally due sales

       2     taxes.  At the same time, we support and

       3     encourage voluntary efforts to simplify the

       4     tax system.  Already alluded to is the

       5     Northwest regional sales tax pilot which is

       6     bringing together state, local, and business

       7     leaders in Utah, Idaho, and Washington, to

       8     explore these ways.

       9               Having participated in the work of

      10     the National Tax Association's project, I am

      11     well aware of the complexity of our tax

      12     structure and the challenges that lie ahead

      13     as the Internet changes the way we do

      14     business.

      15               There are so many other examples of

      16     inventions and technological advances that

      17     dramatically changed our day-to-day lives and

      18     required major adjustment in public policy to

      19     meet these changes.  We've adjusted to these

      20     changes.

      21               As leaders of the nation's states,

      22     counties, citizen towns, we urge you to pay









                                                             65
       1     close attention to the principles we have

       2     outlined in our statement which focuses on

       3     the importance of equity, fairness, and

       4     partnerships as we shape this new

       5     marketplace.

       6               CHAIRMAN GILMORE:  Thank you,

       7     Mr. Brooks.  We appreciate the benefit of

       8     this, and we will look forward to interacting

       9     with you on some of the Q&A in just a few

      10     minutes.

      11               MR. BROOKS:  Okay.  Thank you.

      12               CHAIRMAN GILMORE:  The next panel that

      13     is to come forward is Bruce Josten, State

      14     Representative Matthew Kisber, State Senator

      15     Steve Rauschenberger, and Terrence Ryan.

      16     Gentlemen, good morning.  We thank you very

      17     much for being here.  Bruce Josten is a

      18     representative of the United States Chamber

      19     of Commerce.  Welcome, and thank you for your

      20     comments.

      21               MR. JOSTEN:  I'm Bruce Josten.  I'm

      22     executive vice president for government









                                                             66
       1     affairs at the U.S. Chamber of Commerce, and

       2     the chamber does greatly appreciate the

       3     opportunity to be here today.

       4               The Internet has begun to

       5     dramatically change the way America does

       6     business, and if the projections of future

       7     growth are even remotely accurate, these

       8     changes will only intensify.  In fact, change

       9     is the only constant with respect to the

      10     Internet.  These changes go on to question

      11     certainly the way we raise tax revenue.

      12     Broad issues of tax fairness, state revenues

      13     and macroeconomic impacts raise concerns over

      14     whether we should tax the Internet.

      15               The characteristics that define the

      16     Internet raise questions and concerns over

      17     whether we could effectively tax it if we

      18     choose to.  However, I believe we have an

      19     obligation to seek answers before we move too

      20     precipitously.

      21               Rather than viewing these

      22     challenges as a threat, we would suggest we









                                                             67
       1     view them as an opportunity, an opportunity

       2     to rethink our current tax system and create

       3     a system that is simpler and fairer with

       4     minimal compliance costs, a system that will

       5     in fact complement the economy of the 21st

       6     century.

       7               Internet growth projections are

       8     startling.  This growth will not only

       9     contribute directly to GDP, but it has the

      10     beneficial by-product of fostering

      11     productivity growth across most sectors of

      12     the economy.

      13               Our recent unprecedented run of

      14     strong economic growth and low inflation

      15     would have been impossible without a surge in

      16     productivity and nurtured by technology and

      17     use of the Internet.  Taxing this wellspring

      18     of economic activity may not be the best way

      19     to raise needed tax revenue.

      20               Taxation of the Internet also

      21     raises questions of tax fairness and state

      22     tax revenue needs.  Although it is unfair to









                                                             68
       1     tax traditional retail vendors while allowing

       2     virtually online sellers to operate tax free,

       3     placing a tax in Internet sales may not be

       4     the best way to achieve fairness.  Because

       5     the Internet provides a marketplace far

       6     beyond a company's physical location, many

       7     entrepreneurs are finding that they can

       8     operate a business nationally and even

       9     internationally from small-town America.

      10               Interestingly, this past Saturday

      11     "The Washington Post" reported that the

      12     National Trust for Historic Preservation says

      13     that this very technology is now contributing

      14     to a revival along the nation's Main Streets,

      15     and its executive director for the Main

      16     Street Center says he sees massive growth of

      17     location-neutral businesses on Main Street.

      18               The impact of potential impact of

      19     e-commerce on state and local governments to

      20     raise revenues has been cited repeatedly as a

      21     reason to tax the Internet.  However, even

      22     though sales taxes are a very import source









                                                             69
       1     of state revenue, we do have time to examine

       2     the repercussions before we act.  The

       3     combined 1997 fiscal balance across all 50

       4     states was in surplus by some $19 billion,

       5     and recent upward revisions to our economic

       6     growth potential over the coming decade

       7     suggests the states' ability to collect tax

       8     revenues will be increased substantially.

       9               Even if the decision were made to

      10     tax the Internet, its very nature raises

      11     questions as to whether it could be taxed.

      12     To impose a tax, a taxing authority must be

      13     able to identify, measure, and verify the

      14     occurrence of a taxable event.  Many of the

      15     characteristics of the Internet make it

      16     difficult if not impossible to identify the

      17     who, what, and where of e-commerce

      18     transactions.

      19               Central to that difficulty is the

      20     tension between the government's right to

      21     verify transactions for taxability, and an

      22     individual's constitutional rights to









                                                             70
       1     privacy.  Verification would necessitate the

       2     monitoring and decrypting of personal

       3     transmissions, a chilling prospect.  Privacy

       4     and liberty cannot and should not take a back

       5     seat to taxability.

       6               In addition, the mobility of

       7     parties to Internet transactions and their

       8     ability to relocate to other jurisdictions

       9     offer opportunities for tax shifting,

      10     minimization, and evasion.  Likewise, the use

      11     of electronic cash further erodes the ability

      12     of tax authorities to monitor transactions by

      13     allowing the easy transfer of digital phones

      14     offshore.

      15               The tax system we have now is

      16     clearly a mess.  Internet taxation is not the

      17     problem.  It is instead a chance to rethink

      18     the way we do the taxes.  Internet provides

      19     us with an opportunity to create a new system

      20     of taxing for a new economy, one that is not

      21     only consistent with economic growth but, in

      22     fact, conducive to that very growth.  Thank









                                                             71
       1     you.

       2               CHAIRMAN GILMORE:  Thank you,

       3     Mr. Josten, very much.  Our next speaker is

       4     Representative Matthew Kisber, State of

       5     Tennessee.  Is it State Representative?

       6               MR. KISBER:  Yes, sir.

       7               CHAIRMAN GILMORE:  Thank you for being

       8     here, Mr. Kisber.

       9               MR. KISBER:  I am Matthew Kisber, a

      10     member of the Tennessee House of

      11     Representatives, where I serve as chairman of

      12     the Finance, Ways and Means Committee.  I'll

      13     add that Tennessee is a state that depends

      14     upon the sales tax for some 60-some percent

      15     of our general fund revenues.

      16               I'm joined this morning by Senator

      17     Steven Rauschenberger, chairman of the

      18     Illinois State Appropriations Committee.  We

      19     both serve as co- chairs of the National

      20     Conference of State Legislatures, Executive

      21     Committee Task Force on State and Local

      22     Taxation of Telecommunications and Electronic









                                                             72
       1     Commerce.

       2               On behalf of Steve and myself, I

       3     would like to thank you, Governor Gilmore,

       4     and the members of the Commission for the

       5     opportunity to address the Commission.  We

       6     speak on behalf of NCSL, a bipartisan

       7     organization representing all elected state

       8     legislators from the 50 states, our nation's

       9     commonwealths, territories, and possessions.

      10               We recognize the vital economic

      11     force that the Internet and advanced

      12     telecommunications services will be for our

      13     state and our nation.  We are as concerned as

      14     you about the unintended consequences of

      15     obsolete, discriminatory, or multiple taxes

      16     on this vital new technology.

      17               With that said, we need to make

      18     clear that state legislatures are equally

      19     concerned about the impact that our inability

      20     to collect sales and use taxes on electronic

      21     commerce transactions will have on state

      22     revenues, and the unfair competitive burden









                                                             73
       1     it could have on small Main Street businesses

       2     in our communities.

       3               As we all know, taxes are not very

       4     popular.  However, if state and local

       5     governments are to provide basic necessary

       6     services like education and public safety,

       7     then we need to have the ability to levy

       8     taxes.  When you ask taxpayers which of all

       9     the major federal, state, and local taxes is

      10     the least unpopular or onerous, sales and use

      11     tax is the big winner.

      12               In some states like Michigan, the

      13     voters by a comfortable margin chose to

      14     finance their state's educational

      15     improvements through the imposition of a

      16     sales tax rather than relying on the property

      17     tax, and then voted to increase the sales tax

      18     that they'd pay.  We understand that the

      19     voters in Arkansas may soon be asked to

      20     approve a similar referendum.

      21               As state legislators, we recognize

      22     the problem.  Over the last 60 years, some









                                                             74
       1     states have created a confusing,

       2     administratively burdensome tax system with

       3     very little regard for the compliance burden

       4     placed on multi-state businesses.  The NCSL

       5     task force that we chair has identified six

       6     principles to govern the reform and

       7     modernization of state and local sales and

       8     use and telecommunications taxes.

       9               These principles are, first, state

      10     and local sales and use taxes and

      11     telecommunication taxes should treat market

      12     participants in a competitively neutral

      13     manner.

      14               Second, sales and use taxes are

      15     vital to states' sovereignty and autonomy, an

      16     important strength in our federal system.

      17               Third, participants in electronic

      18     commerce should not receive preferential

      19     treatment.  Nor should they be subject to

      20     special, discriminatory, or multiple taxes.

      21               Fourth, states recognize the need

      22     to undertake significant simplification of









                                                             75
       1     state and local sales and use taxes to reduce

       2     the administrative burden of collection.

       3               Fifth, under a simplified system,

       4     remote sellers without regard to physical

       5     presence in the purchaser's state should be

       6     required to collect and remit sales and use

       7     taxes.

       8               Sixth, NCSL encourages current and

       9     future cooperative efforts by states to

      10     simplify the operation and administration of

      11     sales and use taxes.

      12               We also include in our statement of

      13     principles the reaffirmation of a

      14     long-standing policy that NCSL would continue

      15     to oppose any federal action to preempt the

      16     sovereign and constitutional right of the

      17     states to determine their own tax policy in

      18     all areas including telecommunications and

      19     electronic commerce.

      20               The state of principles was

      21     unanimously endorsed by NCSL's membership

      22     during our annual meeting this summer in









                                                             76
       1     Indianapolis.

       2               I wish to close by saying that not

       3     only am I a citizen legislator.  I'm a

       4     small-business owner as well.  I understand

       5     the complexities which are involved in this

       6     issue and appreciate your thoughtful and

       7     careful examination.  At this time, I would

       8     like to ask Steve to address the three

       9     options that we believe the Commission has in

      10     making their recommendations.

      11               CHAIRMAN GILMORE:  Representative

      12     Kisber, thank you very much, and we will now

      13     hear from Steve Rauschenberger.

      14               MR. RAUSCHENBERGER:  We provided

      15     prepared remarks to all of the Commissioners,

      16     and I would refer you to those for a copy of

      17     the six principles that were adopted by NCSL.

      18     I'll just make a few comments to try to move

      19     you along because I know people want to fly

      20     out.  I'm used to being on the other side of

      21     the microphone as the appropriations chairman

      22     in Illinois.  We have a $43 billion state









                                                             77
       1     budget that is approximately 40 percent

       2     dependent on sales tax revenues in the State

       3     of Illinois.

       4               I was also an impress tax collector

       5     for the State of Illinois for more than 15

       6     years.  I ran three home furnishing stores

       7     into the ground prior to my election to the

       8     State Senate.  I'm a third-generation

       9     retailer, and I know the frustrations both of

      10     collecting taxes for states, as well as in

      11     the home furnishings industry we were one of

      12     the first to materially feel market effects

      13     of out-of-state transactions and

      14     transshipping and a number of other issues.

      15     So, I come to this discussion with some

      16     familiarity.

      17               I think the credibility of the

      18     report that you gentlemen and ladies agree to

      19     is going to be dependent on recognition of

      20     some important points that I haven't heard

      21     discussed with a lot of frequency yet.  If

      22     your report doesn't recognize state









                                                             78
       1     sovereignty, I think that there's a

       2     credibility issue.  If your report doesn't

       3     recognize the federalism model that has been

       4     operative in the United States for more

       5     than 200 years where states in effect act as

       6     laboratories of democracy and provide most of

       7     the policy innovation that takes place in the

       8     United States, I think you're missing a major

       9     point of your work.

      10               I believe states need to be

      11     encouraged, and I think properly encouraged,

      12     states will move to a zero-burden collection

      13     system and to standardization of both rates

      14     and definitions.  We didn't build a sales tax

      15     and use tax system overnight, and we wont'

      16     change it overnight, and we do need some

      17     incentives to do that, and we need leadership

      18     and that's what I hope this Commission moves

      19     toward.

      20               I also think there's a good chance

      21     that states will carefully examine modified

      22     consumption taxes as a replacement for sales









                                                             79
       1     taxes where we can take a look at net income

       2     and take nonconsumption uses and apply a much

       3     lower rate.

       4               State taxation should be broad

       5     based and low rate and it works effectively

       6     across the 50 states.  The 50 states are the

       7     ones with the balanced budget and without the

       8     long-term liabilities or obligations, and

       9     generally without the swirling political

      10     tensions that Congress and the federal

      11     government are frequently subject to.

      12               A couple of quick comments.  Those

      13     who argue that for creation of electronic

      14     Cayman Islands for the Internet are both

      15     unrealistic and naive and should recognize

      16     that the public will not support or stand for

      17     two-tiered treatment of transactions over

      18     time.  Physical NEXUS as a concept is a --

      19     interim compromise to give policy makers in

      20     the legislative branches time to make the

      21     right decision.

      22               Don't hold to NEXUS as a solution.









                                                             80
       1     NEXUS is an explanation by the courts based

       2     on flaws in the current statutes, and I think

       3     you need to recognize that.

       4               I was very surprised briefly to

       5     hear Ernst & Young, an accountant make a

       6     lawyer's argument about vehicle

       7     complications.  We do require vehicles to

       8     comply with 50 separate state regulations and

       9     the regulations in more than 90 different

      10     countries, and they manage to do that.

      11               We manage to title those vehicles

      12     effectively and act in the public safety by

      13     making sure they're equipped with the safety

      14     equipment that we believe that is socially

      15     acceptable and reasonable.

      16               Four quick things.  I hope this

      17     Commission does its work and recommends

      18     equitable treatment of all participants in

      19     transactional sales in electronic commerce.

      20     I hope that you recommend reasonable time

      21     lines for state and local reforms.  I hope

      22     that you make an attempt to define the scope









                                                             81
       1     of acceptable burdens that remote sellers

       2     should have to accept.  I hope that you

       3     recommend standardized rates and standardized

       4     definitions.

       5               There are some U.N. as I understand

       6     commerce definitions that are perhaps

       7     adaptable by states to try to come up with

       8     common definitions.  I hope that you

       9     recommend reform of the multiple audit risk

      10     that remote sellers are exposed to currently.

      11               So, I really hope that you give us

      12     an opportunity to move the ball forward and

      13     to define some of the leadership issues, but

      14     we hope that you're not precipitous in your

      15     action and you take your time.  We're

      16     encouraged by the number of Governors on this

      17     panel and legislators and the high-quality

      18     people represented in the private sector.

      19     Thank you.

      20               CHAIRMAN GILMORE:  Thank you very much.

      21     I don't think we're precipitous anyway I can

      22     say.  But we appreciate very much what you









                                                             82
       1     have offered to us today and together with

       2     the state representative as well.

       3               The next individual to speak to us

       4     is Terrence Ryan, the director of state and

       5     local taxes, Apple Computer.

       6               MR. RYAN:  Thank you.  I'm here

       7     today because you asked for some solutions.

       8     I listened to Dan Bucks earlier, and Dan said

       9     we need objectives to more forward, and I'm

      10     going to first offer four objectives that I

      11     think you guys should have.

      12               The first one we can all agree on,

      13     simplicity.  The second objective is

      14     scalability.  It needs to be scalable.

      15     Because no one is really talking about the

      16     problems here.

      17               The problems are going to get

      18     bigger in the future.  We're going to have

      19     cybercash.  We're going to have anonymous

      20     cybercash.  We're not going to know where the

      21     buyer is.  So this solution that we comes up

      22     with needs to be scalable.









                                                             83
       1               The third objective is that the

       2     system needs to harmonize with the other

       3     industrial nations.  If we don't have

       4     harmonization then we're going to have more

       5     problems.  Number four, we need to preserve

       6     the physical-presence standard.

       7               The only system that accomplishes

       8     these four goals is the origin-based system

       9     that I'm going to talk about today.  The

      10     origin-based system is one rate, one set of

      11     rules, based on where you're located, where

      12     your Internet business is located.  You'll

      13     like this.  There's no state sovereignty

      14     issues.

      15               There's no NEXUS problems because

      16     you're there.  You have a physical presence

      17     there.  There's no question about NEXUS.

      18     You'll have to collect tax on all your sales.

      19     It'll be based on the rate where you're

      20     located.  So, hopefully the revenue will be

      21     there.

      22               I'm not here looking for a tax









                                                             84
       1     break.  We collect the taxes at Apple.  We do

       2     a lot of business over the Internet, but

       3     we're collecting the taxes.  I just don't

       4     like the system.  In terms of harmonization,

       5     Europe is going to an origin-based system.

       6     You know what?

       7               Those folks in Europe, they're

       8     competing with us.  They're competing with

       9     the U.S.  What they've done is they've

      10     adopted the things that they felt worked in

      11     the -- for example, one currency.  They've

      12     also broke down the barriers for trade.  If

      13     you've been to Europe lately, you can move

      14     around without being stopped.  You can go

      15     from Paris all the way to Amsterdam and not

      16     even know you've gone through Belgium.

      17               These are important changes.  But

      18     what didn't they do?  They didn't adopt our

      19     tax system.  In fact, they used to have one

      20     rate per country.  Some people are talking

      21     about one rate per state.  Well, that just

      22     doesn't cut it.  The European commissioners









                                                             85
       1     looked at that.  That was their system and

       2     they said no, this isn't working.  So,

       3     they're going to an origin-based system.

       4               I don't think they're worried about

       5     companies picking up and going to the

       6     lowest-rate country because the only

       7     objection to this plan is the uncertainty

       8     that the states and that local governments

       9     have about this fear that companies are going

      10     to pick up and move to the Cayman Islands or

      11     Oregon.  I just don't believe that's going to

      12     happen.  If it does, then we need to deal

      13     with it.  If it does happen, we need to deal

      14     with it.

      15               CHAIRMAN GILMORE:  Mr. Ryan, I think

      16     that's very interesting, and I think there's

      17     going to be a lot of questions about that as

      18     we go forward, and I'm looking forward to

      19     that.  Thank you all very much.

      20               The final panel before we just move

      21     into questions of discussion and debate is

      22     Fran Smith, William Gregory Turner, Gary









                                                             86
       1     Cornia, Kendall Houghton who I believe would

       2     like to participate by phone, and I think she

       3     has suffered an injury -- National Tax

       4     Association, Communications and Electronic

       5     Commerce Tax Project.

       6               I think she's suffered an injury

       7     and there have been arrangements for her to

       8     do this by phone.  Then finally, I propose to

       9     add one person, a name that did not get

      10     submitted to my attention that I think should

      11     be heard, and that is an offering by Michael

      12     Mazerov, Center on Budget and Policy

      13     Priorities who we will add to the panel

      14     without objection to discuss the digital

      15     divide, and one Commissioner particularly has

      16     requested that.

      17               We will take then in about that

      18     order if that's all right, and we will then

      19     be concluded.  I will introduce the

      20     Commission, and then we will either move

      21     straight ahead either after a break or we

      22     will just not break and go straight into









                                                             87
       1     discussion at the will of the Commissioners.

       2     But first, our final panel, Fran Smith of

       3     Consumer Alert.

       4               MS. SMITH:  Thank you Governor, and

       5     I'm very pleased to be here.  Consumer Alert

       6     is a market-oriented consumer group that

       7     promotes consumer choice and competition and

       8     how market economies can produce advances in

       9     technology that can reduce costs for

      10     consumers, improve choices, and sometimes

      11     improve health and safety.  So, I'm here

      12     looking at the tax issues and looking at some

      13     of the other issues from that perspective.

      14               Today my comments are going to

      15     focus on what I think are some overlooked

      16     benefits of competition and choice in tax

      17     jurisdictions.  Essentially, consumers as

      18     taxpayers consider tax costs of jurisdictions

      19     and respond accordingly.  We know that some

      20     jurisdictions can lose sales, but the can

      21     also lose citizens if they overtax, just as

      22     producers if they overcharge can lose









                                                             88
       1     customers.

       2               So, I think some of that tension

       3     between jurisdictions in increasing taxes or

       4     their tax base so that they can provide

       5     services to its citizens is also balanced by

       6     taxpayers who look at the tax base and see if

       7     indeed they're getting services or whether

       8     they might find them better elsewhere.

       9               I live in the District of Columbia,

      10     and we have three tax jurisdictions very

      11     close-by, Virginia and Maryland, and people

      12     make those choices on a range of issues,

      13     whether to buy property, the schooling

      14     issues, et cetera.

      15               But today I wanted to make that

      16     point about consumer choice and competition,

      17     and I think state jurisdictions should look

      18     at that.  We support this creative tension.

      19     We support the fact that as someone earlier

      20     said, that states are the laboratories.

      21     That's where experimentation occurs.  That's

      22     where we find some of the new and better









                                                             89
       1     approaches.

       2               We often I think in looking at tax

       3     issues look at the business point of view,

       4     and we look at the tax jurisdiction point of

       5     view.  What I think today we're not looking

       6     at is the taxpayer point of view, the

       7     consumer point of view, and how many of the

       8     schemes for simplification, many of the

       9     schemes to impose some sort of software

      10     requirements on vendors, verification schemes

      11     for customers and such, what that means for

      12     consumers' right to privacy.

      13               We have seen just recently the

      14     federal government regulators in the

      15     financial area imposing without much

      16     knowledge of consumers massive collection

      17     activities at people's banks for the public

      18     good, public benefits, of getting more money

      19     launderers in jail.

      20               However, there was a huge outcry

      21     when people realized that that meant that

      22     they would be treated as criminals and that









                                                             90
       1     they would be viewed by their banks as

       2     potential criminals and that the data would

       3     be collected in central points and could be

       4     accessed by federal, state, local government

       5     law enforcement.

       6               That know your consumer, those

       7     proposals, were quickly pulled by the

       8     regulators when 250,000 consumers were in to

       9     question them.

      10               I would expect that some soft of

      11     outcry similar to this if consumers did

      12     realize that some of these proposals for

      13     simplification and proposals for uniformity

      14     might have some of the same consequences.

      15               Therefore, I urge this Commission

      16     that consumer privacy issues have to be

      17     paramount.  Consumers are the ones who are

      18     buying the Internet, they're the ones paying

      19     the taxes, and they're the ones who stand the

      20     risk of having their privacy invaded by

      21     having their transactions tracked and

      22     monitored.  Thank you.









                                                             91
       1               CHAIRMAN GILMORE:  Thank you very much,

       2     Ms. Smith.  The next speaker is Gregory

       3     Turner of the California Taxpayer's

       4     Association.

       5               MR. TURNER:  Thank you very much,

       6     Mister Chairman, and members.  I wanted to

       7     thank you first of all thank you for the

       8     gracious invitation for allowing me to come

       9     and participate in this process.

      10               The California Taxpayer's

      11     Association is a nonprofit, nonpartisan

      12     research and advocacy organization.  We

      13     represent businesses large and small in

      14     California on tax policy matters, and with

      15     the production of the Internet Tax Freedom

      16     Act, we have participated in that process as

      17     well.  We were one of the lead advocates for

      18     business in the California version of the

      19     Internet Tax Freedom Act.

      20               Our association generally has a

      21     goal of promoting the economy in general, and

      22     particularly in the nature of electronic









                                                             92
       1     commerce because we think that it has so many

       2     benefits for California in particular.

       3               We have been very fortunate in

       4     California to have had record surpluses at

       5     state and local government levels for the

       6     last several years.  A lot of that has been

       7     attributed to the growth in electronic

       8     commerce.  We are the home to the Internet.

       9     It was invented in California.  We are the

      10     home of the entertainment industry that

      11     provides content.  We are Silicon Valley,

      12     just so we get the competition rolling

      13     between the states.

      14               But I make that point because as an

      15     association we have not come up with a

      16     solution to the problem as an association,

      17     but I want to provide you what I think are

      18     some of the issues that this Commission needs

      19     to address, and we will certainly consider

      20     when recommendations are made by the

      21     Commission.  So, the comments I have in terms

      22     of an actual solution are my own, and I









                                                             93
       1     wanted you to know that up front.

       2               A lot has been said so far on

       3     simplicity and automation and uniformity, and

       4     those are all good things, but I think that

       5     they exist independent of the central

       6     question which I think faces the Commission

       7     which is the obligation to collect.

       8               At some point the question for

       9     Congress and the question for the Commission

      10     is at what point of activity does a person

      11     become subjected to taxes in another

      12     jurisdiction.  Right now we work off of

      13     roughly 150 years of Supreme Court decisions

      14     trying to define at what point the taxpayer

      15     becomes obligated to pay tax in that

      16     jurisdiction.

      17               Simplicity alone does not result

      18     necessarily in the obligation to collect, and

      19     it is that question I think that maybe the

      20     Commission can consider specifically as to at

      21     what point do we force the book seller -- and

      22     for every book seller that has suggested that









                                                             94
       1     they've gone out of business, I've heard the

       2     same from those who have found a new business

       3     as a small entrepreneur who has a unique

       4     business finds a market on the Internet.

       5               That is the beauty of the Internet,

       6     is that it's finding a market for small- and

       7     mid-sized businesses.  So the obligation that

       8     we impose upon them to collect and remit

       9     taxes to various jurisdictions can be a

      10     burdensome one, but at some level it does

      11     become a question of federalism as someone

      12     else has suggested.  That is, at what point

      13     do we obligate that person as a matter of

      14     public policy to collect and remit from

      15     another state.  So, I hope you will address

      16     that question.

      17               I think in terms of specific

      18     proposals, the problems that have come about

      19     because of electronic commerce or electronic

      20     commerce is facing by state and local

      21     taxation have been clearly addressed I think.

      22     I think the solution actually can be fairly









                                                             95
       1     simple, and that is to pursue an effort of

       2     codifying existing standards for NEXUS.

       3               I think that one of the biggest

       4     problems facing business right now is the

       5     uncertainty of independent jurisdictions

       6     interpreting Supreme Court cases in different

       7     manners and applying them differently to

       8     different industries based on either the

       9     sales and use tax or income tax which is

      10     another big issue.

      11               We tend to focus on sales and use

      12     taxes in our comments so far, but the income

      13     tax is as big an issue I think as the use tax

      14     is.

      15               Just one final point I want to make

      16     is in our solution let us not forget the

      17     ability of the states to implement the grand

      18     solution.  One thing I know we face in

      19     California which I have yet to get an answer

      20     to is the fact that -- state concept I don't

      21     think is practically implementable in

      22     California.









                                                             96
       1               That would be something that would

       2     require our constitution and a vote of the

       3     people.  Not to mention probably a two-thirds

       4     vote of our legislature.  So in some

       5     respects, we need to keep a practical eye on

       6     what outcome we propose.  So, thank you very

       7     much.

       8               CHAIRMAN GILMORE:  Thank you,

       9     Mr. Turner.  Next speaker is Gary Cornia.

      10     Mr. Cornia?

      11               MR. CORNIA:  Thank you.  My name is

      12     Gary Cornia, co-chair of the National Tax

      13     Association's Communication and Electronic

      14     Commerce Tax Project.

      15               Kendall Houghton, the other

      16     co-chair, will participate via teleconference

      17     with us on this statement.  You have in front

      18     of you copies of our statement as well as the

      19     final report.

      20               Electronic commerce has significant

      21     implications for state and local taxation,

      22     and it raises a number of questions as to









                                                             97
       1     whether and how state and local taxes should

       2     be applied to such commerce.

       3               The National Tax Association's

       4     Electronic Tax Policy Project was organized

       5     to identify possible solutions to state and

       6     local tax issues that may have existed in the

       7     context of more traditional commerce that are

       8     and have been magnified by electronic

       9     commerce.

      10               The project's initial work embraced

      11     all types of state and local taxes.  However,

      12     the project's participants agreed that the

      13     first set of discussions should focus on

      14     sales use and telecommunications taxes.

      15     Further on in the project, however, it was

      16     agreed that any recommendation made with

      17     respect to electronic commerce would also

      18     have to be considered in the context of other

      19     forms of commerce.

      20               The following categories and issues

      21     were addressed in the report:  Sales and use

      22     tax rates including the question of one rate









                                                             98
       1     per state -- collect sales and use taxes and

       2     other taxing jurisdiction issues; sales and

       3     use tax base; sourcing of transactions;

       4     simplification of tax administration -- and

       5     implementation issues.

       6               For many of those topics, no

       7     substantial agreement on the proper

       8     modification of the sales and use tax system

       9     was reached.

      10               However, with respect to certain

      11     issues considered in isolation, the project

      12     members did tentatively define a consensus

      13     viewpoint.  All such consensus viewpoints

      14     were recorded by the projects and are noted

      15     in the context of the report.

      16               Nevertheless, we cannot present

      17     this report without impressing upon our

      18     audience the central working tenet of the

      19     project:  Namely, that nothing is agreed to

      20     until everything is agreed to.

      21               This caveat means simply that it

      22     would seriously misrepresent the work of the









                                                             99
       1     project to pluck any of the tentative and

       2     preliminary conclusions including those

       3     specifically reached by a formal vote out of

       4     context and present them as a conclusion of

       5     the project.  Ms. Houghton will now continue

       6     with the statement.

       7               MS. HOUGHTON:  Thank you, Gary, and

       8     thank you to the Commission for accommodating

       9     my situation.  Gary Cornia having noted this

      10     caveat, we encourage the Commission members

      11     and other interested parties to review the

      12     entire report at to consider ways in which

      13     this concept can spur and form continued

      14     examination of the critical state tax issues.

      15     Each facet of the report presents -- and a

      16     number of the proposals to improve the taxing

      17     system -- electronic commerce --

      18               CHAIRMAN GILMORE:  Ms. Houghton, we're

      19     having a problem hearing you over the phone.

      20     I'm not sure what that is.

      21               MR. CORNIA:  Perhaps I should just

      22     jump in and finish the statement.









                                                             100
       1               CHAIRMAN GILMORE:  Unless Ms. Houghton

       2     is able to speak into the phone, we'd sure

       3     like to hear her.  But if it can't work any

       4     better, Gary, you may have to finish.

       5               MR. CORNIA:  Thank you.

       6               MS. HOUGHTON:  Is this any better?

       7               CHAIRMAN GILMORE:  Yes, that is better.

       8     Go ahead.

       9               MS. HOUGHTON:  I will start a

      10     sentence back.  Where consensus was not

      11     obtained which is admittedly the case in a

      12     majority of situations, our -- and the

      13     resulting report still offer -- to groups and

      14     individuals concerned about state and local

      15     taxes.  A brief overview of select -- of the

      16     report serves to underscore the incredible --

      17     efforts of -- members --

      18               CHAIRMAN GILMORE:  Ms. Houghton, I'm

      19     sorry, it just isn't working.  The phone is

      20     cutting out.  We're going to call on

      21     Mr. Cornia to go ahead and complete the work,

      22     but we appreciate your with us and we will be









                                                             101
       1     calling you on for your written materials as

       2     well.

       3               MS. HOUGHTON:  Well, thank you.

       4               CHAIRMAN GILMORE:  Gary, if you could

       5     complete the presentation.

       6               MR. CORNIA:  Thank you.  A

       7     discussion of sales and use tax rates focused

       8     on a dual challenge.  One, developing one

       9     rate per state applicable to all commerce

      10     involving goods or services that are taxable

      11     in that state.  Two, ensuring the protection

      12     and equitable distribution of revenues to

      13     local jurisdictions.

      14               Discussions of sourcing tackled the

      15     complex questions of whether to source

      16     transaction to the state level only, and

      17     whether to source transactions uniformly or

      18     by reference to predefined but very low

      19     criteria which could include default rules

      20     for transactions that were difficult or

      21     impossible to source under general rules.

      22               The jurisdictional tax issues are









                                                             102
       1     difficult to describe succinctly, but they

       2     merit here close review as they present

       3     questions of tremendous practical and

       4     constitutional import.  Significant questions

       5     were also devoted to the topic of

       6     simplification of tax administration and

       7     compliance.  There is no question, as you

       8     have heard, that the current system is

       9     complex -- involved in the context of state

      10     physical sovereignty.

      11               The projects examined how the

      12     system could be made less complex and

      13     burdensome, particularly for multi-state

      14     businesses.  A general conclusion is that

      15     many improvements could be made in the

      16     current system.  Such improvements might

      17     include a uniform process of vendor

      18     registration, uniform sales and use tax

      19     returns, uniform laws permitting bad debt,

      20     and et cetera.

      21               There would undoubtedly be

      22     something for everyone in this report.  On









                                                             103
       1     the other hand, no one will agree with each

       2     proposal in the report.  Indeed, this will be

       3     impossible, for we have endeavored to present

       4     every conflicting point of view and competing

       5     rationales articulated in the context of each

       6     issue explored by the project.

       7               The National Tax Association -- and

       8     I do believe that this report represents an

       9     excellent first step towards the meaningful

      10     exploration and potential resolution of

      11     numerous tax policy issues that have been

      12     highlighted by electronic commerce, issues

      13     that may in turn meaningfully impact the

      14     future shape and development of electronic

      15     commerce.

      16               We defer to the Commission and

      17     others to determine whether and how to

      18     implement the various proposals contained

      19     therein.  Ms. Houghton and I welcome your

      20     questions about the NTA project and the

      21     project report.  Thank you.

      22               CHAIRMAN GILMORE:  Mr. Cornia, thank you









                                                             104
       1     very much.  You, sir, I believe you are

       2     Mr. Michael Mazerov.  Is that correct?

       3               MR. MAZEROV:  Correct.

       4               CHAIRMAN GILMORE:  We welcome you here

       5     as an additional speaker and our last

       6     presenter before we move into general

       7     discussion.  You're with the Center on Budget

       8     and Policy Priorities.  Welcome.

       9               MR. MAZEROV:  Thank you, Governor

      10     Gilmore, members of the Commission.  My name

      11     is Michael Mazerov.  I'm a senior policy

      12     analyst with the Center on Budget and Policy

      13     Priorities, and we very much appreciate the

      14     opportunity to give testimony this morning

      15     and to have been added to the list of

      16     speakers this morning.

      17               The Center on Budget and Policy

      18     Priorities is a nonprofit research institute

      19     that studies government programs and public

      20     policy issues that have an impact on

      21     low-income Americans.  The single most

      22     important decision confronting this









                                                             105
       1     commission I believe is whether to recommend

       2     federal legislation empowering states to

       3     require all large businesses to charge

       4     applicable state and local sales taxes on

       5     Internet, mail order, and other remote sales,

       6     and remit the taxes to the states in which

       7     the business's customers are located.

       8               In other words, that's the issue

       9     we've been talking about this morning,

      10     whether as a matter of public policy we are

      11     going to preserve a physical presence NEXUS

      12     standard or whether there is going to be a

      13     deal between the Internet industry and remote

      14     sellers and state and local governments to

      15     trade off abandonment of the physical

      16     presence NEXUS standard for substantial

      17     simplification and standardization of state

      18     and local sales and use taxes.  I think

      19     that's the central issue facing the

      20     Commission.

      21               The enactment of such legislation

      22     would eliminate the current de facto sales









                                                             106
       1     tax exemption that applies to most Internet

       2     and mail order purchases made by both

       3     businesses and individuals.  Failure to close

       4     this obsolete loophole would have three

       5     profoundly negative impacts on low-income

       6     Americans.

       7               If the de facto sales tax exemption

       8     for Internet and mail order sales is not

       9     eliminated, low-income consumers without the

      10     resources or the desire to shop online or by

      11     mail will continue to pay a disproportionate

      12     share of state and local sales taxes.

      13     Businesses in affluent households

      14     increasingly will avoid sales taxes that

      15     low-income households consigned to shopping

      16     in stores will continue to pay.

      17               At present, the de facto sales tax

      18     exemption that applies to mail order and

      19     Internet purchases already provides

      20     disproportionate tax savings to the more

      21     affluent households and businesses most

      22     likely to shop through these mechanisms.









                                                             107
       1               Households with incomes

       2     above $80,000 are more than twice as likely

       3     to shop from catalogues as households with

       4     incomes below $25,000, and businesses account

       5     for approximately 40 percent of catalogue

       6     purchases.

       7               Internet purchasing is even more

       8     skewed toward relatively affluent households

       9     and businesses.  Owning Internet-equipped

      10     computer is the price of admission to the

      11     cybermall, and households with incomes

      12     over $75,000 remain more than eight times as

      13     likely to have home Internet access as

      14     households with incomes between $10-

      15     and $15,000.  That data is provided by the

      16     Commerce Department's recent study on the

      17     digital divide.

      18               So it's not surprising that

      19     Forrester Research, an

      20     Internet-commerce consulting firm, estimated

      21     that households with incomes below $25,000

      22     made 25 percent of all retail purchases last









                                                             108
       1     year, but they made only 6 percent of online

       2     purchases.  Then in addition to affluent

       3     households disproportionately benefiting, of

       4     course, businesses purchases made the

       5     predominant share of purchases on the

       6     Internet.

       7               The second consequence of

       8     preserving the de facto sales tax exemption

       9     for state and local purchases on Internet and

      10     catalogue sales would be that there's great

      11     potential in the future for state and local

      12     governments to seek to preserve a target

      13     level of sales tax revenue as their sale tax

      14     base has eroded in the future by raising

      15     sales tax rates across the board.  If they do

      16     so, state and local governments will not only

      17     be imposing a disproportionate share of sales

      18     and use tax liability on low-income

      19     households, but their liability in absolute

      20     terms will go up as well.

      21               Finally, state and local

      22     governments which will may already be losing









                                                             109
       1     on the order of $5 billion in sales tax

       2     revenues annually from their inability to tax

       3     most mail order sales could be losing an

       4     additional $10 billion annually in just a few

       5     years if Internet purchases remain

       6     effectively tax exempt.

       7               This loss of revenue could

       8     significantly impair the ability of some

       9     states and localities to meet demands for

      10     education funding and other services that

      11     enable the disadvantaged to get ahead in an

      12     increasingly technology-oriented economy.

      13               Therefore, I think it is essential

      14     that the Commission seriously consider

      15     whether as a matter of policy we can any

      16     longer maintain a physical presence NEXUS

      17     standard which is at heart the reason why we

      18     have this de facto sales tax exemption for

      19     Internet mail order purchases.  Thank you.

      20               CHAIRMAN GILMORE:  Thank you,

      21     Mr. Mazerov.  I appreciate that.  Ladies and

      22     gentlemen, I had suggested that we might just









                                                             110
       1     proceed, but we have to take a break, and

       2     there are three reasons.  I'm going to

       3     introduce the members of the Commission, but

       4     the two principal reasons are that the staff

       5     would like to get some chairs and get people

       6     up at the front of the room so that they are

       7     available for our Q&A.

       8               The second reason is that I have

       9     now a note that's been handed to me that I

      10     have to go and confer on the hurricane

      11     situation in Virginia and see what I have to

      12     do for the rest of the day.  So, we'll be

      13     back though within 5 minutes.  It's 11:10.

      14     Let's see if we can't get back in 5 minutes

      15     and then proceed on, and then I'll introduce

      16     the Commissioners.

      17                    (Recess)

      18               CHAIRMAN GILMORE:  Let me just speak

      19     about the schedule for just a moment.  We're

      20     scheduled for another good hour here of the

      21     discussion back and forth.  Then lunch.  I

      22     believe sustenance demands that we still do









                                                             111
       1     lunch, although there's no formal program

       2     connected with it.  We probably ought to go

       3     into the 2-minute warning on some of this,

       4     and the reason is that the information I have

       5     from the Richmond is that the hurricane is a

       6     significant problem that we have got to

       7     address.

       8               I've issued some additional

       9     declarations over the phone just a few

      10     minutes ago regarding evacuations and even

      11     dealing with closure of state government.

      12     So, we have to do something.  I may have to

      13     return to Richmond earlier in the day.  I'm

      14     not aware of what the situation is with the

      15     other Commissioners and what you're able to

      16     do.

      17               I think we ought to see if we can't

      18     get in as much discussion as we can.  It

      19     looks to me like that the international

      20     aspects of this are not extensive, and it may

      21     be that we're able to take those matters up

      22     in San Francisco.  We have plenty of time I









                                                             112
       1     think there on that agenda.  We ought to get

       2     into as much of this discussion as we

       3     reasonably can before Commissioners have to

       4     leave.  Again, I certainly have to return to

       5     Richmond earlier than I had projected.

       6               MR. GUTTENTAG:  Mister Chairman, I

       7     don't want to speak, Mr. Novick is across

       8     there and he can say it, but I think since

       9     I'm involved in the international and

      10     Mr. Novick is involved; we also have

      11     Mr. Smith here.  As far as Mr. Novick and I

      12     are concerned, I think it would be fine with

      13     us.

      14               CHAIRMAN GILMORE:  To defer to San

      15     Francisco?

      16               MR. GUTTENTAG:  Yes.

      17               MR. SOKUL:  Governor Gilmore?

      18               CHAIRMAN GILMORE:  Yes, sir, Mr. Sokul?

      19               MR. SOKUL:  I was going to do this

      20     later, but I'll do it now.  I was going to

      21     recommend something similar to that.  There

      22     were two international witnesses that we









                                                             113
       1     invited but had to back out either because of

       2     the short time frame they had to rearrange

       3     their schedules, and I was going to recommend

       4     that the Commission reinvite them for the San

       5     Francisco meeting.  So what we're talking

       6     about kind of falls in line with that.

       7               CHAIRMAN GILMORE:  Well, I think it

       8     gives us an opportunity to sharpen up that

       9     side of it and discuss it particularly with

      10     our fellow representatives and other

      11     presenters and work that out.  That would

      12     save us some additional time and give us

      13     certainly our discussion time also to the

      14     extent that we have it on the state and tax

      15     issues.  I might say this.

      16               Since this is a very central part

      17     of our discussions, there's no reason why we

      18     can't reawaken some of those discussions also

      19     in San Francisco.  There's nothing to prevent

      20     this Commission from doing anything it wants

      21     to do, quite frankly, in terms of addressing

      22     these issues.









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       1               I do want to take a quick moment

       2     and just in terms of particularly for our

       3     Webcast viewers and others who are listening

       4     to us in other ways just to simply identify

       5     the members of this Commission very quickly,

       6     and I will just simply run through their

       7     names.

       8               I will not ask everyone to stand

       9     and take a bow or anything like that, but I

      10     do think it is important that the citizens of

      11     the United States who is in fact on this

      12     Commission.  Dean Andal, the chairman of the

      13     California Board of Equalization; C.  Micheal

      14     Armstrong, the chairman and chief executive

      15     officer of AT&T; myself, the Governor of

      16     Virginia serving as chairman of this

      17     Commission; Joe Guttentag, senior adviser,

      18     Office of Tax Policy, U.S. Department of

      19     Treasury; Paul Harris, Delegate, Virginia

      20     House of Delegates; Delna Jones, County

      21     Commissioner, Washington County, Oregon; Ron

      22     Kirk, the Mayor of the City of Dallas, Texas;









                                                             115
       1     Mike Leavitt, the Governor of the State of

       2     Utah; Gene Lebrun, the president of the

       3     National Conference of Commissioners on

       4     Uniform State Laws; Gary Locke who was not

       5     able to be with us today, but Gary Locke is

       6     the Governor of the State of Washington;

       7     Grover Norquist, the president of Americans

       8     for Tax Reform; Robert Novick.

       9               He is the general counsel, office

      10     of the United States Trade Representative,

      11     Charlene Barshevsky.  Richard Parsons, the

      12     president of Time Warner, Incorporated;

      13     Andrew Pincus, the general counsel, the

      14     United States Department of Commerce here for

      15     William Daley; Robert Pittman, the president

      16     and chief operating officer of America

      17     Online; David Pottruck, the president and

      18     co-chief executive officer of Charles Schwab

      19     Corporation; John Sidgmore, the vice chairman

      20     of MCI WorldCom and chairman of UUNET; Stan

      21     Sokul, independent consultant for the

      22     Association for Interactive Media; and  Ted









                                                             116
       1     Waitt, the chairman and CEO of Gateway,

       2     Incorporated.  These Commissioners have done

       3     wonderful work, and we appreciate this very,

       4     very much.

       5               I also want to mention, by the way,

       6     that we have together expert panelists who

       7     are in the room as well.  This is a rather

       8     cozy setting, I must say, and we appreciate

       9     the flexibility of the presenters who are

      10     here with us today as well as the

      11     Commissioners.

      12               We also have a group of expert

      13     panelists.  If you all would raise your hands

      14     so that we're aware of your presence, I'm

      15     going to read your names.  That doesn't look

      16     like the whole crowd, but I'm advised that we

      17     have Larry DeFranco, InContext; Peter Grey of

      18     Internet Consumers Association; Walter

      19     Hellerstein, the University of Georgia School

      20     of Law; Brian Horey who has spoken today, the

      21     New York New Media Association; Jim Johnson,

      22     EIKON Strategies, Incorporated; Aaron Lukas









                                                             117
       1     of CATO institute; Michael Mazerov who has

       2     spoken, the Center on Budget and Policy

       3     Priorities; Peter McGeough, Seaman Furniture

       4     Company, representing the National Home

       5     Furnishings Association; Charles McLure of

       6     the Hoover Institution; Brian Hanson of

       7     Hanson Brothers Fresh Seafood; Mark

       8     Nebergall, Software Finance Executive

       9     Council; Mark Rhoads, U.S. Internet Council;

      10     Frank Shafroth, National Governors

      11     Association; Joseph Taricani, Interstate

      12     Solutions, LLC; Oren Teicher, American

      13     Booksellers Association; and Bill Townsend of

      14     Holland Knight, LLP.

      15               All of these ladies and gentlemen

      16     are in the room and are available to us.

      17     Some have presented, but most are available

      18     to us for any information that we may wish to

      19     inquire about.

      20               I offer this to the people of the

      21     country who are listening to this.  All of

      22     the names that I have read, Commission









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       1     members, presenters and experts who are here,

       2     begin to demonstrate the level of complexity,

       3     the level of attention that is being paid to

       4     this and the remarkable diversity of

       5     interests and concerns that are involved in

       6     this entire process.  So, it is a great

       7     challenge, and I certainly appreciate the

       8     commitment of the Commissioners in the work

       9     that they are doing.

      10               We now have a good hour, and then

      11     at least probably another hour after lunch.

      12     Then we will make some decisions after that,

      13     depending on what our hurricane looks like or

      14     other things that are going on and the needs

      15     of the Commissioners as they need to depart.

      16               We have put in a number of

      17     questions.  The Commissioners have asked

      18     questions and they have been submitted in a

      19     list.  I'm going to begin with one question

      20     and then begin to open it up to the

      21     Commissioners as well.  The first question

      22     that a Commissioner has submitted to us is









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       1     given that after 2 years the NTA was unable

       2     to resolve any issues, what evidence is there

       3     to suggest that there are any satisfactory

       4     answers to -- the duty to collect and remit

       5     sales and use taxes on electronic commerce.

       6     Are there Commissioners that would like to

       7     speak to an issue like this?

       8               MR. ANDAL:  Yes.

       9               CHAIRMAN GILMORE:  Mr. Andal, you

      10     probably submitted this question, so please

      11     proceed.

      12               MR. ANDAL:  Actually, I've be happy

      13     to take credit for it because I agree with

      14     it, but it wasn't mine.  You're going to have

      15     to bear with me.  For the Commissioners, I

      16     think we passed out another copy of this

      17     proposal that I'd like to offer today.  It is

      18     a new way of dealing with some of these

      19     difficulties.

      20               It is in direct conflict with I

      21     know some of the views of some Commissioners,

      22     Governor Leavitt and some of the others on









                                                             120
       1     the Commission, but I don't believe this

       2     Commission is going to advance unless we

       3     start talking substantive proposals.

       4     Therefore I'm going to offer this one today,

       5     and if you bear with me, I'll give an

       6     introduction to it.

       7               I don't agree with two of the

       8     claims that I heard today, and I've heard

       9     endlessly to be honest with you, that state

      10     and local governmental officials offer as

      11     problems with the growth of electronic

      12     commerce in America.  Those two claims put

      13     shortly is that state and local governmental

      14     revenues are in decline as a result of

      15     electronic commerce and therefore services

      16     are affected, and the most often heard

      17     criticism is that school revenues are at

      18     stake.  I don't agree with that.  I guess

      19     first the facts.  There is no decline right

      20     now in sales tax across America.

      21               In virtually every state, sales tax

      22     revenue stream over the last 5 years has









                                                             121
       1     increased at record levels.  In California

       2     where we have the most Internet tax friendly

       3     laws as it relates to sales tax, our rate of

       4     increase in sales tax revenue from

       5     traditional retailers and our use tax

       6     collections is exceeding population growth

       7     plus inflation for the last 5 years.  It's at

       8     historic rates of increase.  So the facts

       9     right up front belie the case that there's

      10     been any loss of revenue to date.

      11               The next question is will there be

      12     in the future.  That's something we can all

      13     argue about because the future is not here

      14     yet.  Those that disagree with me argue that

      15     there will be, and it's certain.  I argue

      16     that there won't be, and I am prepared to

      17     tell you why I believe that.  In California

      18     we have a use tax.

      19               It is not true that sales of

      20     tangible personal property over the Internet

      21     are not taxed when they're sold by an out-

      22     of-state retailer.  They are taxed.  That's









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       1     what the use tax does.  It is true that some

       2     of that is not collected, but let me tell you

       3     why I think that is a very minuscule amount

       4     of money.

       5               First of all, we had testimony here

       6     both here today and at our last meeting in

       7     Virginia that suggests two big reasons for

       8     the lack of a drain of state revenue based

       9     upon use tax.  The first big reason is that

      10     the Internet commerce transactions on the Net

      11     are heavily service related.

      12               In fact, at our meeting in Virginia

      13     we had testimony that travel tickets and

      14     stock trades accounted for almost half of all

      15     the electronic commerce that we have now.

      16     Neither ticket sales nor stock trades are

      17     taxable in California under the sales tax

      18     law, and I don't think they're taxable in

      19     most states.  Therefore, even if you didn't

      20     have Quill (phonetic), and even if the states

      21     had the right to assert tax collection, that

      22     half would not be collectable because it's









                                                             123
       1     not taxed under current sales tax law.

       2               Then you make another screen.  The

       3     other screen is that over 80 percent of the

       4     electronic commerce transactions are business

       5     to business, not business to consumer.

       6               In California we audit heavily.  We

       7     have over 4,000 people who work for the

       8     agency I head up, and those 4,000 people work

       9     very hard every day making sure everybody

      10     pays their tax.  They audit an enormous

      11     amount of people.  As a matter of fact, our

      12     audit rate in California much to my dismay I

      13     might add is twice the percentage of the IRS.

      14               We audit any business of any size

      15     in California every 3 years.  Most of the

      16     business representatives here can attest to

      17     the fact that we visit you often.

      18               The reason that's important is that

      19     when we audit these businesses we look at

      20     their whole range of books.  That includes

      21     use tax.  If they bought something from an

      22     out-of-state retailer, we find it and we make









                                                             124
       1     them pay.  So, you get that screening coming

       2     off, the 80 percent and the 50 percent coming

       3     down and you can see this whittling down to a

       4     fairly manageable problem.

       5               Then you get to the more modest

       6     stuff, planes, boats, cars, all have to be

       7     registered in virtually every state, and

       8     almost every state has figured out that if

       9     you tie use tax collection to the

      10     registration of the boats and the planes and

      11     the automobiles, that you can force the

      12     person to pay the use tax or otherwise you

      13     don't license their vehicle.

      14               So, we're getting down to

      15     relatively modest purchases by individuals.

      16     We could still collect that if we wanted to

      17     invest the resources in chasing them down,

      18     but it is a very modest amount of money.  In

      19     California it is less than $100 million that

      20     we anticipate that we're losing, and that's

      21     on a base of $26 billion in annual sales tax

      22     revenue.  We don't view it as a problem now,









                                                             125
       1     and I don't view it as a problem in the

       2     future.

       3               I want to give you an example that

       4     makes my philosophical commitment to this

       5     very apparent.  In 1991 I was a state

       6     legislator in California during the economic

       7     decline.  We had a series of tax increases

       8     that added up to $7 billion at the time.  The

       9     worst one was what we called the Bunker Fuel

      10     Tax.

      11               The Bunker Fuel Tax was a tax on

      12     these huge tankers that come into Los Angeles

      13     loaded with oil.  They're several times the

      14     size of a football field, and they come in.

      15     Over 17,000 people were employed taking the

      16     oil off the tanker.  We had a bunker fuel tax

      17     on that oil, and it wasn't taxed previously.

      18               The result was not only did we not

      19     get the tax that was anticipated, but we lost

      20     about 85 percent of the traffic because they

      21     fueled up in Seattle and they fueled up in

      22     Mexico and other places to avoid the tax.  My









                                                             126
       1     point is, some tax is not worth collecting.

       2     It's not worth the administrative costs, it's

       3     ont worth the audit time, and it's not worth

       4     the money, and I think that's where we are

       5     right now on some of these use tax

       6     collections that are not taking place on the

       7     Net.

       8               CHAIRMAN GILMORE:  If you can expedite,

       9     Dean, we need to try to get as many people in

      10     as we can.

      11               MR. ANDAL:  I have a lot to say,

      12     and I've listened to quite a bit, so I really

      13     would like to say it.  I enjoyed coming to

      14     New York to argue over bylaws, but I want to

      15     talk about something real here, and this is

      16     what I'm offering.

      17               The other argument is Main Street

      18     merchants, and the examples are given like

      19     bookstores being run out of business.

      20     Independent bookstores are not being run out

      21     of business by the Net.  They're being run

      22     out of business by big Main Street merchants









                                                             127
       1     like Barnes & Noble and Wal-Mart.  They're

       2     not being run out of business by the Net.  In

       3     fact, a lot of bookstores are competing with

       4     Wal- Mart and Barnes & Noble by use of the

       5     Net.

       6               That leaves us with a real problem,

       7     confusion, litigation, administrative costs,

       8     all revolving around NEXUS issues.  We have

       9     three options to deal with it.  One a lot of

      10     people have tried.  That is, a compromise

      11     between the business community, a uniformed

      12     rate on the one side, and an overturning of

      13     Quill on the other.

      14               I point you to the NTA's final

      15     report on page 10, and I want to read this

      16     because I think it's critical to what we're

      17     talking about:  "For the business

      18     representatives, one sales tax rate per state

      19     was an essential ingredient in any sales tax

      20     simplification project."

      21               Midway through the project endorsed

      22     the principle that there should be one sales









                                                             128
       1     tax rate.  For the government

       2     representatives, an expanded duty to collect

       3     sales and use tax on remote sales was the --

       4     ingredient.  The project, however, was never

       5     able to reach a consensus on expanding the

       6     duty to collect.

       7               That deal has been shot for years.

       8     It doesn't work.  In fact, it's been

       9     introduced in Congress many times and it

      10     hasn't achieved even getting out of

      11     committee.

      12               I think we are going to be left

      13     with three options whether we like it or not

      14     in the end of this as Commissioners.  We can

      15     try to work that deal again, and you can try

      16     to achieve two-thirds vote here and then you

      17     can send it over to Congress and see if it

      18     has any better success than it's had for the

      19     last 10 years.

      20               We can do nothing, and we can allow

      21     the litigation and administrative costs and

      22     burdensome costs of confusion and









                                                             129
       1     complication to continue.  Or we can do what

       2     I've offered here.  This is the proposal.

       3               I've actually put it into words.

       4     The legislation is in here.  But the basic

       5     thematic part of it is I deal with two pieces

       6     of existing law.  Quill, the Supreme Court

       7     case, and Public Law 86272 that involves

       8     income tax apportionment NEXUS liabilities

       9     that's put into the deal.

      10               I merged those together and I

      11     provided safe harbor for various forms of

      12     electronic commerce.  Short, I codified Quill

      13     and I expand the protections of 86272 on

      14     income tax to electronically based products.

      15               I have it here on paper, I'm

      16     willing to defend it, and I welcome my

      17     opponents to do the same.  We're not going to

      18     get anywhere if we just keep giving ourselves

      19     a list of problems.  Somebody is going to

      20     have to put their solution on paper.  I've

      21     tried to do that with my view, and I welcome

      22     that from my opponents on the Commission.









                                                             130
       1     Thanks for the time.

       2               CHAIRMAN GILMORE:  Dean, thank you, and

       3     we also will of course be sure that the

       4     matter gets a thorough review also in San

       5     Francisco when we're there.  Governor

       6     Leavitt?

       7               GOVERNOR LEAVITT:  I'd like to ask the

       8     panel a question.  As I listened as carefully

       9     as I could, and I've really enjoyed the

      10     discussion, there were a number of themes

      11     that I heard reoccurring in every

      12     presentation, and I'd like to bounce my sense

      13     off of what I heard as reoccurring themes.

      14               One is that the existing system is

      15     a mess I think was the best way I heard it

      16     described; that it needs to be radically

      17     simplified.  We're not talking just about

      18     remote sales here.  We're talking about the

      19     entire system of sales tax adjudication in

      20     the country.

      21               The second thing I heard is there

      22     really ought be no new tax imposed on the









                                                             131
       1     Internet at all.  I heard that reoccurring

       2     over and over among all the presentations.

       3     Third, that any system we would have that is

       4     a burden to the seller is a nonstarter; that

       5     the system, whatever we do, has to be no

       6     burden to the seller.

       7               Fourth, that anything that

       8     compromises privacy and requires an

       9     identification of the sellers goes too far

      10     and therefore is an unnecessary complication.

      11     Fifth, and some acknowledgement of the fact

      12     that we have a country here that recognizes

      13     the sovereignty of states and the ability for

      14     them to do different things in different

      15     states different ways, and we've got this

      16     problem of commerce we've got to work

      17     through, of interstate commerce, but that was

      18     a principle.

      19               Next, there shouldn't be any

      20     special classes necessarily of taxpayers;

      21     that if we have more revenue, we ought to cut

      22     taxes then as a means of solving that.  I









                                                             132
       1     heard over and over the statement that there

       2     was technology that could solve these

       3     problems.  I guess the question I'd like to

       4     ask is, number one, do any of you disagree

       5     with the principles that I've laid out there

       6     that I heard you say, or at least that I

       7     interpreted to say, number one.

       8               Number two, does it not seem to you

       9     that the business of this Commission ought to

      10     be at least partially about figuring out

      11     whether such a system that could be radically

      12     simplified that would have no new taxes, that

      13     would remove the burden from sellers, that

      14     would not compromise privacy, that would in

      15     fact not create special classes, and would

      16     protect the sovereignty of states, isn't the

      17     responsibility of this Commission, and I'd

      18     ask this to my fellow Commissioners, to

      19     figure out if a system like that can work?

      20               I think it was Henry Kissinger who

      21     once said it's a amazing how absence of

      22     alternative clears the mind.  If we can't









                                                             133
       1     find a system that does those things, it

       2     seems to me we ought to go on to a much

       3     broader question and that is if it doesn't

       4     work, let's figure out a system that does,

       5     and let's get away from sales tax generally.

       6               But part of our discussion here

       7     ought to be revolving around whether or not

       8     we can make a system like that work, and I

       9     would like to ask your response to that, and

      10     then I would like to have some discussion in

      11     the Commission about whether or not that's a

      12     reasonable goal for us to undertake in the

      13     very short time we have to continue.

      14               CHAIRMAN GILMORE:  I believe that that

      15     question may have been generally directed

      16     towards the panelists.  We can't have every

      17     answer for 5 minutes or we'll be here all

      18     day, but if you could be brief, and then any

      19     Commissioner that wishes to address that, of

      20     course also has top priority.  Yes, ma'am?

      21               MS. CALDWELL:  Kaye Caldwell with

      22     CommerceNet.  I also found this concept of a









                                                             134
       1     technology solution fairly attractive and

       2     created a working group within CommerceNet to

       3     take a look at it several years ago.  I have

       4     become convinced that that not actually work.

       5     I think there are enormous issues there.  I

       6     would encourage people who are looking at it

       7     to continue to look at it, but I don't think

       8     that we can rely on that solution being

       9     productive.

      10               It would be nice if it was, but I

      11     don't think it's technically feasible.

      12     There's an enormous infrastructure problem

      13     there that you're going to have to deal with

      14     I think that's going to be a problem.

      15               As far as the level playing field

      16     issue is concerned, one of the things that we

      17     really have to keep in mind is that you are

      18     correct, there is ont a level playing field.

      19     You give local merchants all sorts of

      20     exemptions to this system that you are trying

      21     to impose on electronic commerce, and that is

      22     where the level playing field problems come









                                                             135
       1     in.

       2               The local merchants get to find in

       3     one place with one jurisdiction, and you

       4     don't ask them to ask them to ask everyone

       5     who comes into their store where are you

       6     from, we have to collect the tax based on

       7     where you live.  That is what you're asking

       8     of remote merchants.  Thank you.

       9               CHAIRMAN GILMORE:  Presumably of bricks-

      10     and-mortar merchants also I suppose if we're

      11     going to level the playing field.

      12               MS. CALDWELL:  Presumably?

      13               CHAIRMAN GILMORE:  Bricks-and-mortar

      14     merchants also if we're going to level the

      15     playing field.  Is that right?

      16               MS. CALDWELL:  Well, exactly.

      17     Exactly.  If you're going to ask Internet and

      18     remote merchants to identify where everyone

      19     is coming from, I think you have to ask that

      20     of local merchants, and that's where we get

      21     into severe privacy problems.

      22               CHAIRMAN GILMORE:  Yes, sir?









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       1               MR. CORNIA:  Governor, if I may

       2     respond to your initial question about the

       3     NTA project not reaching a conclusion, I

       4     think that Governor Leavitt has outlined very

       5     succinctly the issues that we've heard from

       6     the panelists this morning.

       7               While it is true the NTA report did

       8     not come to a specific recommendation on each

       9     of these issues, as you read the report,

      10     particularly in the area of simplification,

      11     you will find that we have addressed a number

      12     of areas where exploration and study I

      13     believe will lead to ways where

      14     simplification will come about.

      15               So, while conclusions were not

      16     reached on many issues, we have articulated a

      17     number of very important points where this

      18     Commission I think should take the time to

      19     examine those things and flesh out those

      20     answers or have others help you flesh them

      21     out.

      22               CHAIRMAN GILMORE:  It seems to me that









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       1     we can do a follow-on and come at it from a

       2     much different perspective, quite frankly,

       3     the members of this Commission.  We're all so

       4     balanced and have such different points of

       5     view that we can do that.  I was struck by

       6     the report's position that nothing is decided

       7     unless everything is decided.

       8               That may be just too high a

       9     standard in this debate, and it may be that

      10     we should decide what we can talk to the

      11     congressmen and not pretend that we ourselves

      12     are the congressional leaders likely to make

      13     policy, but instead offer them what guidance

      14     that we can in accord with the issues that we

      15     have laid down.

      16               MR. CORNIA:  I don't work on many

      17     commissions accused of too high a standards.

      18     Thank you.

      19               CHAIRMAN GILMORE:  Sort of a back-handed

      20     suggestion, high standards.  Are there others

      21     that wish to make brief comments?  Yes, sir.

      22               MR. RAUSCHENBERGER:  Senator









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       1     Rauschenberger from Illinois, and I just want

       2     to point out I think that the Governor

       3     essentially defined the problem very

       4     succinctly.  The argument that it's

       5     impossible to electronically or to use

       6     software to overcome some of these problems

       7     is probably valid if you agree that you're

       8     going to sustain 7,000 separate rates in 190

       9     different jurisdictions and no

      10     standardization or definitions.

      11               If, however, you make the

      12     assumption that you can and will standardize

      13     both rate and definition, it is clearly a

      14     solvable problem.  To argue that we lost our

      15     bulk oil tankers because we had a tax

      16     differential and then to flip the argument on

      17     its head and say but it's not going to affect

      18     Internet growth seems to buy both sides of

      19     question from Commissioner Andal.

      20               CHAIRMAN GILMORE:  Let's take one or two

      21     more from the panel and then get back to our

      22     Commissioners, I believe.  Yes, ma'am?









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       1               MS. SMITH:  I'm Fran Smith.  I

       2     appreciate Governor Leavitt's synopsis as he

       3     saw it, but I think some important issues

       4     that were brought up by panelists were not

       5     considered.  One, that there does not seem to

       6     be a major problem.

       7               Two, that states are important

       8     laboratories of experimentation, and one fix

       9     may not be the right answer, that we may want

      10     to look and see how the evolution of how

      11     states approach some of the tax issues.

      12               I think the other one you had

      13     mentioned, the privacy of vendors, I guess,

      14     and I think the privacy of customers.  So, I

      15     would approach that.

      16               CHAIRMAN GILMORE:  Let's take one or two

      17     more.  Yes, sir?

      18               MR. BAYLESS:  Illinois Power.  The

      19     point I would like to make, I would say that

      20     right now it is a possibility that it hasn't

      21     affected commerce.  Main-line industries like

      22     ours -- industry hit the Internet which we









                                                             140
       1     are doing rapidly.  Last year we paid in our

       2     industry $5 billion of sales tax, not

       3     property tax income, pure sales tax.  One of

       4     the companies that I helped form when I was

       5     at another company, New Energy Ventures, is

       6     doing quite well in New York because we found

       7     a way to get around the 8 percent gross

       8     receipts tax.  In an industry where margins

       9     are 1 percent, that gives us an incredible

      10     cost advantage.

      11               I would say that our position

      12     though as an industry, that everyone is a

      13     customer and we'll have the opportunity

      14     within years to log on and buy power.  It is

      15     keep it simple.

      16               Our industry would not oppose any

      17     type of a tax.  That's up to the local

      18     jurisdictions.  But we simply do not want to

      19     make us subject to thousands of sales taxes

      20     and potential audits from those people.  We

      21     would be selling nationwide power from all

      22     over.  What we need is certainty that we know









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       1     what we're doing, and when we do it it's

       2     done; we're not going to be audited by

       3     hundreds of people.

       4               I think if you can devise a system

       5     that's either national or state by state or

       6     whatever so that if we sell power -- we have

       7     a pretty large office in Utah -- if we sell

       8     power in Utah in Salt Lake, we know it's a 4

       9     percent tax rather than have to figure out

      10     each jurisdiction.

      11               I think if you could do that, much

      12     of the opposition from main-line I'll call us

      13     industries would fall way because we have no

      14     bone to pick on whether there should or

      15     should not be Internet taxation, but we do

      16     not want to descend into a morass of 7,000

      17     different jurisdictions.

      18               We will have millions of

      19     transactions a day, I believe, in 10 years,

      20     and we are a major sales tax payer in the

      21     United States.  Thank you.

      22               CHAIRMAN GILMORE:  That point is clear.









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       1     Let me come back to the Commissioners, and if

       2     we need to we'll come back into the panel at

       3     a later time.  David Pottruck has had his

       4     hand up.

       5               MR. POTTRUCK:  Thank you, Governor.

       6     Governor Leavitt, I would agree with the

       7     observations that you had.  I think you have

       8     laid out many of the issues, but I think it's

       9     just a start.

      10               I disagree with Commissioner Andal

      11     that the problem is small and staying small.

      12     I think it's going to get very large.  I

      13     think that we believe at our firm that the

      14     winning strategy on the Net is going to be

      15     what we call clicks and mortar which is

      16     really the combination of online and physical

      17     presence.

      18               We're going to be in a world where

      19     people are going to go to a store and try on

      20     a suit that's $1,000 and then go home and

      21     order it over the Internet to save $70 in

      22     tax.  I think we're going to see a fair









                                                             143
       1     amount of that.

       2               We already see that kind of

       3     behavior of people going over state lines to

       4     buy things that is nontaxed.  It's going to

       5     motivate that kind of behavior.  The issue of

       6     NEXUS and collecting these sales taxes is

       7     going to even more complicated when you have

       8     this intersection of the physical world and

       9     the cyberworld.

      10               Governor Leavitt also said at our

      11     last meeting, and I remember this, there's a

      12     point in time where a problem is big enough

      13     to see, but small enough to solve.  The good

      14     news is we have an opportunity to think about

      15     this and not have to solve it tomorrow.  We

      16     can recommend to Congress a process that can

      17     take 3 or 4 years to methodically approach

      18     changes because it's not yet the huge burden

      19     that it is likely to be later, but it is not

      20     today.

      21               I grant you that it's not a big

      22     problem today, and that's the good news.  We









                                                             144
       1     do have an opportunity to make a huge

       2     difference.  But I think the notion that this

       3     will not inevitably go from a $100 million

       4     issue in California to $500 million issue,

       5     and $500 million stuff sounds like real money

       6     to me.

       7               That's something we have to face up

       8     to.  So, I think we have before us an

       9     opportunity to look at what we have, make

      10     some recommendations for change and deal with

      11     some of the problems with today's system.

      12     This has been fascinating to me because

      13     unlike most of the people here from

      14     government, I'm sure many of us from the

      15     private sector really had not been focused on

      16     issues of NEXUS and state taxes and use

      17     taxes.  These are all new issues me, and it's

      18     fascinating how incredibly complicated our

      19     system is.

      20               Usually things like this that have

      21     evolved over many years become so difficult

      22     to change.  I think Commissioner Andal









                                                             145
       1     suggested that we've been working at this for

       2     years.  There were several comments from the

       3     panel about how this problem has been

       4     addressed with no solution.  Usually a

       5     solution to a problem like this comes when

       6     there's a galvanizing event, something that

       7     creates the necessity to do it now.

       8               E-commerce has happened so fast

       9     that we again have the notion where we could

      10     get our congresspeople to take a look at the

      11     problem and say now is the time to do

      12     something that will achieve simplification,

      13     achieve fairness, be revenue neutral, and

      14     create a level playing field and be better

      15     for all Americans and all businesses.

      16               I would just add one more comment,

      17     and that is that many people have said today

      18     that the Internet is fueling our economy and

      19     it's creating a boom in America.  I think in

      20     reality competition and innovation is what's

      21     creating the boom in America.  The Internet

      22     is simply a great vehicle, and we have to









                                                             146
       1     seize upon the benefits of competition and

       2     innovation to also use that as an opportunity

       3     to fix our tax system.

       4               CHAIRMAN GILMORE:  Mr. Kirk?

       5               MAYOR KIRK:  Governor, with the risk

       6     at this point, I'm reluctant to speak because

       7     someone came up from the back and told me how

       8     impressed they were with my performance today

       9     and I reminded them I hadn't said anything,

      10     that that was yesterday.  I'm at the risk of

      11     eroding that every second, I guess.

      12               First I wanted to thank all of the

      13     speakers.  It was a learning process for me

      14     as a mayor as well.  Even though obviously I

      15     agreed with some speakers more than others, I

      16     appreciate you taking the time to come and

      17     distill what I know.

      18               Secondly, I think Governor Leavitt

      19     has outlined broadly what I think is and has

      20     been sort of a central I think emerging thing

      21     among this Congress which is to try to fix

      22     the problem while it is small and have state









                                                             147
       1     and local governments have the comfort that

       2     this is not a wholesale attack on the way we

       3     fund those things that are part of a social

       4     compact that we expect.

       5               But also accept the real challenge

       6     that we've got a system that's a mess and

       7     that we have a responsibility to say to the

       8     industry if they're going to say look we

       9     don't mind paying our fair share, that we're

      10     willing to rethink differently how we apply

      11     those taxes so that we achieve these goals of

      12     simplicity, fairness, uniformity, protection

      13     of consumer privacy, and I believe if we

      14     could focus on those we can get there.

      15               Then third, I greatly thank David

      16     for your observation in terms of how you look

      17     at this from the private sector and those of

      18     us who do it in the public sector.  It's not

      19     any better the fact that we go through this

      20     routinely than you do.

      21               My dad used to always have a

      22     favorite saying that God so loved the world,









                                                             148
       1     he didn't send a committee.  I don't know how

       2     that speaks to our efforts or not, but I am

       3     confident that we can do -- there were a

       4     couple of things that I wanted to -- because

       5     we've heard again and again, and I do think

       6     the Governors -- we've heard so many people

       7     come talk about that we don't need to do

       8     anything because there are these billions of

       9     dollars that states are flush with.

      10               Yesterday it was 8 billion, this

      11     morning it was I heard 19.  By the end of the

      12     day it was 33 billion.  The only thing I

      13     would challenge those same people doing those

      14     statistics, go back and find out what those

      15     states' unfunded needs are.

      16               I will tell you I'm very proud of

      17     the fact that as a mayor and like others --

      18     and I'm a Democrat, and I can tell you I've

      19     cut taxes which some people an anachronism.

      20     We've cut taxes.  We just passed the most

      21     progressive bond program and the biggest bond

      22     program in our city's history, $546 million,









                                                             149
       1     but we went to the public and the citizens we

       2     care about, said tell us what you think.

       3               They gave us a list of $3 billion.

       4     Now, some people would look at us and way,

       5     boy, your city is going and my city looks

       6     just like what Dean says.  Our sales tax

       7     revenues are up.  But I've still got streets

       8     with potholes, and my streets look just like

       9     New York.

      10               They're clogged and they're

      11     crowded.  You're going to rush out of here

      12     and try to get to the airport and sit in

      13     traffic in for 2 hours and then find out

      14     they've cancelled the flights anyway.  Then

      15     you're either going to cuss the mayor or

      16     you're going to fuss at the FAA or the

      17     airlines.

      18               All I would say in this cyberworld,

      19     until you get to the point that you make that

      20     purchase and the book magically materializes

      21     out of your computer, they're still going to

      22     be delivered over city streets, over









                                                             150
       1     airports, over resources that we collectively

       2     come together and say we need to do this as a

       3     community because that stuff is expensive to

       4     build.

       5               I've been trying to find some --

       6     for common ground for Dean and Grover and I.

       7     Grover, I guess you won't be surprised to

       8     know I too am a product of the public school

       9     system.  For me still this all goes about

      10     making sure that we have schools that work

      11     because this whole industry, this incredible,

      12     wonderful industry is based on intellectual

      13     power at the end of the day.

      14               My biggest concern in all of this

      15     is that schools, universities, research

      16     centers, are expensive as heck, and we cannot

      17     continue to rely on imported talent.

      18               I think if all the Commissioners

      19     want to do something instructive between now

      20     and San Francisco, go to any advanced applied

      21     science, engineering, mathematics program in

      22     the United States and don't even get into the









                                                             151
       1     issue of how many women and minorities you

       2     see.  Look at how many American students you

       3     see.

       4               Look how small they are.  We have

       5     to have I think a national focus on how we

       6     need to focus on math and sciences and fund

       7     public education.  Whether it's $100 million

       8     or $5 million, I don't want to do anything to

       9     diminish our states' abilities to supply the

      10     intellectual fuel that's going to really feed

      11     this industry.

      12               CHAIRMAN GILMORE:  Members of the

      13     Commission, I've asked my time keeper to

      14     restart my clock, and if I start fidgeting it

      15     means that we're close to 5 minutes per

      16     speaker.  But there are no limits on this

      17     Commission technically, so we'll just do the

      18     best we can with the time that we have.

      19               Before I call on Mr. Norquist who

      20     had his hand up next, let me mention two

      21     things.  We're focusing on two costs here.

      22     One is the recognition that businesses are









                                                             152
       1     not paying this tax.  Consumers are paying

       2     this tax.  The people of the United States

       3     are paying these taxes on commerce on the

       4     Internet, and their voice of course has to be

       5     spoken out among these Commissioners as well.

       6               The second is that business is

       7     paying a cost, however, and that is the cost

       8     of compliance, and there is a recognition

       9     that there is an expense involved with that.

      10               So, the simplification issue goes

      11     to the questions of whether or not business

      12     can in fact impose a tax policy.  The

      13     underlying question is, what should a tax

      14     policy be, and that I think is validly before

      15     this Commission.  Mr. Norquist, you had your

      16     hand up?

      17               MR. NORQUIST:  I just found missing

      18     from the list that Governor Leavitt put

      19     together is what I took away from yesterday

      20     and this morning, that this industry,

      21     telecommunications and the building blocks of

      22     e-commerce, is an overly taxed industry now









                                                             153
       1     and the idea that we should be for revenue

       2     neutrality meaning maintain present levels of

       3     taxation, I don't think is necessarily a

       4     position the American people share.  Taxes

       5     are too high; they should come down.  We've

       6     been seeing that in the polls over the last

       7     several months.

       8               People want lower taxes, but I

       9     think particularly one of the things our

      10     Commission has been asked for in a letter we

      11     got from the leadership of the House of

      12     Representatives asked to focus on as well is

      13     the present level of taxes and the damage

      14     that's presently doing as has been mentioned

      15     on the digital divide.

      16               I mean, one of the things that

      17     hopefully the political leaders will do is

      18     stop damaging things.  Reduce the taxes that

      19     they now at the state and local level and at

      20     the federal level with this 3 percent tax and

      21     other taxes, the damage they're now doing to

      22     America's children and to our future by









                                                             154
       1     taxing telecommunications and access.

       2               So, I certainly have been hearing

       3     yesterday and today that this is an overly

       4     taxed industry now, and we ought to be

       5     looking for ways to reduce the tax burden on

       6     telecommunications and the Internet for now

       7     and into the future.

       8               CHAIRMAN GILMORE:  I have a list of

       9     people who wish to speak.  I'm placing my

      10     name third.  Mr.Lebrun, I think you were

      11     next.

      12               MR. LEBRUN:  Thank you, Governor --

      13     listed some issues and ask can it be fixed.

      14     I think it can be fixed, and I think all we

      15     have to do is look at the model of commerce

      16     in general in this country over the last 100

      17     years.

      18               One hundred years ago the states

      19     were going in various directions in the law

      20     of sales, the law of secured transactions,

      21     you name it.  The Uniform Commercial Code was

      22     drafted about 50 years and enacted by every









                                                             155
       1     one of the 50 states, and it has enabled

       2     commerce to flourish in this country.  The

       3     UCC is the envy, I believe, of most countries

       4     in the world today, and that was done at the

       5     state level.

       6               It didn't have to be done at the

       7     federal level, and I would suggest that the

       8     states can again get together and adopt a

       9     uniform sales tax law, whatever you want to

      10     call it.  It won't happen overnight, but it

      11     can be done because it's been done before.

      12     That type of uniformity can flourish the

      13     Internet just like it has general commerce

      14     over the last 50 years.

      15               CHAIRMAN GILMORE:  Paul Harris?

      16               MR. HARRIS:  Thank you, Governor.

      17     I wanted to thank the panelists for their

      18     excellent presentations this morning as well.

      19     I've certainly learned a lot this morning and

      20     throughout this process.  I listened to

      21     Governor Leavitt's summary of recurrent

      22     themes that we heard this morning, and I









                                                             156
       1     agree with just about all of them.  But I

       2     heard some themes that I had taken down in my

       3     notes that were not emphasized.

       4               There are some questions about the

       5     constitutionality of some of the taxation

       6     that we currently have.  Someone even

       7     mentioned taxation without representation

       8     which I thought was interesting.

       9               We talked about a digital divide in

      10     our country which I think is something that

      11     all of us ought to be concerned about.  We

      12     should be concerned about that from the

      13     perspective of how we close the digital

      14     divide and making sure that we don't

      15     recommend any policies that might exacerbate

      16     that divide.

      17               We heard about arresting the growth

      18     of the Internet and related technologies

      19     through taxation.  I heard individuals talk

      20     about the effects of taxation on Main Street

      21     businesses.  Some say Main Street businesses

      22     will not be affected, others say they will be









                                                             157
       1     severely affected, and there are other

       2     opinions.  We heard talk about states serving

       3     in an historic role as laboratories for

       4     experimentation.  We heard federalism

       5     concerns.

       6               These are some of the issues that I

       7     think we need to focus on, as opposed to how

       8     we fix it.  When I hear how we fix it, I hear

       9     that some people have already concluded that

      10     we need to tax e-commerce.  That's what I

      11     hear.  Inherent in the discussion about what

      12     we can do to simplify it and make sure it's

      13     tax neutral, et cetera.

      14               These all seem to be buzz words and

      15     code words:  Well, we're going to e-commerce.

      16     It's just a question of how we do it.  I

      17     think if these discussions at this level are

      18     going to be meaningful that we just need to

      19     be straight up and honest.  I'm a little bit

      20     uncomfortable about going down the road to

      21     fixing the problem because what I hear is

      22     that we're going to tax it, and I don't know









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       1     that we've made that decision as a

       2     Commission.

       3               Before we get too far afield on

       4     some of the principles that Governor Leavitt

       5     highlighted, I thought I would suggest some

       6     of the themes that I heard as well because I

       7     think they're equally as substantive and

       8     relevant to our conversations.

       9               CHAIRMAN GILMORE:  I have my list and

      10     I'm next on it, and I have numerous questions

      11     that I've thought about since I've been

      12     chairman of this Commission for a long time,

      13     and I'm going to toss two of them very

      14     quickly out there for anybody to respond to

      15     either out of the panels or out of the

      16     Commission, or even maybe an ongoing

      17     discussion about this.

      18               Number one, as I reviewed the

      19     charter, the command from the Congress on

      20     this, and they have commented on it now by

      21     letter to this Commission that I think has

      22     been distributed to all the Commission









                                                             159
       1     members, but it is that they expect that

       2     remote sales whether it's by Internet or by

       3     mail order will be treated similarly in the

       4     future.  That seems to be what is under

       5     discussion.

       6               Sometime back there was a

       7     discussion about remote sales through

       8     catalogue sales.  The remote collection has

       9     not occurred in the United States.  Has this

      10     meant that the streets are torn up, that the

      11     fire departments are no longer working, the

      12     police are out in the widows are in the

      13     streets?  It hasn't.

      14               So, I guess the question I think we

      15     have is, is this qualitatively different,

      16     because I think that people will be treated

      17     the same no matter what.  So that's the

      18     question.  Since remote sales has not

      19     demonstrated as a matter of history that the

      20     catastrophe has occurred, does Internet mean

      21     that, or do we even know yet.

      22               The second question that I have is









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       1     I have been just fascinated with and I

       2     suspect our fellow guys and gals might be

       3     able to answer this one, or comment on it,

       4     and that is what to prevent if we decide to

       5     set up a national regime, simple,

       6     complicated, or whatever we decide to do,

       7     what is to prevent people from simply selling

       8     from offshore where they can evade our laws?

       9     Evade is not the right word.  Avoid is the

      10     right word.  Tax avoidance.

      11               I just read an article which I hope

      12     has been distributed, if not we will get it

      13     to you, where some sophisticated servers and

      14     entrepreneurs are now setting up Bermuda

      15     precisely for the purpose of setting up

      16     virtual sales operations in Bermuda.

      17               It can't be for any other reason

      18     other than to get it out of the jurisdiction

      19     of the United States, but Bermuda is not

      20     necessary.  It could be Moscow or any place

      21     else.  So, I'm interested in the

      22     international implications of this and just









                                                             161
       1     whether technically we can do this.  Are we

       2     going to it by closing our borders?  Are we

       3     going to do it by invading the privacy of the

       4     Net?  I just don't know the answer to that.

       5     That's a genuine, honest question, and I

       6     would like to get some commentary on it.

       7               If anybody would like to talk about

       8     it now, that would be great.  I do have a

       9     list of two more Commissioners at least who

      10     want to speak.  Governor Leavitt?

      11               GOVERNOR LEAVITT:  I'd actually just

      12     like to ask the question whether or not the

      13     Commission views its role in part as to

      14     figure out if technologically such a system

      15     can work.  If it can't work, then we've got

      16     an entirely different set of problems to

      17     solve.

      18               If it does work, then we can get

      19     down the policy question of whether it should

      20     or it shouldn't.  But I firmly believe that

      21     one of the things that needs to come out of

      22     this Commission's meeting today is some









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       1     direction as to determine with all of the

       2     technology fire power sitting around this

       3     table; now, I'm guessing that's one of the

       4     reasons they put the head of AT&T and MCI and

       5     Charles Schwab and AOL others.  Let's figure

       6     out of this thing can work.  Let's go out and

       7     find the expertise that exists in the world

       8     and find out if you can make this system

       9     work.

      10               CHAIRMAN GILMORE:  Let me go on to the

      11     list in the interests of fairness, and we'll

      12     get everybody in.  Delna Jones is next.

      13               MS. JONES:  I think in the process

      14     that we've been going through, there's a

      15     couple of issues that I'd like to focus on.

      16     First of all, I think we're mixing the issue

      17     of fairness and rate of tax, because I think

      18     in many people's minds the question of

      19     whether I order a suit over the Internet

      20     through a catalogue or purchase it next door

      21     at the retailer is not really clear as to

      22     whether I should pay the tax one place and









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       1     not another.

       2               But when the issue is not just

       3     fairness, but it is also the rate mixed in,

       4     then you have a complication of the problem I

       5     think we need to separate.  Maybe our rates

       6     are too high.  But if that's the case, then

       7     we shouldn't be discussing it in a

       8     relationship of who pays the tax and when.

       9               I haven't heard local retailers.

      10     I've heard people tell me what they think

      11     local retailers are going to have in terms of

      12     the impact of the Net, that they're going to

      13     be in a better position.  I've heard others

      14     say that they are really going to use the Net

      15     and they're going to find better ways to

      16     expand their businesses in that regard; and

      17     some have said they're going to go broke.

      18     But I haven't heard any real retailers tell

      19     us anything that is really the reality of

      20     where they sit.

      21               I also have a question, and that

      22     would be probably some of our folks either on









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       1     the Commission or in the experts, and that is

       2     how many of our sellers today are already

       3     collecting a tax even though not required,

       4     because I believe that is happening in many

       5     cases.

       6               CHAIRMAN GILMORE:  Let me follow-up on

       7     Delna's question, and it's a question of one

       8     of rate and whether or not there are policy

       9     reasons why there should be different rates.

      10     In Virginia, and I think in other states as

      11     well, and also by the way at the national

      12     level, there are certain areas that are

      13     designated as Enterprise Zones.

      14               Businesses located in those

      15     Enterprise Zones get a favorable tax

      16     treatment.  They get a better rate, or they

      17     get a better situation, and we do it because

      18     we either want to put them in inner cities or

      19     we want to encourage import and export.  They

      20     get tax breaks on income taxes for each

      21     employee that they hire.

      22               They get tax breaks for









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       1     rehabilitating buildings in blighted areas.

       2     Suburban malls sometimes receive tax

       3     subsidies in the form of public expenditures

       4     on road access, construction of new off

       5     ramps.  Each one of those imposes a different

       6     kind of discriminatory tax rate or different

       7     kind of opportunity.

       8               So, Delna, I think you're right.

       9     Sometimes we do favor some industries and

      10     some people, and sometimes we don't,

      11     depending on what kind of social policy that

      12     we're trying to do.  I think Joe Guttentag

      13     was next.

      14               MR. GUTTENTAG:  Thank you, Mister

      15     Chairman.  First, let me just comment briefly

      16     on the question which you've raised regarding

      17     the international aspects of these issues.

      18     Certainly that is a concern.  It's an issue

      19     which might be usefully addressed in

      20     connection with the international discussion

      21     at the next session.

      22               It's an issue which we are









                                                             166
       1     discussing in international fora because in

       2     many cases you can see this requires

       3     cooperation as opposed to problems which our

       4     Congress can deal with or state legislators

       5     can deal with; in many cases this can only be

       6     dealt with internationally.

       7               Sometimes it's not a question of

       8     where the seller is.  It may be more

       9     important where are the goods.  Are the goods

      10     in the U.S., and are they being delivered

      11     from a U.S. source.

      12               But me just turn for a minute to

      13     another aspect of this, Mister Chairman, not

      14     the substantive issues, but the process of

      15     how we move and to discuss and resolve the

      16     issues which Governor Leavitt and others have

      17     raised and which seem to be at a consensus at

      18     least as to these issues.

      19               We have over eight of our speakers

      20     today I believe who have been involved in the

      21     National Tax Association project on the

      22     steering committee which provided this report









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       1     to us, and they are a diverse group.

       2               I would hope that we could devise a

       3     process whereby they could inform us in

       4     addition to the report, the process which

       5     they went through, how that could help us

       6     with our process.  They could advise us of

       7     the issues which they think there is

       8     agreement between the various sectors

       9     represented on the Commission of the hard

      10     issues which need to be decided and which

      11     they couldn't reach agreement.  I think it

      12     would help us focus our issues.

      13               Obviously there are other issues

      14     that we want to deal with besides those

      15     involving the project of the National Tax

      16     Association.  But I would hope that we could

      17     learn as much as possible.

      18               This is obviously not the time, nor

      19     do we have the time to do that, but possibly

      20     we could figure out a way to take advantage

      21     of their expertise and what they have done

      22     over the past 2 years.









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       1               This really goes to the question

       2     which you asked at the beginning:  If they

       3     couldn't reach agreement over 2 years, how

       4     can we do it.  Well, they did reach agreement

       5     on a lot of different matters, and we've

       6     heard from them as to some of those issues.

       7     They've also advanced the ball to the point

       8     where I think we could find it very useful.

       9     So, I hope we can take advantage of that,

      10     Mister Chairman.

      11               CHAIRMAN GILMORE:  Would any of the

      12     members or the people out here like to

      13     address that?  I see three hands, and that's

      14     what we're going to do, and that's all.

      15     Since you have spoken previously, I'll come

      16     to you second.  Joe, why don't you go first?

      17               MR. BROOKS:  That's a very valuable

      18     question from the standpoint of the process

      19     that we are going through.  Let me preface

      20     what I'm going to say very quickly that in no

      21     way do I intend to make any disparaging

      22     remarks about anyone or look down from the









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       1     standpoint of process.  The dynamics of a

       2     group is tough to work with.  I have heard

       3     some comments today which bother me.

       4               This Commission has one of the

       5     greatest opportunities of any Commission from

       6     the standpoint of tax structure and the way

       7     you put together a tax program, and I have

       8     heard the comment, and Mr. Andal, you made

       9     this comment, "My opponents on this

      10     Commission."  This Commission was not

      11     designed to be opponents.

      12               MR. ANDAL:  Can I correct you?  I

      13     did say my opponents.  I didn't say on this

      14     Commission.  Those that disagree with me.

      15               MR. BROOKS:  Well, okay.  Fine.  I

      16     understood it to be --

      17               CHAIRMAN GILMORE:  Mr. Brooks, direct

      18     your comments to the question that was asked

      19     by Mr. Guttentag, and that is, do you have a

      20     recommendation for any ability to do a

      21     process, to reach any sort of agreement on

      22     any issues.









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       1               MR. BROOKS:  Yes, I do.

       2               CHAIRMAN GILMORE:  Please, we have other

       3     people that need to speak before lunch.

       4               MR. BROOKS:  I understand.  I

       5     understand.  But the process is that normally

       6     in a group of this size you will find a few

       7     people, this is true of most any group, that

       8     will continue to bring up subjects that you

       9     are not going to solve.  You should be

      10     working on the issues that you can come to a

      11     solution on.

      12               One of the comments that was made

      13     in our first meeting, do not let the desire

      14     for perfection destroy that which is good.

      15     That's a tough statement.

      16               If I might have the floor for just

      17     a moment having to do with this economic

      18     growth, the cities of America have not

      19     participated in the great economic growth

      20     that has taken place.  A good example, the

      21     city of Richmond's growth per year for the

      22     last 5 years has been 1.2 percent.









                                                             171
       1               The average growth in the state has

       2     been something above 6 percent over the

       3     last 5 years.  When you look at surrounding

       4     areas in Virginia, because we are independent

       5     of counties, when you look at that, that

       6     growth is has been much more than your

       7     central cities.  Mr. Kirk, I think you led to

       8     this, and I would hope that as this

       9     Commission works, that you will realize that

      10     all segments of our economy, particularly the

      11     local segments, are not participating in the

      12     economic growth at the same level.

      13               CHAIRMAN GILMORE:  Mr. Brooks, the

      14     Internet might in fact enable people in the

      15     central cities to begin to participate, might

      16     it not?

      17               MR. BROOKS:  It might if the

      18     structure is set up that is in the right way.

      19     I agree with you.  This is where the

      20     Commission has a great opportunity to do

      21     that.

      22               CHAIRMAN GILMORE:  Was there another









                                                             172
       1     comment from the panel?  Yes, ma'am.

       2               MS. CALDWELL:  I was also a member

       3     of the National Tax Association project, and

       4     I think one of the messages that you need to

       5     get from that report is that we did focus

       6     almost exclusively on what it would take to

       7     make a universal obligation to collect by all

       8     businesses workable, and I think that is the

       9     primary reason why we were unable to come to

      10     a solution that everyone agreed on.

      11               So, my message from that project to

      12     this Commission would be that you do need to

      13     look seriously at other possibilities, the

      14     possibility that Mr. Ryan mentioned and the

      15     one that I mentioned which are relatively

      16     similar; Commission Andal's proposal needs

      17     very, very consideration -- because going

      18     down another path has been done many, many

      19     times before and it has not led to success.

      20               CHAIRMAN GILMORE:  One more and then

      21     back to the Commissioners' list.  Yes, sir.

      22               MR. CORNIA:  I would like to say that









                                                             173
       1     this Commission had some of the best and

       2     brightest minds, the NTA Commission, in the

       3     entire country on state and local tax issues.

       4     I might be speaking out of school here, but I

       5     believe members of that commission would be

       6     more than happy in response to your question

       7     to help you solve and understand these issues

       8     that we went through.

       9               We spent hundreds of hours,

      10     thousands of hours, in conference calls and

      11     meetings, and I believe that you would find a

      12     number of the members of the commission who

      13     would be more than happy to respond and help

      14     and understand the issues we raised and

      15     discussed.

      16               CHAIRMAN GILMORE:  Thank you.

      17     Commissioner Dick Parsons of Time Warner?

      18               MR. PARSONS:  I would just like to

      19     go back to an issue that Governor Leavitt

      20     raised.  Referring to my notes, what I heard

      21     or what I made note of what I heard the panel

      22     say was that currently there are sort of









                                                             174
       1     three bases for state and local taxation or

       2     taxation at the local level:  Property tax,

       3     income tax, sales tax.

       4               Now, that's not because those are

       5     inherently the most logical or sort of only

       6     bases on taxes.  I mean, we used to tax

       7     people on the basis of how many cattle they

       8     owned.  Then they stopped owning cattle, so

       9     that wasn't very good.  Or you could have a

      10     head tax.  You can do a lot of things.

      11               The reason we picked those three

      12     was because there's ease of identification of

      13     a basis for levying a tax.  The property is

      14     in the state.  The income is earned in the

      15     state.  That's gotten more complicated.  Or

      16     the sales transaction took place in the

      17     state.

      18               The other thing I heard was someone

      19     I think put the real question before this

      20     Commission, I mean, there are lots of

      21     subdivisions of it, but the fundamental

      22     question is whether we preserve this sort of









                                                             175
       1     physical presence NEXUS standard as a basis

       2     for taxing remote sales.  I mean, that's what

       3     it comes down to at the end of the day.

       4               The issue it seems to me as just

       5     listening to the debate, the first place you

       6     have to start is can you really do that with

       7     cyberspace sales.  I don't know, and I'll be

       8     interested to hear what people from AOL and

       9     UUNET and AT&T and MCI have to say.  My

      10     instinct is not.

      11               My instinct is that you would have

      12     to create -- talk about anti- simplification.

      13     You would have to create something so

      14     complicated to try and track Internet sales

      15     or electronic commerce back to some source

      16     and define where does this sale take place.

      17               Does it take place on the server;

      18     in my home because I have a computer; at the

      19     offices; wherever they may be of whoever the

      20     vendor is; and how do I find out who that is

      21     and all that.  I mean, I'm not sure that

      22     there is a solution here that simply would









                                                             176
       1     allow us to say let's treat e-commerce like

       2     other remote sales and use the same standards

       3     and that's the principle we proceed on.

       4               What I'd like to suggest is that in

       5     addition to having these distinguished

       6     panelists come and tell us their views on

       7     sort of the economic impact and the fairness

       8     or unfairness of it, have some discussion

       9     around that issue; around the issue of,

      10     frankly, are e-commerce sales or electronic

      11     commerce, is that a sensible basis for

      12     levying a tax?

      13               Because it may not be.  It may not

      14     be any more sensible than taxing how many

      15     cattle you own anymore because it's too

      16     complicated, it's too impossible to track, it

      17     doesn't make sense.  We'll have to think

      18     about other things to tax to raise revenues

      19     and let this develop and it's going to

      20     develop.  But at least I'd like to have some

      21     discussion around it because I don't know the

      22     answer to the question, and I think the









                                                             177
       1     Governor's sort of base line inquiry is a

       2     fair one.

       3               CHAIRMAN GILMORE:  Bob Pittman from AOL?

       4               MR. PITTMAN:  Well, it seem to me

       5     listening to it, and there's been a lot of

       6     information here that's been very valuable,

       7     but there are a couple of pieces of

       8     information which we probably need, and I

       9     don't know if we'll collect it today.  But

      10     there seems to be this distinction between

      11     Main Street merchant and Internet merchants.

      12               If you go on the Internet you

      13     actually find an enormous number of the

      14     merchants are Main Street merchants who now

      15     have a Web site, and I think it would be

      16     instructive and interesting to look at how

      17     many of those Main Street merchants have Web

      18     sites; how much of their business not only

      19     are they doing today, but are they expecting

      20     to do; and how are they expecting to segment

      21     their business between physical presence and

      22     online.  So, I think probably we eventually









                                                             178
       1     look at every merchant in one form or another

       2     as being an Internet merchant as well, some

       3     exclusively, some not.

       4               The second issues is we've talked

       5     some about technology and technological

       6     solutions.  Actually before I came here I

       7     asked our technology folks, I said, I keep

       8     hearing all these ideas about we've got this

       9     piece of technology we can just plug in.  I

      10     said, have you heard of any of them, and they

      11     said no.

      12               I would think it would be helpful

      13     if all of you have heard of it for us to get

      14     the names of those pieces of software because

      15     it is an onerous task.  It does take a lot of

      16     time.  It doesn't always work as you expect

      17     it to.

      18               It gets easy in certain situations,

      19     but the bigger you get and the more complex

      20     you get, the more difficult it gets.  Those

      21     are precious resources because developers can

      22     only develop one thing at a time, and they









                                                             179
       1     either develop your next product or they

       2     develop your technology to handle

       3     administration of something which doesn't

       4     improve the bottom line.

       5               I think if there are those

       6     existing, I think that influences decisions

       7     people make in terms of what it is.  So, I

       8     think if we could get those two pieces of

       9     information it would be very helpful in the

      10     deliberation of this process and actually

      11     trying to put together some ideas.

      12               CHAIRMAN GILMORE:  Four more

      13     Commissioners are on those list, and then

      14     we're going to discuss lunch, and we still

      15     have a little time after lunch to take up

      16     some additional matters also.  Stan Sokul was

      17     next.

      18               MR. SOKUL:  Thank you.

      19               MAYOR KIRK:  Just in response to

      20     Mr. Pittman's question, there is a handout

      21     that was on your tables yesterday from the

      22     Conference of Mayors, and it has several









                                                             180
       1     different software packages that are

       2     available that we specifically reference.

       3     You might want to look at those.  That's at

       4     your desk.

       5               CHAIRMAN GILMORE:  Stan Sokul, Direct

       6     Marketers.

       7               MR. SOKUL:  Thank you.  I want to

       8     respond to a lot of what's said including the

       9     basic fundamental question posed by Governor

      10     Leavitt is one of the most fundamental

      11     questions we have, as he pointed out, is to

      12     ask is the sales tax system salvageable, and

      13     if it's not, shouldn't we start -- isn't one

      14     of the most important things we can do is to

      15     send out to Congress and to the states the

      16     signal that in our opinion saving a

      17     Depression Era system and trying to impose

      18     that on our 21st century economy isn't the

      19     way to go.

      20               I mean, I noticed our motto, I

      21     guess, "Shaping the Future of the Internet."

      22     I would hope that our motto is, "Ensuring









                                                             181
       1     Taxes Don't Shape the Future of the

       2     Internet."  I hope economics and business

       3     shapes the future of the Internet, not our

       4     decisions on taxes.

       5               But in Governor Leavitt's list, I

       6     didn't hear, and I wasn't quite sure, whether

       7     a federal law to overturn Quill was part of

       8     your -- and that again gets to the basic

       9     question for us, and it's a question that

      10     Gene raised, in terms of what we recommend to

      11     Congress, is it a federal-level solution, a

      12     federally imposed solution, or is it a

      13     state-driven solution from the bottom up.

      14               I'm going to end up with a question

      15     here for Kaye Caldwell or George Isaacson.

      16     In Kaye's paper she made the point that the

      17     current system where the state and local

      18     governments since the -- case was decided,

      19     they've been striving for the deal -- the NTA

      20     project was striving for the deal, trading,

      21     simplification, for overturning Quill, and

      22     the prospect of overturning Quill, if you









                                                             182
       1     will, for 30 years has been the Holy Grail of

       2     many state and local officials.

       3               As long as that process and that

       4     hope is there, their incentive is not to

       5     simplify.  They don't have any incentive to

       6     simplify because the collection burden isn't

       7     on the tax authority; it's not on the local

       8     officials or the state officials; it's on

       9     business.

      10               Now, why is this current system

      11     such a mess?  It's because the people who

      12     create it generally don't have to deal with

      13     it.  It's the businesses that have to deal

      14     with it.  The thing that I like about the

      15     Andal proposal is it says we recommend to

      16     Congress you're not going to get the deal.

      17     It's up to you to simplify your systems.

      18     Whether it's a software solution, or as time

      19     goes on that becomes more -- if it works, if

      20     it doesn't work, maybe in years it will work.

      21     If we can just change the incentive structure

      22     of what created this mess, I think that would









                                                             183
       1     be an important effort.

       2               This comes to my question.  A point

       3     in Kaye Caldwell's paper is if states impose

       4     an unconstitutional tax that's challenged by

       5     business and they win, it's virtually

       6     impossible for them to get their money, and I

       7     think that raises the issue in terms of

       8     incentives and what we recommend to Congress.

       9               I think that an important thing is

      10     when states behave badly there should be a

      11     sure remedy for business, swift and sure.  I

      12     know that George Isaacson is a tax

      13     practitioner, a tax litigator who I think has

      14     dealt with this, and if he had any comments

      15     on the need for such a law for a swift and

      16     sure remedy when states impose clearly

      17     unconstitutional taxes, I'd like to hear

      18     them.

      19               CHAIRMAN GILMORE:  Why don't we take up

      20     Mr. Isaacson right after lunch and finish the

      21     Commissioners and then bring you in first

      22     right after lunch.  We'll do that.  If there









                                                             184
       1     is going to be a lunch, we'll see about that.

       2     But let me just finish this.  I think my list

       3     shows Mr. Pincus, Mr. Armstrong,

       4     Mr. Sidgmore, and Mr. Norquist.

       5               Then we're going to make a lunch

       6     decision and close from there.  I might

       7     mention, by the way, for the people who are

       8     on our Webcast, that the Quill decision was a

       9     court decision that stated recently, or not

      10     so recently, that remote sellers do not have

      11     to collect taxes on behalf of states with

      12     which they do not have NEXUS or some

      13     operating connection, and that is the

      14     decision that is driving much I think of the

      15     Commission's work and the Congress's interest

      16     in the issue.  Mr. Pincus, of the Department

      17     of Commerce.

      18               MR. PINCUS:  Thank you, Mister

      19     Chairman.  I have a concern similar to a

      20     question that several other Commissioners

      21     have mentioned, and I thought that some of

      22     the people, our expert panelists -- and it









                                                             185
       1     relates to the question of Main Street

       2     businesses and where are they really, if they

       3     exist, if there is such a differentiated

       4     category anymore; what is their view of this

       5     issue.

       6               I noticed that on our expert

       7     panelists list just by looking at some of the

       8     identifications there are some people that

       9     seem to be perhaps representatives of Main

      10     Street businesses and since they've been good

      11     enough to come, I thought maybe we could give

      12     them an opportunity -- the people who spoke

      13     who wanted to speak to that issue, and I

      14     wondered if we could ask whether any of the

      15     people on the expert panel feel that they

      16     represent those interests and would like to

      17     speak to that issue.

      18               CHAIRMAN GILMORE:  We have one, and we

      19     ought to take you up after lunch shouldn't

      20     we?  I think that would be the better thing

      21     to do, and give me your name, please.

      22               MR. McGEOUGH:  Peter McGeough,









                                                             186
       1     Seaman Furniture Company.  Very good.  We'll

       2     take you up right after lunch in response to

       3     Mr. Pincus's question.  Let me complete my

       4     list here.  Mr. Armstrong?

       5               MR. ARMSTRONG:  Thank you, Mister

       6     Chairman.  I believe that Governor Leavitt

       7     asked a very direct question and I'd like to

       8     give him a very direct answer, and his direct

       9     question was can a system work technically.

      10     Did I get it right, Mike?  The answer is

      11     absolutely yes.  Yes, on three levels.

      12               First, the system can work better

      13     than the system we have to live with today

      14     technically.  AT&T as somebody testified

      15     fills out 39,912 forms, and that's a low-ball

      16     number because it does not include our cable

      17     forms and our wireless forms.

      18               So, we're probably in the 50

      19     to 60,000 form bucket and growing, and so

      20     today's system has got to be fixed.  But if

      21     technically we can do it with this kind of

      22     less, we can probably sit around here and









                                                             187
       1     create a bigger mess that we can technically

       2     do as well.

       3               Second, somebody testified that the

       4     average bill in I think it was Richmond,

       5     Virginia, had a 35 percent tax burden on it.

       6     That's not fair.  Access to the Internet

       7     shouldn't carry that kind of a burden on it.

       8     Finally, to the retailer, to the collector,

       9     to the seller, it's too costly.

      10               It's a big bill to big business,

      11     and it's a bill that can make the difference

      12     to the bottom line to a little business.  The

      13     other thing, Mike, that I would add is that

      14     all this can be done, but what ought to be

      15     done is that somebody mentioned earlier, a

      16     common definition and a common structure.

      17     Then what I'm saying can be technically done

      18     practically also.

      19               CHAIRMAN GILMORE:  Mr. Sidgmore?

      20               MR. SIDGMORE:  Well, I just want to

      21     reiterate what Mike said, but I guess the

      22     reason why I put my hand up here is I wanted









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       1     to agree with Governor Leavitt because I

       2     think the primary focus, at least the first

       3     focus of the Commission, really should be to

       4     figure out whether there's a practical

       5     solution to this problem.

       6               Because like Mike said, if there's

       7     not a practical solution to the problem, then

       8     we're stuck with moral, religious, and other

       9     views on taxation which could take the rest

      10     of our lives.

      11               From my standpoint as a

      12     businessman, and I've talked to many of the

      13     other businessmen here, I think there is a

      14     practical solution here given that the

      15     technology will follow, and I believe that

      16     there will be a technical solution here if

      17     tax simplification is a given.  So to me the

      18     question we need to focus on is whether it's

      19     practical to achieve tax simplification.

      20               I heard a lot of comments before

      21     that indicated that there may not be a way to

      22     do it, that others have tried for centuries









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       1     and we haven't achieved it.  To me, that's

       2     the primary issue.  I think once we can show

       3     that it is feasible, then we have options.

       4     If it's not feasible, we don't have a

       5     practical option and we should move on.

       6               CHAIRMAN GILMORE:  Mr. Norquist?

       7               MR. NORQUIST:  Michigan does not

       8     have a death penalty and they don't have a

       9     lot of people in Michigan lobbying the

      10     legislature about how nifty their guillotine

      11     is or the electric chair.  They don't sit

      12     there and wonder if something is technically

      13     feasible before asking the question of do you

      14     want to do it.

      15               The question of do you want the

      16     state of Alabama to be able to tax amazon.com

      17     or to levy taxes on people in other states,

      18     that's a political decision.  It's not a

      19     technical decision.  We've had some big hints

      20     from Congress.  We got a letter from the

      21     leadership saying we don't want to go down

      22     that road.  The Senate voted three to one









                                                             190
       1     rejecting that idea when Mr. Bumpers put it

       2     forward.

       3               So, for us to get hung up on, gee,

       4     what if Quill went away when the Senate said

       5     three to one it's not going away and the

       6     House leadership just sent us a letter on the

       7     same, is not necessarily putting our time as

       8     well spent.

       9               But the challenges with allowing

      10     Alabama to tax businesses in Maine is not a

      11     technical problem, it's a political problem,

      12     because politicians love the idea of taxing

      13     people who don't vote.  The abuses that we

      14     have now in tort law that all of you suffer

      15     from where a jury in Alabama decides to whack

      16     General Motors because it's for free, you

      17     will have again and again and again with tax

      18     collectors at the state level and at the

      19     local level.

      20               I've talked to some businesses who

      21     have horror stories about out-of-state tax

      22     collectors going after them, hiring bounty









                                                             191
       1     hunters to go after them and so on.  It's a

       2     political problem.  That's what the Commerce

       3     Clause was designed by the Founders for.

       4               So, it's not a technical question

       5     of, gee, could you do it, although that's an

       6     interesting one, it's possible, it's not

       7     possible to do.  It's a political question of

       8     do you really want to give politicians in one

       9     city the ability to reach out and threaten

      10     audits to businessmen all around the country

      11     in other states who don't get to vote for

      12     them.

      13               Maine doesn't beat up on L.L.

      14     Bean more than they do is because people in

      15     L.L. Bean live in Maine.  They have no

      16     protection against Mississippi or Alabama.

      17               CHAIRMAN GILMORE:  I think that

      18     concludes this particular presentation,

      19     although we will be coming back.

      20               MR. SIDGMORE:  Is it possible to

      21     respond to that?

      22               CHAIRMAN GILMORE:  Sure.









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       1               MR. SIDGMORE:  Because my only

       2     response, Grover, is very simple.  I do not

       3     believe we're going to accomplish anything if

       4     we start with the question of whether it's

       5     moral, religiously appropriate, or

       6     politically astute to tax people on the

       7     Internet.

       8               The question really, and I think

       9     what we were charged to do, is to examine the

      10     issue, and most of the issues against

      11     taxation that I've heard so far are that it's

      12     impractical.  Most of the businessmen are

      13     concerned that it's too complex, we'll spend

      14     the rest of our time in our businesses

      15     writing systems to support taxation, 39,000

      16     or 50,000 tax forms or whatever Mike has.

      17               Those have been most of the issues.

      18     To me we ought to get through that issue

      19     first and then decide whether it's even

      20     possible to do it.  Then we can move on to

      21     the religious issue.

      22               MR. NORQUIST:  We can do









                                                             193
       1     simplification and reduction without dealing

       2     with the question the House and the Senate

       3     have already repeatedly told us they don't

       4     want to change, which is Quill.  The

       5     simplification and the reduction of taxes on

       6     telecommunications, that can happen now

       7     without any sort of leap of faith.

       8               My point was this is not a

       9     technical question about how Alabama could

      10     tax people in Maine.  It's a political

      11     question that our Forefathers set up that

      12     said we don't want people doing that, we are

      13     one country and states' rights does not allow

      14     you to do this.

      15               CHAIRMAN GILMORE:  Well, I certainly

      16     don't think that the question of whether or

      17     not taxes ought to be imposed is a religious

      18     or mystical one.  It is a policy question.

      19               It is a legitimate question to find

      20     out whether technically it can be done or not

      21     at all, in which case then maybe that drives

      22     a different policy.  But it is a legitimate









                                                             194
       1     question also to ask what we do with the

       2     consumers and the users of the Internet

       3     across the United States of America.

       4               I also want to say one more thing

       5     before we break, and that is I think I want

       6     to put this process in just 30 seconds into

       7     some perspective here.  I don't think at all

       8     else suggests that because the eCommerce

       9     Advisory Commission meets that the sky is

      10     going to open up, that an angel is going to

      11     descend and is going to tell everybody here

      12     today or in any other meeting the answer to

      13     all of these questions.  It is not realistic

      14     and it is not reasonable to engage in fantasy

      15     thinking.

      16               Instead, we should recognize what

      17     these meetings do.

      18               They are here for the purpose of

      19     educating the Commissioners, allow give and

      20     take of discussing the issues, and allowing

      21     the formation of clear thought in the minds

      22     of the Commissioners so that as we go forward









                                                             195
       1     we know how to talk about this with staffs,

       2     with each other, between meetings as we move

       3     ahead towards drafting and trying to

       4     understand can achieve a majority or a

       5     consensus and what cannot, or whether or not

       6     in fact all these ideas have to be presented

       7     to the Congress.

       8               But let us not dream that all of a

       9     sudden the magic answer is going to appear.

      10     It is, however, a way of sharpening the minds

      11     of the Commissioners so that we can make some

      12     decisions.

      13               On the lunch situation,

      14     Commissioners, I have two choices we'll give

      15     you.  We had arranged for lunch some place

      16     else so we could get off by ourselves, eat

      17     lunch and talk over these issues during

      18     lunch.  That's obviously along the same path,

      19     and we can do that.  We don't have to stop

      20     engaging with each other just because we're

      21     going to go to a different place and have a

      22     sit-down lunch.  Or, if you prefer to









                                                             196
       1     continue this to its fullest extent, there

       2     are box lunches available for the

       3     Commissioners.

       4               We can take 15 minutes now, eat box

       5     lunches, we're right back in here and keep on

       6     going promptly and immediately.  So, those

       7     are the two choices that I think that we

       8     have, based upon our knowledge, of course, of

       9     the weather situation that we have.

      10     Mr. Armstrong?

      11               MR. ARMSTRONG:  I think there's a

      12     lot of people that would say a lot of things

      13     and we've got a hurricane on the way, and

      14     let's get a box lunch.

      15               CHAIRMAN GILMORE:  Box lunches?

      16               MR. ARMSTRONG:  That's why they

      17     invented the term "New York minute."

      18               CHAIRMAN GILMORE:  "New York Minute."

      19     We'll reconvene at 1:15.

      20                    (Recess)

      21               CHAIRMAN GILMORE:  The issue that is on

      22     the area for discussion now is the federal









                                                             197
       1     tax and electronic commerce tax issues

       2     continued from this morning's session.  We

       3     did go through all of the Commissioners who

       4     wanted to speak prior to.  We will continue

       5     on.  I must say to you that my goal would be

       6     to try to conclude in the range of 2:30 if we

       7     can.

       8               The information from Virginia, and

       9     I think the Carolinas is even more serious

      10     than it was when I spoke earlier.  So, I've

      11     issued some new directives, but I got to get

      12     back to Virginia.  I think people here from

      13     the District, the report we have is heavy

      14     rain already in Northern Virginia and in the

      15     District area.  So, we'll just have to do the

      16     best we can.

      17               GOVERNOR LEAVITT:  Mister Chairman, I don't

      18     think I'm on your list, but I would like to

      19     be recognized when it's appropriate to make a

      20     motion as to how we spend some of our time

      21     during the next minutes.  So, I'll let you

      22     conduct it as you will, but if you would









                                                             198
       1     recognize me as soon as possible.

       2               CHAIRMAN GILMORE:  Very good.  I believe

       3     that first of all we had two Commissioners

       4     who wanted to direct some attention back to

       5     the panel members which we deferred until

       6     right after lunch, and one was Stan Sokul.

       7     Stan?

       8               MR. SOKUL:  Thank you.  My question

       9     was for George Isaacson.  As you recall, we

      10     were talking about simplicity, the mess of

      11     the current sales tax system, and the burdens

      12     that imposes on business.  I think it was

      13     Kaye Caldwell's testimony brought up a whole

      14     other aspect of this system and burdens, and

      15     that was that when a state imposes an

      16     unconstitutional tax, it's virtually

      17     impossible for a business to obtain a remedy

      18     for that because of the machinations the

      19     states go through as you're going through the

      20     system.

      21               I know Mr. Isaacson is a tax

      22     practitioner that litigates these matters,









                                                             199
       1     and I thought he might have some comments on

       2     that.

       3               Then just real quickly because I

       4     know he's so articulate, I was going to ask

       5     just real quick a second question which goes

       6     to the issue of the software solution that

       7     we've discussed.  Because in your testimony

       8     you had a comment about the poor and the

       9     elderly pay by check, and do you have any

      10     comments on the software and does that depend

      11     upon a credit card transaction, and how does

      12     that affect the poor and the elderly.

      13               MR. ISAACSON:  I'll be brief and

      14     handle them in reverse order.  We've been

      15     talking about electronic commerce, and one of

      16     the comments that was made earlier is that

      17     all forms of remote selling should be treated

      18     equally.  I think it was Governor Gilmore and

      19     Governor Leavitt who pointed that out.

      20               The majority of remote selling is

      21     not being handled by electronic commerce.

      22     It's in fact still catalogue sales, and much









                                                             200
       1     of the purchasing that's being done in

       2     catalogue sales especially by the elderly and

       3     poor is done by use of payment of check, not

       4     by credit card.  In other words, the consumer

       5     self-computes the applicable tax.

       6               In a destination-based system, if

       7     that purchaser had to make the computation, a

       8     gift buyer which is much of the

       9     direct-marketing industry is seasonal gift

      10     giving, would have to be self- computing what

      11     the applicable tax would be for all the

      12     destinations to which gifts were being sent.

      13               It would make Christmas time like

      14     tax time, and filling out a catalogue order

      15     form like filling out a 1040.  A very

      16     complicated task.

      17               Moving in reverse order and further

      18     on the issue of burdens that you were

      19     discussing, the question of offsetting

      20     burdens, how do you move burdens from the

      21     state to retailers for collection purposes

      22     or, as Governor Leavitt was saying, not









                                                             201
       1     adding any additional burdens on to new

       2     sellers as a result of any suggestions or

       3     recommendations that should come of this

       4     Commission, there was an incident that

       5     occurred during the course of the NTA project

       6     that I think is very telling and illustrative

       7     of this issue.

       8               When looking at all sorts of

       9     different alternatives, one suggestion was

      10     how about a base state system.  How about a

      11     system in which merchants collect for

      12     destination states, but you have the home

      13     state conduct the audit.  There was nobody

      14     specifically who was recommending it, but it

      15     was simply one alternative that should be

      16     looked at:  Have the base state conduct the

      17     audit for all the states.

      18               The reaction that the states had to

      19     that suggestion was would be impossible:  How

      20     could you ever expect a state revenue

      21     department to learn all about the tax laws

      22     and procedures of all the other states.









                                                             202
       1     That's exactly the burden that is being

       2     suggested for electronic merchants, that they

       3     have to learn the tax laws and procedures for

       4     all the states.

       5               Lastly was the issue that you were

       6     discussing about the problem of insufficient

       7     remedies being available.  Without going into

       8     a lot of detail about the statutory or case

       9     law framework, the effect of a federal law

      10     called the Tax Injunction Act is that if you

      11     are going to challenge a tax assessment or a

      12     state tax law in a declaration judgment

      13     action, you have to go to state court.  You

      14     cannot bring that kind of lawsuit in federal

      15     court because of the Tax Injunction Act.

      16               That made good sense back in the

      17     days when the tax issues were really confined

      18     within the single borders of a state, let

      19     their courts take the first crack at it.

      20               But the effect of that when you're

      21     trying to protect interstate commerce,

      22     international commerce, is that you're forced









                                                             203
       1     to go before state court judges even on such

       2     federal constitutional issues as equal

       3     protection, due process, and Commerce Clause.

       4               Unfortunately there's been a

       5     pattern of the number of state supreme courts

       6     to be disrespectful of these federal

       7     constitutional protections, or to say we

       8     goofed, the state is wrong.  This is

       9     unconstitutional, but the remedy is going to

      10     be limited to prospective application.  You

      11     don't get your money back for the

      12     unconstitutional tax that was imposed.

      13               So that one of the things which I

      14     would hope this Commission would be looking

      15     at would be the possibility of protecting

      16     electronic commerce which is so dependent

      17     upon these federal constitutional guarantees

      18     by either providing recourse to federal

      19     courts when there have been federal

      20     constitutional violations, or otherwise

      21     instructing state courts that they have an

      22     obligation to provide a meaningful remedy to









                                                             204
       1     taxpayers when they find that there's been an

       2     unconstitutional assessment.

       3               CHAIRMAN GILMORE:  Mr. Pincus, I believe

       4     that you had someone that you wished to

       5     present to the Commission.

       6               MR. PINCUS:  Yes.  I had a

       7     question.  I actually don't know the

       8     gentleman's name.  My question was about the

       9     views of Main Street.

      10               CHAIRMAN GILMORE:  Sir, if you'll just

      11     identify yourself and the proceed.

      12               MR. McGEOUGH:  Yes.  My name is

      13     Peter McGeough.  I'm an executive vice

      14     president with Seaman Furniture Company.  We

      15     are the largest consumer furniture retailer

      16     in the metropolitan New York area.  I'm also

      17     here on behalf of the National Home

      18     Furnishings Association which represents

      19     approximately 50,000 home furnishing

      20     retailers throughout the country.  I'd like

      21     to thank the Chairman and the Commission for

      22     allowing me to speak this afternoon.  I









                                                             205
       1     recognize you have time constraints, and I

       2     will not overburden them.

       3               What I would like to say is,

       4     firstly, that we are not opposed to

       5     e-commerce.  We recognize that sales over the

       6     Internet are here and are here to stay.  We

       7     believe strongly that sales over the Internet

       8     will grow significantly in the future.

       9     However, what we would like is a level

      10     playing field.

      11               One of the Commissioners earlier

      12     this morning talked about buying $1,000

      13     suits.  Seaman Furniture customers generally

      14     are middle-income consumers, and there's not

      15     too many of them buying $1,000 suits.

      16     Perhaps it was because they didn't benefit

      17     from an IPO with a .com after its name.

      18     However, they are buying $1,000 suites of

      19     furniture, and if you were to compare

      20     a $1,000 of furniture to a book for $20 that

      21     you buy from Amazon, the tax differential

      22     regardless of what the rate is has a much









                                                             206
       1     greater incentive on the consumer buying the

       2     big-ticket item from an Internet retailer as

       3     opposed to a retailer who is the old bricks

       4     and mortar.  That is not fair.

       5               Also, is one to look at the profit

       6     margins in our industry, on average the

       7     EBITA profit margins in our

       8     industry run in the high single digits.  (EBITA is Earnings Before       Interest, Taxes, Depreciation, and Amortization)

       9     Those are EBITA margins before net profits

      10     and before taxes are taken out.  Income

      11     taxes, that is.

      12               If you were to take the net profit

      13     margins in the furniture industry, they run

      14     significantly less than the tax rates that

      15     are being applied by the states and the

      16     localities on average.  So, it is not fair

      17     for a bricks and mortar retailer.  We do not

      18     have the capacity to give back the sales tax

      19     to the consumer who's comparison shopping

      20     with us.

      21               I would go back to the $1,000 suit

      22     again and look at the example that was given









                                                             207
       1     this morning of a customer who will go to a

       2     retailer to try on a suit, and then go back

       3     their home and in the comfort of their home

       4     will buy it over the Internet.  That is

       5     happening today in the furniture industry.

       6               The problem is, is that the

       7     furniture retailer on the street where the

       8     customer is going out and sitting on the

       9     sofa, and we are the largest furniture

      10     retailer in the New York area, and we've made

      11     zero sales to virtual homes, with sales to

      12     real homes they are sitting on furniture and

      13     they want to test it and feel if the texture

      14     of it is good, the sit of it is good.  They

      15     cannot do that over the Internet.

      16               So, they're coming into our stores,

      17     sitting in our stores and then going back to

      18     another retailer who's an e-commerce retailer

      19     and buying, and the advantage is the 8

      20     percent differential.

      21               I know again you have time

      22     constraints and I don't want to overburden









                                                             208
       1     them.  However, what I would like to say is

       2     all we are asking for is a level playing

       3     field.  I have not come here today with a

       4     solution, but I will tell you that a solution

       5     that is not acceptable to the bricks and

       6     mortar retailers is where the Internet

       7     retailers do not have to collect sales and

       8     use taxes, and the retailers who have existed

       9     for a long time do have to collect the tax.

      10     I thank you.

      11               CHAIRMAN GILMORE:  I believe that

      12     Mr. Andal has a question for you.

      13               MR. ANDAL:  I'm interested in this

      14     subject of economic differential, especially

      15     in furniture.  Say you sold products to a

      16     Californian, for instance, and you shipped it

      17     all the way across the country.  Wouldn't the

      18     shipping costs be significant, and wouldn't

      19     the shipping costs make up the economic

      20     differential that you say the sales tax

      21     creates an economic disadvantage to you?  I

      22     guess my second question is, why don't you









                                                             209
       1     put a Web page up?

       2               MR. McGEOUGH:  Well, we do have a

       3     Web page up, but the problem is I think

       4     relative to your first question, as a

       5     industry retailer, the easy task is putting

       6     up a Web page and putting up pictures of the

       7     furniture on it.  The problem is fulfilling

       8     the sale when the customer wants to do it.

       9     So, if we have a customer in California, it's

      10     very difficult for us to deliver that

      11     furniture to the customer in California.  You

      12     basically need to have a site or a

      13     distribution center there to deliver it to

      14     the consumer.

      15               The issue I think with furniture as

      16     opposed to just going into a --

      17               MR. ANDAL:  Before you go on, if

      18     you need a distribution center to the place

      19     where you expect to distribute your products

      20     as a result of Web page orders, does not the

      21     distribution center then give you physical

      22     presence in that state and subject to tax?









                                                             210
       1               MR. McGEOUGH:  That is one way of

       2     doing it.  The way we would do it is have a

       3     distribution center.  However, you could also

       4     contract with manufacturers to drop ship

       5     directly to the consumers.  I mean, the point

       6     I think that I'm trying to make is that you

       7     had made an example earlier that it is easy

       8     for a local retailer to establish a Web site

       9     and to ship and deliver to wherever in the

      10     country.

      11               That is not so easy for furniture

      12     because there's so much handling of it

      13     afterwards, and the disadvantage in the small

      14     profit margins of not having sales tax on

      15     Internet users is egregious for us.

      16               MAYOR KIRK:  Mister Chairman, I just

      17     wanted to observe, and Mr. Andal and the

      18     speakers, a hypothetical that Dallas is about

      19     halfway between New York and California if

      20     you got to have a central distribution place.

      21     Just making that observation.

      22               On a less humorous note because









                                                             211
       1     this is -- I would hope no one out there

       2     seriously would believe that someone

       3     Christmas shopping would pay a sales tax

       4     based on the recipient of the gifts as

       5     opposed to if you walked into a Nieman Marcus

       6     or Saks or Target and buy all your Christmas

       7     shopping and you pay for it and then you send

       8     the gifts.

       9               I hope you didn't imply that making

      10     Christmas like tax time because you were

      11     sending gifts to people all over the country

      12     you'd be calculating different sales taxes.

      13     I find that hard to believe.

      14               MR. ISAACSON:  No.

      15               MAYOR KIRK:  But that's the inference

      16     that you made.

      17               MR. ISAACSON:  Let me just clarify

      18     what I was saying.  If you were requiring

      19     consumers who are purchasing from mail order

      20     companies to have to pay the sales tax and

      21     they have to self-compute it because they're

      22     paying by check, under the current system,









                                                             212
       1     the tax is determined based upon the

       2     destination where the goods are being sent.

       3     So, if a grandmother in New York were sending

       4     a set of L.L.

       5               Bean boots to her to a grandchild

       6     in California and a grandchild in Texas, the

       7     Texas tax would be due on the grandchild's

       8     gift, and the California tax would be due on

       9     the other grandchild's tax.  That self-

      10     computation exercise would be the effect of

      11     legislatively requiring that.

      12               MAYOR KIRK:  Well, that can be fairly

      13     easily cured by just having the sales tax

      14     computed on the basis of who bought it.  I

      15     just didn't want to leave that out there.

      16     Thank you.

      17               CHAIRMAN GILMORE:  Let's go to Governor

      18     Leavitt.

      19               GOVERNOR LEAVITT:  Thank you, Governor

      20     Gilmore.  About 30 days ago Governor Gilmore

      21     and I met with the Governors of this country

      22     at the National Governor's Association.  One









                                                             213
       1     of the rituals of that event is that we have

       2     on two or three occasions opportunity to sit

       3     down with all of the Governors in a

       4     closed-door meeting to talk about the things

       5     that are most on our mind.  One of those

       6     meetings revolved almost entirely around this

       7     issue.

       8               The discussion was not directed

       9     toward we've got to get out there because

      10     we're losing our revenue.  The issue was we

      11     need to figure out whether or not we can make

      12     sales tax work for the 21st century, and

      13     there was a substantial amount of urgency in

      14     the need for us to conclude whether or not it

      15     could be done.

      16               As chairman of the organization, I

      17     asked if there would be a handful of states

      18     that would be willing to begin looking at the

      19     technical question can we make this work,

      20     hoping I would get eight or ten who would

      21     send their best technical people and their

      22     best policy people to a meeting.  It turns









                                                             214
       1     out we had 30 Governors who said this is a

       2     serious matter, we've got to deal with it,

       3     and they have volunteered to send their best

       4     policy and technical people to a meeting that

       5     will coincidentally occur in Atlanta on

       6     the 22nd and 23rd of September.

       7               Our discussion today calls to my

       8     mind that if any one of us, and many of you

       9     are, many of us are, were a chief executive

      10     officer of a company, the way we would deal

      11     with this problem is we would call the

      12     functional equivalent of those people into

      13     our office and we would say to them, look, we

      14     have a problem.

      15               We don't know for sure if this is

      16     the direction we want to go or if we want to

      17     go this direction, but we've got t figure out

      18     if this direction even works.

      19               So I'd like to give you some basic

      20     specifications of a system, and I want you to

      21     go back and figure out whether you can make

      22     it work.  I want you to do it 24 hours a day









                                                             215
       1     if you have to because we're dealing with

       2     Internet years here.  We don't have a lot of

       3     time.

       4               You come back, give me a proposal,

       5     and tell me whether or not you can make this

       6     thing work, and I'll be the judge.  If you

       7     make it work, we may go into business.  If

       8     you can't, you're out of the deal.

       9               Now, we've spent a lot of time

      10     talking today, but I'd like to suggest that

      11     it would be very fruitful whether or not

      12     we're going to make a policy decision to do

      13     this or not in the future, to figure out

      14     whether one is an option of not.  Because I'd

      15     like to tell you as a Governor who is very

      16     concerned about this, if we can't make a

      17     functional system work, I don't want to do

      18     it.

      19               I'd like to suggest that we

      20     spend 30 minutes in this meeting today

      21     deciding what we want if we are going to do

      22     it.  My own sense, we ought to have a system









                                                             216
       1     that's radically simplified.  The current

       2     system is a mess.  We ought to have no new

       3     taxes.

       4               We ought to have no new taxes.  We

       5     ought to remove all burdens from sellers.  We

       6     ought to be saying no compromise of anyone's

       7     privacy who's making a purchase.  We ought to

       8     be talking about the need for states to be

       9     able to reflect their own values in all of

      10     this, and there may be others.

      11               I'd like to propose that this group

      12     take 30 minutes and just hypothesize if we

      13     were to do this, what would the system need

      14     to look like.  Then I would like to send that

      15     list of specifications to this group who are

      16     only going to have to execute this or get out

      17     of the way, and that's the tax professionals

      18     and the policy people in the states.

      19               Then I would like us to act as a

      20     CEO.  Have them bring it back to our next

      21     meeting.  Let them show us, here's the way it

      22     meets the specifications.  If it doesn't meet









                                                             217
       1     the specifications, if they can't satisfy the

       2     chief executives around this table, we need

       3     to get on to the next discussion.  But if

       4     they can, we're now making serious progress.

       5               Mister Chairman, I'd like to

       6     recognize that it may short-circuit some of

       7     the discussion that would occur here, but I

       8     think it would be very productive if we could

       9     list up five or six or seven things, whatever

      10     the number would be, that such a system would

      11     need to satisfy and then ask them to come

      12     back to us in San Francisco and give us their

      13     best shot.

      14               CHAIRMAN GILMORE:  Governor Leavitt has

      15     made a motion that we spend the duration of

      16     our time here today to set up some concepts

      17     about what we would want to do if in fact

      18     taxes were to be imposed on the Internet, and

      19     if so, technically what would be an approach

      20     that would be done, that we do that.

      21               MAYOR KIRK:  Second.

      22               CHAIRMAN GILMORE:  Mayor Kirk has









                                                             218
       1     seconded that we do that, and we can do that,

       2     and then we can talk over what role we want

       3     to play or what value we want to play in

       4     whether or not we feel like we want to send a

       5     direction to some other group somewhere or

       6     not.  We can talk those matters over.

       7     Without objection, we'll just proceed to any

       8     further discussion on this matter.  Does

       9     anybody have an opinion that they wish to add

      10     on this?

      11               MR. NORQUIST:  I mean, we had sort

      12     of an agenda and I was hoping we were going

      13     to deal with the international aspects prior

      14     to Bill Clinton being out in Seattle and

      15     meeting with people.  I got my resolutions in

      16     weeks in advance that I want to talk about,

      17     and I appreciate that, but there was another

      18     one on international electronic commerce, and

      19     this is an idea, but it's something we can

      20     walk through in San Francisco.

      21               CHAIRMAN GILMORE:  In fairness, you have

      22     offered a resolution I guess you want to









                                                             219
       1     bring forward for discussion and I think

       2     you're entitled to do that, and I think we

       3     can take up Governor Leavitt's issue within

       4     the 30 minutes also.  Yours is the only

       5     resolution I believe that we have.  Mr. Sokul

       6     has a resolution also.  Let's do those and

       7     then take up Governor Leavitt's issue and see

       8     if we can't get something together and

       9     proceed.

      10               GOVERNOR LEAVITT:  I think we have a

      11     motion on the table.

      12               CHAIRMAN GILMORE:  We have a motion on

      13     the table to spend the time, but we also have

      14     resolutions that have been presented in

      15     proper order under our other rules as well.

      16               GOVERNOR LEAVITT:  Well, I think that we

      17     need to act on this motion.  I have no

      18     objection to our dealing with Commission

      19     Norquist's proposal.

      20               CHAIRMAN GILMORE:  Your motion is not to

      21     utilize all the remaining time.

      22               GOVERNOR LEAVITT:  No.  It is that we









                                                             220
       1     set aside today and not that we could

       2     formulate what it was.  No.  It doesn't have

       3     to be now.

       4               MR. ANDAL:  How about an amendment

       5     just to get these resolutions out of the way

       6     and then go to 30 minutes?  Can you accept

       7     that?  I can't imagine a vote on the

       8     resolution as taking more than about 5

       9     minutes.  Let's go.

      10               GOVERNOR LEAVITT:  Mister Chairman, I

      11     have no objection to Mr. Norquist's -- if

      12     you'd like me to withdraw my motion, I'd be

      13     happy to do it, and I'm sure the seconder

      14     will do the same.  Then if you'd like to go

      15     in that order, I have no objection.

      16               CHAIRMAN GILMORE:  I don't think anybody

      17     wants to prevent us from going to that kind

      18     of issue.  I think we're prepared to do that.

      19     But I feel uncomfortable in not allowing

      20     people who've operated under the rules to be

      21     able to proceed.  But I think we can do it

      22     all, and let's just move along very quickly.









                                                             221
       1     Grover, you present your resolution and you

       2     present -- pardon me?  You're just going to

       3     withdraw yours?  Good.

       4               MR. SOKUL:  I think our two are the

       5     same, if I just might briefly.  Our two are

       6     basically the same resolutions.  I see no

       7     need to do them both.  The point of mine as I

       8     explained in my letters to the Commissioners

       9     was to buttress the position of Mr. Novick

      10     and the USTR when they're going into the

      11     Seattle ministerial meeting of the World

      12     Trade Organization.

      13               I was speaking at dinner last night

      14     with the head of the Direct Marketing

      15     Association.  He was in China recently

      16     talking to the postmaster general of China in

      17     a big room and they had a translator,

      18     conversations are going back and forth.

      19               Suddenly there's a lull in the

      20     conversation and the translator says to him,

      21     "He wants to know if you're going to tax the

      22     Internet," and the room was hushed, and of









                                                             222
       1     course he said, "Absolutely not."  Then they

       2     went on to discuss the issue more.  But my

       3     point is, the world is watching what this

       4     country is doing.  We're the acknowledged

       5     world leaders on this issue.

       6               China's notion was are you going to

       7     tax it in order to pay for it because their

       8     government runs things and that's what they

       9     were thinking.  But basically the world is

      10     watching us, so I introduced my resolution to

      11     send a signal to the world that we support

      12     USTR.  I withdraw my resolution because it's

      13     virtually identical to Grover, and as I said,

      14     there's no reason to do both.

      15               CHAIRMAN GILMORE:  Grover, if you'd like

      16     to present your resolution.

      17               MR. NORQUIST:  People have a copy

      18     of the resolution.  It's a statement of

      19     support for the present administration, the

      20     Clinton Administration's advocacy of a

      21     standstill on tariffs on the Internet, and

      22     it's a resolution in support of the









                                                             223
       1     administration's position, and I think it

       2     would be helpful if we could adopt it here.

       3     The other two resolutions that I had sent in

       4     a month or so ago that we talked about

       5     yesterday were eliminating the 3 percent

       6     federal excise tax and not taxing access.

       7               I appreciate the support and the

       8     super majority support that that has received

       9     from you all, but we can put that into the

      10     report at another time when we put other

      11     things together.  But I do think it's

      12     important for this Commission to state its

      13     support for a standstill on tariffs prior to

      14     the Clinton Administration meeting with other

      15     countries in Seattle later this fall.

      16               I think that would be helpful and

      17     strengthen their hand, particularly since

      18     it's been unfortunate that the House and the

      19     Senate have not been able to pass fast-track.

      20     That's the motion.

      21               CHAIRMAN GILMORE:  It's been -- Grover's

      22     motion has proposed and seconded by Mayor









                                                             224
       1     Kirk.  Is there further discussion on the

       2     motion?

       3               MS. JONES:  I have a question.

       4               CHAIRMAN GILMORE:  Delna, you ask your

       5     question, then I'll come back to whoever was

       6     over here.  Yes, sir.  I'll be right with

       7     you, Robert.  Go ahead, Delna.

       8               MS. JONES:  We have two pieces of

       9     information in the book, and I just want to

      10     clarify.  Are we looking at the modifications

      11     that have been made by Bob Novick?

      12               MR. NORQUIST:  Yes.  Those were

      13     friendly amendments.  Those were friendly.

      14               MS. JONES:  So, those are accepted,

      15     and so the proposal is to include those?

      16               MR. NORQUIST:  Right.

      17               MS. JONES:  Okay.

      18               CHAIRMAN GILMORE:  Bob Novick?

      19               MR. NOVICK:  Thank you, Governor.

      20     Just as a practical matter, the

      21     administration is concerned about the

      22     Commission adopting resolutions before it









                                                             225
       1     studies issues.  In this case, however, this

       2     resolution goes to a long-standing U.S.

       3     government position that's been vetted,

       4     that's been discussed with Congress, it's

       5     been discussed with the private sector and

       6     represents the U.S. government's position in

       7     the World Trade Organization.

       8               As such, we're appreciative of

       9     Mr. Norquist's and Mr. Sokul's efforts to

      10     support the administration and would support

      11     the passage of this resolution.

      12               CHAIRMAN GILMORE:  Further discussion?

      13               MR. LEBRUN:  Mister Chairman?

      14               CHAIRMAN GILMORE:  Yes, sir.  Gene

      15     Lebrun?

      16               MR. LEBRUN:  Although I support the

      17     position of the resolution, I don't think

      18     it's the role of this Commission to be taking

      19     positions on such resolutions.  I don't think

      20     that's without our charge.  I'm afraid that

      21     once we start down this road, where do we

      22     stop?  What other resolutions are going to be









                                                             226
       1     submitted and asking us to vote on?  For that

       2     reason I'm going to vote against the

       3     resolution, not because I'm against the

       4     policy of it.  But I'm against this

       5     Commission voting on such resolutions at this

       6     time.

       7               MR. NORQUIST:  If I could address

       8     that, we aren't actually flooded with

       9     resolutions or measures to be voted on.

      10     There were three I put forward, two of which

      11     were consensus items, but we needn't note on

      12     them.  The second is similar in intent to

      13     this one.  So, basically three proposals.  If

      14     somebody shows up with 25 in San Francisco,

      15     we can just say thank you, no.

      16               I mean, this is not something we

      17     have to be overly concerned about.  But I do

      18     think it's very important because we've been

      19     asked to speak to the issue of taxation of

      20     the Internet at the national, international,

      21     state, and local level, and so we're going to

      22     be making recommendations to state and local









                                                             227
       1     governments as well as to the Congress and

       2     the President.

       3               I think it is important because the

       4     U.S. government has a correct and good

       5     position on not taxing electronic commerce at

       6     the border, but I think we should support

       7     that and point out that they're right, that

       8     they're doing the right thing.  It's not just

       9     to make Bill Clinton feel good.  I want the

      10     rest of the world to hear that President

      11     Clinton has broad-based support from the

      12     country on this.

      13               CHAIRMAN GILMORE:  There is a resolution

      14     that has been submitted in accordance with

      15     the rules prior to the meeting:  Resolved

      16     that a moratorium on tariffs should be

      17     implemented and made permanent at the

      18     earliest possible date.  What did I say?

      19               Moratorium on tariffs?  Is that

      20     what I said?  It should be implemented and

      21     made permanent at the earliest possible date,

      22     endorsed, and worked with by Robert Novick,









                                                             228
       1     the representative for international trade.

       2     Motion has been made to call the question on

       3     this by Mr. Andal.  Second on calling the

       4     question?

       5               SPEAKER:  Second.

       6               CHAIRMAN GILMORE:  All in favor of

       7     calling the question say aye.

       8               COMMISSIONERS:  Aye.

       9               CHAIRMAN GILMORE:  All opposed nay.  All

      10     in favor of the resolution please say aye.

      11               COMMISSIONERS:  Aye.

      12               CHAIRMAN GILMORE:  All opposed?  The

      13     resolution passes.  Excuse me.  I think I'm

      14     supposed to do a roll call on this in order

      15     to fulfill the rules, but I believe it's

      16     unanimous with Mr. Lebrun dissenting, I

      17     believe.  Is that the record of where we are?

      18     Very good.  Now let me turn our attention back

      19     to the other issue at hand which is the one

      20     of setting down I suppose criteria for what a

      21     tax system ought to be if one should be

      22     imposed, and whether or not one is workable.









                                                             229
       1     Why don't I just give the floor back to

       2     Governor Leavitt or Mayor Kirk as necessary?

       3     I beg your pardon?  Did someone speak?

       4               MR. SOKUL:  Just to save time, I'd

       5     like to ask Governor Leavitt a question.  Are

       6     you talking about a tax system in general, or

       7     a software package?

       8               GOVERNOR LEAVITT:  I'm talking about two

       9     phases of this.  One, remote sales to begin

      10     with.  Then second of all, what can we learn

      11     from our experience in our discussion on

      12     remote salves about the entire system,

      13     because I personally believe the entire

      14     system is a mess as it was earlier

      15     characterized.

      16               Now, whether this Commission will

      17     have to make a decision as to, (A), whether

      18     you want to do that at all -- want to deal

      19     with this issue at all; or whether we want to

      20     deal with it just as remote sales or the

      21     entire system.  I think that's a decision for

      22     the Commission on a later date.









                                                             230
       1               MR. NORQUIST:  I'm concerned.

       2     We're going to ask a taxpayer-funded group,

       3     the National Governor's Association, to

       4     present what to us, and why don't they do it

       5     the way everybody else who's presented today?

       6               GOVERNOR LEAVITT:  Thank you.  First of

       7     all, I'd like to suggest that I would not

       8     like this to be viewed as a resolution.  This

       9     is a motion in routine business.  But this

      10     would not be the National Governor's

      11     Association.  It happened the meeting under

      12     that auspices.

      13               But what happened was, we sat in a

      14     meeting with the Governors and talked about

      15     this issue and concluded that we really have

      16     an obligation to put a proposal together that

      17     determines whether this is going to work or

      18     not -- this same question, and who would we

      19     logically turn to.

      20               Well, we would logically turn to

      21     people who have to run the systems of

      22     taxation in this country, and at least in the









                                                             231
       1     states.  First of all, because they

       2     understand the nature of the policy issues.

       3     Second of all, they understand the technical

       4     challenges.

       5               Now, if I were a CEO of a company

       6     and I were trying to decide whether to do

       7     something or not, and I've been in this

       8     position, I'd call them in and say I'm trying

       9     to make a decision here.  I'd like you to

      10     take the following general criteria.  I want

      11     you to go out and take all of the barriers

      12     down.

      13               Forget about guarding all of the

      14     sacred things that are in your past, forget

      15     about protecting this and protecting that,

      16     and come up with a system that will work and

      17     bring it back to me and I'll decide whether

      18     or not it meets the criteria.

      19               If it does, then we'll go to future

      20     discussions.  If it doesn't, you're out of a

      21     deal and I'm going to a different direction,

      22     and we may want to tax cattle or something.









                                                             232
       1     Worked once.

       2               So, I'm proposing that we say to

       3     the states you have to solve this problem.

       4     We're going to be the executives here.  We'll

       5     give you a criteria.  We'll give you a

       6     hurdle.  You bring it back and we'll decide,

       7     and I propose we do that in San Francisco.

       8               Furthermore, I'd lay out at least

       9     what I heard this panel saying, and I

      10     recognize that I didn't have a complete list,

      11     but I would offer as a beginning point that a

      12     system out to have -- we ought to give them

      13     the following criteria.  One, radically

      14     simplify.

      15               This has to be a radically

      16     simplified system.  You can't have 32,000

      17     taxing jurisdictions.  You can't have a

      18     million different definitions.  You've got to

      19     have a radically simplified system.

      20               Second of all, no new taxes.  Don't

      21     want any more taxes being raised by being

      22     imposed on the Internet itself.









                                                             233
       1               MR. NORQUIST:  Does that mean no

       2     net tax increase on the citizens?

       3               GOVERNOR LEAVITT:  No.  What it means is

       4     that no new taxes being imposed on sales over

       5     the Internet.

       6               MR. NORQUIST:  You understand that

       7     as a representative of taxpayers and

       8     consumers, if we were to collect taxes that

       9     are not presently taxed, that is viewed as a

      10     tax increase?

      11               GOVERNOR LEAVITT:  Yeah, that's a fair

      12     way to look at it.  I will tell you what we

      13     do in our state when we have that happen.  We

      14     do what we've done 29 times.  We cut taxes.

      15     There are other states that may make a

      16     different decision, but that's what we do, is

      17     we cut taxes.  So, I'm interested in

      18     saying --

      19               MR. NORQUIST:  But on your list of

      20     criteria, are you then arguing that there

      21     should be no net tax increase?

      22               GOVERNOR LEAVITT:  No.  I'm arguing that









                                                             234
       1     there are no new taxes imposed.  We have a

       2     sales tax in 45 states are now owed on goods

       3     that are transacted on a remote basis.

       4     They're not paid, but they're owed.

       5               MR. NORQUIST:  But if you figured

       6     out how to raise it, that would be a tax

       7     increase on the citizens.

       8               GOVERNOR LEAVITT:  Well, this Commission

       9     will need to make the decision on whether or

      10     not it meets that criteria.  I think it would

      11     be unrealistic for us to say no net taxes

      12     given that we're dealing with 50 different

      13     states.  But the third criteria would be

      14     remove the burden from the seller.

      15               If we produce a system that becomes

      16     a burden to the seller like they have now --

      17     we haven't moved this process forward.  That

      18     should likely be no financial burden, and it

      19     should be no logistic burden.

      20               Fourth, that it does not compromise

      21     the privacy of the purchaser.  Fifth, that we

      22     would acknowledge the role of states as









                                                             235
       1     sovereign taxing authorities, and that they

       2     should have some means of creating options on

       3     the part of the state to play out their best

       4     tax judgment.  Next, that it should treat

       5     purchasers as close to equal as possible.

       6               MAYOR KIRK:  I'm sorry.  Could you

       7     repeat that last one?

       8               GOVERNOR LEAVITT:  The level playing

       9     field that Main Street was looking for, as

      10     close to equal as possible.

      11               MAYOR KIRK:  Is that treating

      12     purchasers or is that treating vendors?

      13               GOVERNOR LEAVITT:  No, I was talking

      14     about purchasers.  That goes back to the

      15     issue of who pays it.  The sellers, we

      16     decided no burden there.  So, it should not

      17     be a burden to sellers, and it should be

      18     neutral in terms of who pays the tax.  Well,

      19     let me just state it another way.  As close

      20     as we can, we ought to have a policy or

      21     system that will not discriminate on the

      22     basis of how people buy, but if they buy.









                                                             236
       1               Now, there may be others.  I think

       2     there were others that were mentioned, and

       3     I'm very open to these being changed or

       4     others.  But I would like to lay out what a

       5     system would look like.

       6               MAYOR KIRK:  I was just wondering

       7     with there being one more criteria, and I

       8     think Mr. Novick that you had something

       9     related to it being technologically feasible

      10     or --

      11               GOVERNOR LEAVITT:  I would say that's

      12     the whole question:  Can you technologically

      13     make a system like this work.  Now, there may

      14     be other suggestions.

      15               CHAIRMAN GILMORE:  I'm sorry.  Who was

      16     next?  David, you go first.  Then we'll get

      17     Stan.

      18               MR. POTTRUCK:  Mike, I think this

      19     is a good list.  A good place to start.  The

      20     only comment I would have though on your

      21     proposal is sending this last to the state

      22     tax collectors sort of creates a closed loop.









                                                             237
       1     They're the people who have to implement it.

       2     They're the people whose systems have to be

       3     changed.  I'm not sure if they're the only

       4     ones who ought to comment on whether it's

       5     feasible or not.  There might be lots of

       6     other people who might comment on whether

       7     it's feasible.  That's number one.

       8               GOVERNOR LEAVITT:  David, I would really

       9     like to have this group be the judge as to

      10     whether or not they meet that criteria.  I

      11     mean, other groups may want to take a whirl

      12     at this, but what I'd like to this group

      13     doing is let's set some hurdles up for

      14     whoever wants to weigh in on this system.

      15               MR. POTTRUCK:  Yeah, I would love

      16     to hear their point of view, but I would love

      17     to hear others.  Maybe one of the challenges

      18     here would be to take a group of

      19     Commissioners who would like to volunteer to

      20     rise to the challenge of coming up with a

      21     recommendation that meets this list and an

      22     expanded list with the provision of no new









                                                             238
       1     taxes on the Internet which obviously an

       2     underlying foundation of this; if we had a

       3     few more items, maybe we could as a working

       4     committee a group that would try to create a

       5     recommendation that would somehow embody this

       6     kind of thing.

       7               Because one of the problems we have

       8     with the issue of a technological solution is

       9     there may be any number of different ways to

      10     functionally and structurally approach this

      11     problem, and sometimes I'm sure my colleagues

      12     here would say is that the more involved you

      13     are with the details, the more knowledge you

      14     have, the more impossible the problem always

      15     is to solve, and sometimes rising above it

      16     you can some up with some idea that somehow

      17     make it more simplified and make it easier to

      18     do.

      19               GOVERNOR LEAVITT:  I would amend my

      20     proposal if the Commission was inclined to

      21     include the appointment of -- and

      22     particularly I'd be interested in having some









                                                             239
       1     of the major technology players that sit at

       2     this table work as a part of that group to

       3     help conclude it.

       4               CHAIRMAN GILMORE:  Sounds like we got a

       5     different group right there that wants to

       6     compete with our Commission doesn't it?

       7     Grover?

       8               MR. NORQUIST:  Yeah, I had that

       9     concern.  Everybody came here and told us how

      10     messed up the present sales tax system is at

      11     the state level.  The Governors are the

      12     people who designed this system.  I'm sorry.

      13     It wasn't the business community, and it

      14     wasn't taxpayers, and it wasn't consumers.

      15               GOVERNOR LEAVITT:  Well, it wasn't the

      16     sitting Governors now.  There's 100 years of

      17     history in the system.

      18               MR. NORQUIST:  But the interests

      19     represented by the tax collectors are the

      20     Governors who collect the taxes, and the

      21     state legislators as well.  The purpose of

      22     this Commission and why it was so balanced









                                                             240
       1     was we had some Governors, some state

       2     legislators, some locally elected officials,

       3     one taxpayer representative, and business

       4     leaders as well, so that we could take all of

       5     the different attitudes to subcontract to one

       6     of the interested parties.

       7               I'd love to have the National

       8     Governor's Association come and give a

       9     presentation or give us material as any other

      10     group has, and I don't think it makes any

      11     sense to give them any sort of special

      12     status.

      13               I mean, have the taxpayer groups

      14     all get together and come up with an

      15     explanation of what taxpayers think this

      16     ought to be treated, and I would ask that

      17     they come and present it or just as anyone

      18     else would at the next meeting or in writing.

      19     Any Governor can put together anything he

      20     wants and send it to us.

      21               GOVERNOR LEAVITT:  Grover, I think this

      22     would be the chance of a lifetime for a









                                                             241
       1     taxpayer organization to say to the tax

       2     collectors fix the system or get out of the

       3     way.  I would think that would be a very good

       4     thing.  I guess I'd also suggest that I don't

       5     know how many taxpayers -- how many voters

       6     aren't taxpayers.

       7               I don't know exactly who it is I

       8     represent if it isn't taxpayers.  That's who

       9     pays my salary.  That's who I work for every

      10     day.  That's who all 50 Governors work for.

      11     In terms of who represents taxpayers at this

      12     table --

      13               MR. NORQUIST:  If the Governors

      14     were as solicitous of taxpayers as they ought

      15     to be, we wouldn't be having this discussion

      16     obviously.

      17               GOVERNOR LEAVITT:  Well, the Governors

      18     have got religion I guess, Grover.

      19               CHAIRMAN GILMORE:  Instead of a lot of

      20     berating going on back and forth, let's move

      21     on to something that begins to answer the

      22     question of whether or not this panel wants









                                                             242
       1     to put together something here in the next

       2     few minutes which they want to communicate

       3     the -- group of 30 Governors, or at least

       4     their representatives in their evaluations,

       5     and we'll come back to that.  Go ahead.  Dick

       6     Parsons, you had your hand up.  I'm sorry.  I

       7     beg your pardon, Dick.  I asked Stan Sokul to

       8     go next.  I beg your pardon.  I missed you.

       9               MR. SOKUL:  Just real quickly, I

      10     had an addition to the list.  When we're

      11     talking about electronic commerce, I've said

      12     this before yesterday and today, and I think

      13     an important issue is the international

      14     perspective.  So I would add to your list

      15     international scalability or effect on global

      16     competitiveness or something like that.

      17               GOVERNOR LEAVITT:  I accept that as a

      18     good addition.

      19               MR. SOKUL:  But then just also real

      20     briefly in terms of the process, I would echo

      21     Mr. Pottruck's comment.  I used to work for a

      22     senator, and if senators got together and









                                                             243
       1     wanted to decide is senate staff still

       2     necessary, I think the answer would be yes.

       3     Assigning this task to the tax collectors who

       4     have a protectionist interest in the results,

       5     I think that's something we ought to discuss

       6     and consider.

       7               CHAIRMAN GILMORE:  Dick Parsons?

       8               MR. PARSONS:  I guess this isn't so

       9     much a question as it is an observation, but

      10     I want to make sure I understand what your

      11     proposal really means.  As I understand the

      12     issue, Mr. Pottruck said at the 100,000 foot

      13     level, it's do we continue in the modality

      14     that we're in now with Quill which says you

      15     have to have a NEXUS of physical presence

      16     before you have taxes which means essentially

      17     that a lot of this Internet commerce is going

      18     to escape taxation.

      19               Or do we go with what some people

      20     have called the level playing field, I'm not

      21     sure that's really it, but where we basically

      22     try and change Quill for all remote sales to









                                                             244
       1     bring them within the structure of a state

       2     sales tax, and how do we do that.

       3               What your proposal says is in

       4     effect without addressing the question of

       5     whether we decide to do it or not, let's at

       6     least come up with a model or framework or

       7     set of criteria or specifications that says

       8     in order to change from the system we have

       9     now, we would need to have something that was

      10     much simpler, that didn't impose new taxes,

      11     just made it possible -- redefined on what

      12     transactions taxes would fall; remove the

      13     burdens from the sellers; didn't compromise

      14     privacy; acknowledge state sovereignty; and

      15     was technically feasible; and treated

      16     transactions neutrally or transparently so

      17     that it's irrelevant whether you do the

      18     transaction over the Net or in a bricks and

      19     mortar place.

      20               Let's develop that set of criteria

      21     and then let's ask at least one group but not

      22     necessarily one group, this group of 30









                                                             245
       1     that's meeting in Atlanta, let's ask them if

       2     they think they could come up with something

       3     that fills that bill and then we have

       4     something to look at and compare to the

       5     status quo and say do we like this better or

       6     do we like that better.

       7               You're not suggesting that we're

       8     making a decision to go in this direction.

       9     We're just trying to find out if there's

      10     something that this group in Atlanta or any

      11     other group could construct that would be

      12     attractive or at least evaluatable.  If

      13     that's the context, it seems to me that's

      14     sort of what this Commission is supposed to

      15     be doing.

      16               We're supposed to be kind of

      17     saying, look, here are some guidelines.

      18     That's why we have these people here today.

      19     Come back to us and tell us what you think do

      20     against this and then we make a judgment as

      21     to how that compares to the status quo.

      22               Because, again, I'm not sure as I









                                                             246
       1     look at this list, somebody can actually fill

       2     out all these boxes.  It would be a hell of a

       3     deal.  My personal view is that -- those

       4     people down in Atlanta, but I could buy off

       5     on something like that as I understand it.

       6               CHAIRMAN GILMORE:  I think one question

       7     is whether or not we want to give criteria to

       8     an outside group or whether we want to hear

       9     back from them as to what at appropriate time

      10     in San Francisco is to what they propose.  I

      11     think that's the issue.

      12               The question is, does this

      13     Commission want to send criteria as opposed

      14     to simply listening back to what they come up

      15     with, and I think that's the question.  The

      16     proposal is that we in fact develop some sort

      17     of criteria here in the remaining time and

      18     send that down to them in some way.

      19               I don't know how that would be

      20     interpreted around the country, but it's a

      21     proposal on the table and seconded by Mayor

      22     Kirk.  Gene Lebrun first, and then we'll come









                                                             247
       1     back to David Pottruck.

       2               MR. LEBRUN:  I would support Mister

       3     Governor Leavitt's proposal.  I think

       4     regardless of what this Commission

       5     recommends, we have to not only recommend

       6     something that's acceptable to Congress, but

       7     it has to be acceptable to state and local

       8     governments because it's their tax laws we're

       9     talking about.

      10               It's their tax laws that we're

      11     talking about messing with, even though it

      12     may be a mess.  So, I think it is important

      13     that we get the Governor's association, I

      14     think it's important that we get the NCSL and

      15     the mayors and the counties to at least

      16     accept or be neutral in whatever we come up

      17     with.

      18               In terms of the mess that our tax

      19     laws are, in my earlier life I was in state

      20     legislature, and the lot of the mess that we

      21     see as a result of private interest groups

      22     lobbying changes in the lax law:  We want an









                                                             248
       1     exemption for the farmers; we want an

       2     exemption for this; we want this change.  It

       3     didn't happen all at once.

       4               Every year somebody has got a bill

       5     in to change something to help their

       6     particular interests.  That's fine.  That's

       7     the way democracy works.  I don't think we

       8     should put the blame of the mess on any one

       9     particular group.  There's enough to go

      10     around.

      11               GOVERNOR LEAVITT:  Your suggestion is a

      12     great one.  Somebody said it's not the

      13     Internet, it's competition.  If we could lay

      14     a criteria out, we ought to see if we can

      15     find a dozen groups that will take this on

      16     and come back and see who can best come up

      17     with this criteria.

      18               CHAIRMAN GILMORE:  Mike, I don't recall

      19     the NGA meeting that discussed this and

      20     Governors only.  This may have been on the

      21     last day.  Is this position from the National

      22     Governor's Association proposal?









                                                             249
       1               GOVERNOR LEAVITT:  Well, the point is

       2     we're not representing a position.  I think

       3     what I'm proposing is that this group remain

       4     a policy body and that we go out to

       5     individual groups.  It can be the taxpayers,

       6     it can be the Governors, and they bring it

       7     back and in San Francisco we hear, we listen

       8     to real proposals against a real criteria

       9     that we think has to be satisfied.

      10               CHAIRMAN GILMORE:  Let me ask again.  Is

      11     this the NGA proposal?

      12               GOVERNOR LEAVITT:  No.

      13               CHAIRMAN GILMORE:  This is not the same

      14     as the NGA proposal?

      15               GOVERNOR LEAVITT:  No, it is not.  Well,

      16     it may bear some recollection or some

      17     resemblance, but it is not being represented

      18     at this table.  You don't see single rate

      19     here.  You don't see anything dealing with

      20     NEXUS here.  Those are all part of the NGA

      21     proposal.  I'm just suggesting what would a

      22     system look like.









                                                             250
       1               MR. LEBRUN:  Do we have a copy of

       2     the NGA proposal?  Was that passed out?

       3               CHAIRMAN GILMORE:  I don't think that

       4     it's among the materials, but it can be such.

       5               GOVERNOR LEAVITT:  This is not the NGA

       6     proposal.

       7               MR. LEBRUN:  There's a second

       8     question.  Does it exist, and can we have a

       9     copy?

      10               GOVERNOR LEAVITT:  You're certainly

      11     welcome to have it.  It's on the Web.

      12               CHAIRMAN GILMORE:  Indeed it is.

      13               MR. LEBRUN:  But it wasn't

      14     presented here?  No.

      15               CHAIRMAN GILMORE:  The NGA position is

      16     not unanimous adopted.  It was not supported

      17     by California, Iowa, Massachusetts, Colorado,

      18     and certainly as Chairman of this Commission

      19     I myself abstained from the most recent

      20     version of that.  But there is a proposal out

      21     there to be sure.  David Pottruck, I think

      22     you wanted yours.









                                                             251
       1               MR. POTTRUCK:  I think that we had

       2     a proposal to create a list down that road.

       3     I have a couple of suggestions to add to the

       4     list based upon some things I heard, and I'm

       5     not to state these very articulately, but I

       6     think they're principles we talked about

       7     today, that we have a system that avoids

       8     out-of-state discrimination.  This is the

       9     notion where a state discriminates against

      10     businesses and tries to collect on the people

      11     who can't defend themselves.

      12               Also some sort of a safe haven from

      13     oppressive auditors, where we have a system

      14     that doesn't allow state auditors to become

      15     police that beat up on out-of-state retailers

      16     in some sort.

      17               GOVERNOR LEAVITT:  David, would you

      18     suggest a suggestion that we go beyond that

      19     and tell them we'd like to eliminate to the

      20     extent possible multiple audits?

      21               MR. POTTRUCK:  Sure, if we could

      22     get there.  I don't know if that's possible.









                                                             252
       1               GOVERNOR LEAVITT:  I don't either.

       2               MR. POTTRUCK:  But let me make a

       3     change since I was the chairperson of the

       4     work plan committee.  I'd like to put a

       5     proposal even at this late hour in front of

       6     the Commissioners, because I think this is at

       7     the heart of what we're supposed to be doing,

       8     and this is the outcome of what we heard

       9     today.

      10               We've come together.  We've

      11     listened to a lot of testimony.  We've had a

      12     lot of ideas, problems, issues, put on the

      13     table.  This is reflective of what we've

      14     heard.  So, here's an idea.  The idea is the

      15     following, that we challenge any organization

      16     to put a plan together, an outline together,

      17     that meets these criteria.  We require the

      18     following.

      19               We require the outline to be let's

      20     say five pages or less.  So, it can't

      21     be 1,000 pages.  It hits the high points.  Or

      22     whatever the list is.  Ten pages.  I don't









                                                             253
       1     care.  Then it has to get the support of any

       2     three or four Commissioners, and if we can

       3     get three or four Commissioners, whatever we

       4     believe in, it gets presented to all of us

       5     and we have an open discussion of these

       6     alternatives.

       7               The other alternative is do

       8     nothing.  We have that alternative.  We can't

       9     come up with a solution, our view is either

      10     do nothing at all which stands out as an

      11     alternative, or a permanent moratorium is

      12     another very simple alternative.  So, those

      13     sort of stand there.

      14               Then we have any number of good

      15     ideas that could meet all these criteria, and

      16     we have a threshold of a certain number of

      17     supporters around the Commission and we maybe

      18     say no Commissioner can support any more than

      19     two ideas so we won't be flooded with a

      20     zillion ideas.

      21               Then based upon our discussion in

      22     San Francisco, we try to see if we have some









                                                             254
       1     coalition around a couple.  Then we have

       2     between San Francisco and Dallas an

       3     opportunity to forge a solution.

       4               CHAIRMAN GILMORE:  We've got a few

       5     people who want to speak in addition to I

       6     know Mike Armstrong and Mr. Sokul and

       7     Mr. Waitt as well.  We're now discussing

       8     although we haven't moved it into formally

       9     yet the idea of a simple call for people

      10     across the country to put forward their ideas

      11     I believe on this or some other criteria.

      12               But let's go down very quickly, and

      13     then I'm going to have to go to Virginia

      14     pretty soon, but let's go down a few of these

      15     and then see what we can do.  Ted Waitt, I

      16     believe, is on the list.

      17               MR. WAITT:  Thanks, Governor.  Just

      18     real quickly because I know we're running out

      19     of time here.  From my perspective, we've

      20     dealt with all this complexity of the tax

      21     system.  We collect taxes in multiple states.

      22     We collect taxes over the Internet.









                                                             255
       1               We collect taxes over our phone

       2     catalogue sales.  I think it is prudent for

       3     this Commission to go off and look at real

       4     solutions to the problems before we say we're

       5     not going to do something or we're going to

       6     do something.

       7               I think it is our role, and I

       8     definitely think we need to consider it

       9     because we have to look at solutions and we

      10     have to at least look at something before we

      11     decide to do something or to do nothing.  So,

      12     I think it's absolutely prudent that we do

      13     that, and I would support Governor Leavitt's

      14     proposal as modified by Mr. Pottruck over

      15     there as well.

      16               CHAIRMAN GILMORE:  Mr. Armstrong?

      17               MR. ARMSTRONG:  I very much support

      18     both David's contributions and Governor

      19     Leavitt's proposal.  I think that not to take

      20     advantage of the Governors who rule the roost

      21     when it comes to state taxes and sales taxes,

      22     and sales taxes are what we're talking about,









                                                             256
       1     would be irresponsible of us.

       2               The coincidence that the Governors

       3     have delegated some authority to the people

       4     that work for them in order to consider this

       5     issue and that we might form some criteria, I

       6     would suggest that rather than try to in the

       7     face of a hurricane in 30 minutes get all the

       8     criteria correct, that Mister Chairman we

       9     have fax machines and telephones that we

      10     might use 48 hours in which to conclude and

      11     confirm that we got the criteria that we want

      12     on there.

      13               I also absolutely support that any

      14     other body that can give as good input on

      15     this issue, this shouldn't be Governors only.

      16     I stressed Governors versus tax collectors

      17     because I agree with the comments about tax

      18     collectors.

      19               Finally, something that's not in

      20     there, Mike, one of the biggest problems is

      21     not just a simplified rate structure and how

      22     to collect it efficiently.  But having lived









                                                             257
       1     through the homologation efforts over in

       2     Europe when we're going to a common market

       3     and a single system and trying to call a

       4     vacuum cleaner and vacuum cleaner, we have

       5     got that problem in the United States, and a

       6     common definition has to be given to them as

       7     well as a simplified tax structure and

       8     efficient collection, and then a time frame

       9     in which to deliver that because this could

      10     be a virtual answer that we get.

      11               CHAIRMAN GILMORE:  Mr. Sokul, you're the

      12     last one I think.

      13               MR. SOKUL:  Well, I think

      14     Mr. Novick is also in line.  I have just a

      15     couple points and a suggestion as to where we

      16     are.  I think we have adopted as a Commission

      17     Mr. Pottruck's work plan which set out thee

      18     type of process we were going to follow going

      19     to San Francisco.  We also have a motion on

      20     the table which kinds of deputizes 30 or so

      21     tax collectors of 30 or so states as almost

      22     an official Commission body.









                                                             258
       1               I would suggest that we follow our

       2     work plan on the Commission staff level, we

       3     go on to develop and work on the issues and

       4     options paper as was originally envisioned,

       5     and then rather than maybe the specifics of

       6     Governor Leavitt's proposal, we kind of mold

       7     what you had suggested and others have

       8     suggested and put out a general call for

       9     people to come forth with ideas.  Certainly I

      10     think the 30 or so should be first in line,

      11     and guarantee a panel on that issue in San

      12     Francisco.  I think that would be maybe a

      13     quick way to reach consensus on this.

      14               But one final comment.  I have a

      15     problem with us right now setting the

      16     criteria.  I think it would be very helpful

      17     to all of us.  What's been thrown up on us in

      18     the last second, we all have things to do.

      19     Let the people who are coming set forth what

      20     criteria they think are important.  There

      21     might be several that we haven't even thought

      22     of and wouldn't think of today.









                                                             259
       1               CHAIRMAN GILMORE:  Mr. Novick, and then

       2     Mr. Norquist.

       3               MR. NOVICK:  It seems to me that

       4     both the objectives we have on the work plan

       5     and the proposal of Governor Leavitt can be

       6     complemented.  The work plan ought to go

       7     forward.  It seems to me that we've got a

       8     list that we can give to the group that

       9     Governor Leavitt refers to, and the other

      10     groups, let them begin work on this.

      11               We're looking for any input that we

      12     can get from experts in the field.  As the

      13     work plan effort goes forward, we'll probably

      14     develop other criteria and identify other

      15     issues that we may want to add to a list, it

      16     would be an evolving list, and we'll send it

      17     back and we'll modify it.

      18               But our time is short, and we ought

      19     to take advantage of any expertise that's

      20     available to look at what is beginning to

      21     form around the deliberations of this

      22     Commission.









                                                             260
       1               I don't think one has to wait for

       2     the other.  Nor should the other be affected

       3     Governor Leavitt's plan.  I think we can move

       4     forward on both tracks simultaneously and

       5     without prejudice to the outcome of either.

       6               CHAIRMAN GILMORE:  Mr. Norquist?

       7               MR. NORQUIST:  I like the idea of

       8     asking the Governors and other interested

       9     parties to come up with suggestions to us

      10     that we can look at in San Francisco.  While

      11     we can informally give them some guidelines,

      12     I think we're still trying to decide what

      13     some of those are.

      14               I would certainly hope that what we

      15     come up with, and I would challenge the

      16     Governors who come up with plans, that what

      17     they come up with would fall under the

      18     category of being constitutional; that while

      19     they look after states' rights, that they not

      20     trample on Indian sovereignty; and that I

      21     would insist, and I'm going to ask the

      22     Governors, to come up with a no net tax









                                                             261
       1     increase plan nationally.

       2               Also the eighth point which you

       3     accepted as a friendly amendment earlier in

       4     the day but didn't mention when you revisited

       5     it, and I hope it's still on your agenda,

       6     that we ask the Governors to come up with how

       7     to reduce state and local taxes on

       8     telecommunications, that we recognize that

       9     the telecommunications industry is an

      10     overtaxed industry now.

      11               I'll send a letter to all the

      12     Governors looking for how they might be able

      13     to reduce telecommunications taxes in their

      14     state, but I'd certainly hope that that's one

      15     of the criteria that they would use.

      16               MR. ANDAL:  I have a quick question

      17     of Governor Leavitt.  One of the problems in

      18     serving on this Commission is reading all the

      19     material without enough time to really review

      20     it.  Do you have a deadline before San

      21     Francisco that you can envision that we would

      22     be able to review it?









                                                             262
       1               GOVERNOR LEAVITT:  I feel confident they

       2     could get it to us in more advanced time than

       3     we've had in other situations.

       4               CHAIRMAN GILMORE:  Would you say

       5     about 45 days before, or something like that?

       6               GOVERNOR LEAVITT:  No.  When did we get

       7     the budget?  Friday?

       8               MR. ANDAL:  I don't mean to suggest

       9     a specific date, but whatever would be

      10     reasonable.  A couple of weeks before maybe?

      11               CHAIRMAN GILMORE:  Actually, that's not

      12     right.

      13               GOVERNOR LEAVITT:  I think so.

      14               CHAIRMAN GILMORE:  The budget was out on

      15     August the 11th, I believe.

      16               GOVERNOR LEAVITT:  I don't think -- 2

      17     weeks in advance.

      18               CHAIRMAN GILMORE:  I'm going to try to

      19     synthesize the discussion here in just a

      20     minute and see if we've got a motion we want

      21     to vote on, but I do want to give everybody a

      22     chance to speak before we have our hurricane.









                                                             263
       1     Mr. Pottruck?

       2               MR. POTTRUCK:  Governor, let me see

       3     if I can place this a little context.  I

       4     actually think as I thought about this and

       5     listened to what people have said that

       6     everything we're talking about is within our

       7     work plan.  We're just talking about a

       8     process.  We have a drafting committee.

       9     Where were the ideas from that drafting

      10     committee supposed to come from?

      11               So, arguably everything we've

      12     talked about, a sense of a beginning list of

      13     criteria that we want to work further on; the

      14     process of the drafting committee sending

      15     those criteria out and see if we have a good

      16     list that we can have a consensus around; the

      17     process of challenging the tax collectors and

      18     others to offer suggestions to the committee;

      19     a process by which the committee would

      20     understand which of the alternatives seem to

      21     have support of at least some of our

      22     Commissioners so we know as a set of









                                                             264
       1     alternatives, here are our set of

       2     alternatives.

       3               All that seems to me to be

       4     inclusive within the work plan that we have.

       5     So, I think that we can pursue what Mike has

       6     suggested and that different people have

       7     commented on within the plan that we have.

       8               CHAIRMAN GILMORE:  Well, I agree with

       9     that, and I think it ought to be directed

      10     into the drafting subcommittee that was set

      11     up, and we are prepared to move I think in

      12     that direction.

      13               MR. SOKUL:  I was going to just to

      14     try to close this out just offer an amendment

      15     to Governor Leavitt's motion, that we have a

      16     panel on this issue in San Francisco.

      17               CHAIRMAN GILMORE:  I think you would --

      18     amendment on that?

      19               GOVERNOR LEAVITT:  I would hope that

      20     we'd devote a substantial amount of our time

      21     in San Francisco to receiving whatever

      22     proposals come forward from whatever









                                                             265
       1     disparate groups.

       2               CHAIRMAN GILMORE:  Is there any

       3     objection to that type of proposal?  Seeing

       4     none, that that's adopted.  Ladies and

       5     gentlemen, I would propose that we adjourn

       6     our meeting.  Is there objection to that?

       7               GOVERNOR LEAVITT:  Mister Chairman,

       8     could I add to the list of criteria that

       9     we've developed just one other category, and

      10     it would be any other ideas that you have

      11     that would improve this system?

      12               CHAIRMAN GILMORE:  I think that that

      13     goes without saying within the discussion.

      14               GOVERNOR LEAVITT:  Do we need to vote on

      15     this, Mister Chairman?

      16               CHAIRMAN GILMORE:  I think we don't.  Is

      17     there an objection?

      18               MR. NORQUIST:  Just one second.

      19     Let me be clear.  The list that was put

      20     together by Governor Leavitt is an informal

      21     list.  This is not a list we voted on.

      22               GOVERNOR LEAVITT:  Mister Chairman, that









                                                             266
       1     is not the proposal.  The proposal is that we

       2     as a Commission need to establish some

       3     formalized benchmarks that are subject to

       4     change at any time this Commission chooses

       5     to, but any group that goes forward needs to

       6     have something against which they are

       7     comparing and we are operating.  My motion is

       8     that we formalize the group as they have been

       9     specified.

      10               MR. NORQUIST:  Well, then I'm going

      11     to insist on a vote on the no net tax

      12     increase position if it's going to be formal.

      13               GOVERNOR LEAVITT:  That's fine.  That's

      14     what this is about.

      15               CHAIRMAN GILMORE:  Listen.  The

      16     challenge here is does this Commission want

      17     to establish these criteria as being the

      18     position of this Commission on the basis of

      19     this type of discussion we've had here today.

      20     I'm not going to vote for that, but if the

      21     Commission wants to do that, that's fine.

      22               I think it's got a looseness about









                                                             267
       1     it where other people can come in with

       2     different kind of criteria, different kind of

       3     ideas, and I think that's supported.  I don't

       4     think there's any difficulty with that.  But

       5     if we're going to nail that down, I'm going

       6     to vote no, but let's vote.  Okay?

       7               MR. NORQUIST:  I would argue that

       8     we keep the criteria open because we're going

       9     to have other criteria that come up.

      10               CHAIRMAN GILMORE:  Well, there are.

      11               MR. NORQUIST:  The Governors can

      12     come back and give us the list of criteria

      13     that they use.

      14               CHAIRMAN GILMORE:  I think the tenth

      15     position was anything else anybody else wants

      16     to put in as well.

      17               MR. ARMSTRONG:  I thought we were

      18     going to take a couple days to go over the

      19     criteria, and the last thing that Mike said

      20     is that I'm open to anything new that might

      21     come.  So, I'm not sure.

      22               CHAIRMAN GILMORE:  Let's formalize this.









                                                             268
       1     Mike Armstrong has moved that we instead take

       2     a couple of days and deal with the criteria

       3     in a more thorough way.  That is his motion

       4     to amend Mike Leavitt's motion.  Now, is

       5     there a second to Mr. Armstrong?

       6               MR. NORQUIST:  Second.

       7               CHAIRMAN GILMORE:  Seconded by Grover

       8     Norquist.

       9               MR. PARSONS:  So that we know

      10     because I'm lost right now, can we have the

      11     criteria that are consistent with Governor

      12     Leavitt's motion?  Can you just review so

      13     that we have them?

      14               GOVERNOR LEAVITT:  Yes.  Mike, with your

      15     permission, I will do my best to solidify

      16     what I am saying and add to what I think

      17     you're saying.  I am proposing that we

      18     establish as at least a beginning position

      19     subject to the change of this Commission a

      20     criteria for evaluation of various groups who

      21     will come and present, among them being the

      22     one that's been spoken of, and that the









                                                             269
       1     beginning criteria would be, one, a radically

       2     simplified system.

       3               Two, no new taxes.  Three, remove

       4     the burden from sellers.  Four, does not

       5     compromise the privacy of purchasers.  Is

       6     that four?

       7               Five, acknowledging the role of

       8     states as sovereign taxing entities.  Six,

       9     transparency as to purchasers.  Thank you.

      10     Seven, would avoid out-of-state

      11     discrimination.  Eight was one that I

      12     suggested, international -- that it would be

      13     scalable I think was the word on an

      14     international basis.

      15               MR. NORQUIST:  International

      16     scalability and not adverse to local

      17     competitors.

      18               GOVERNOR LEAVITT:  Grover, yours was?

      19               MR. NORQUIST:  Eliminate multiple

      20     audits.

      21               GOVERNOR LEAVITT:  Eliminate multiple

      22     audits.









                                                             270
       1               MR. NORQUIST:  The other one was

       2     reduce overall taxation on

       3     telecommunications.

       4               GOVERNOR LEAVITT:  I'd like to suggest

       5     that I am a supporter of reducing taxation --

       6     but I may believe that may run to a different

       7     issue, and I'm prepared to --

       8               MR. NORQUIST:  A different issue

       9     than what?

      10               MAYOR KIRK:  Can we finish this?

      11               MR. NORQUIST:  We are.  We're going

      12     through the list.

      13               MAYOR KIRK:  Mr. Pottruck had three

      14     that we had some protection against

      15     out-of-state audits and out-of-state

      16     discrimination.

      17               CHAIRMAN GILMORE:  Go to your

      18     microphone, please, Ron.

      19               GOVERNOR LEAVITT:  That was one that I

      20     meant to say about out of state --

      21               CHAIRMAN GILMORE:  Go to your

      22     microphone, please, Ron.









                                                             271
       1               MAYOR KIRK:  Mr. Pottruck had added

       2     that there be some safeguards against

       3     out-of-state discrimination both in terms of

       4     audit and oversight.  I thought that

       5     Mr. Armstrong raised two issues further, that

       6     there be some attempt to some up with some

       7     common definitions, and a reasonable time

       8     frame for development and implementation.

       9               GOVERNOR LEAVITT:  Could I suggest, Mike

      10     Armstrong, that the simplification on

      11     definitions, I would personally include that

      12     into just the radical simplification of the

      13     system.  I would see that not just as rate,

      14     but also as definitions.  But if you'd like

      15     to list it separately --

      16               MR. ARMSTRONG:  Why don't you

      17     combine them?

      18               GOVERNOR LEAVITT:  Radical

      19     simplification of the system.

      20               CHAIRMAN GILMORE:  We've got a proposal.

      21               MR. NORQUIST:  I'd recommended also

      22     that recommendations be constitutional and









                                                             272
       1     that they not undermine Indian sovereignty

       2     which is an important issue.  Right?

       3               GOVERNOR LEAVITT:  I can't haggle with

       4     that.  Then as to respect to Mike Armstrong's

       5     suggestion that there may be other thoughts

       6     that come to us that improve this, I'd like

       7     to propose that we create an authorization

       8     for a mail ballot that could be sent out

       9     e-mail and fax if there are other items that

      10     should be added and that that be done in the

      11     next 72 hours or whatever.  A week as far as

      12     I'm concerned.

      13               MR. ARMSTRONG:  That's perfectly

      14     acceptable.

      15               CHAIRMAN GILMORE:  Well, we've got some

      16     kind of proposal on the table.  I think we

      17     don't have a proposal to defer it for 48

      18     hours now do we, Mike.

      19               MR. ARMSTRONG:  I've withdrawn that

      20     because Michael included that any other ideas

      21     that we had -- a ballot by e-mail?

      22               GOVERNOR LEAVITT:  Yeah.  Some









                                                             273
       1     electronic ballot where if somebody's got an

       2     idea we can circulate it, and then if it gets

       3     whatever the requirement is of the Commission

       4     that it be added to the criteria.

       5               CHAIRMAN GILMORE:  Yes, Delna?

       6               MS. JONES:  We have a committee

       7     already, and David chairs that committee.

       8     Could that not be the focus for getting these

       9     ideas and formulate them, because there's

      10     already a committee structure there to do

      11     that.  The work plan committee.

      12               CHAIRMAN GILMORE:  Well, there is that,

      13     but we were also discussing sending all these

      14     things over to the drafting subcommittee

      15     which we can do.

      16               SPEAKER:  In order to get the

      17     Governor on his way back to Virginia before

      18     the hurricane, I move the question.

      19               MR. HARRIS:  If I could ask one

      20     question.

      21               CHAIRMAN GILMORE:  Quickly, yes.  One

      22     question.









                                                             274
       1               MR. HARRIS:  I'm not sure.  One of

       2     the principles that was listed was no new

       3     taxes I believe was how it was phrased.  I'm

       4     just not sure what you mean by that.

       5               GOVERNOR LEAVITT:  Well, as simply as I

       6     can put it, that there is no new tax placed

       7     on access or by this whatever system; that

       8     we're dealing with existing tax structures;

       9     that we're not in any way trying to impose

      10     any new tax on the Internet.

      11               CHAIRMAN GILMORE:  Well, I think that

      12     what we're doing is a general call to people

      13     within these types of confined to go forward

      14     and to submit us information.  Submit it into

      15     the drafting subcommittee and then we'll go

      16     from there.  All in favor please say aye.

      17               COMMISSIONERS:  Aye.

      18               CHAIRMAN GILMORE:  All opposed say no.

      19     We're not going to call the roll on that.

      20               SPEAKER:  Governor, do we know

      21     who's on the drafting subcommittee?

      22               CHAIRMAN GILMORE:  We can't name









                                                             275
       1     everybody.  In fact, I think this thing is

       2     too big as it is, but I'm going to go ahead

       3     and name myself, Dean Andal, Richard Parsons,

       4     David Pottruck, Gary Locke, Andrew Pincus,

       5     Delna Jones, Robert Pittman, and Stan Sokul.

       6     But as I said, this is not going to be

       7     exclusive of anyone's ideas or commitments.

       8     It's trying to put pencil to paper.  I think

       9     it's too big now, but we'll go with it.  All

      10     in favor of adjournment, please say aye.

      11               COMMISSIONERS:  Aye.

      12               CHAIRMAN GILMORE:  All opposed, nay.

      13     We're in adjournment.

      14                     *  *  *  *  *

      15

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