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Third Meeting: Transcript of December 14 1999

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                                 THIRD MEETING

                           Westin St. Francis Hotel

                           San Francisco, California

                          Tuesday, December 14, 1999



         1     PARTICIPANTS:

         2          JAMES S. GILMORE, III

         3          JOSEPH H. GUTTENTAG

         4          RON KIRK

         5          JOHN W. SIDGMORE

         6          MICHAEL O. LEAVITT

         7          THEODORE WAITT

         8          GARY LOCKE

         9          DAVID POTTRUCK

        10          DELNA JONES

        11          RICHARD PARSONS

        12          DEAN F. ANDAL

        13          PAUL C. HARRIS, SR.

        14          GROVER NORQUIST

        15          GENE L. LEBRUN

        16          ANDREW PINCUS

        17          STAN SOKUL

        18          ROBERT NOVICK

        19          ANDREW MARSLAND

        20          MICHEL AUJEAN

        21          FRED SMITH

        22          CHRIS WYSOCKI



         1     PARTICIPANTS (CONT'D)

         2          ADAM THIERER

         3          STACEY L. SPRINKLE

         4          KEITH LANDRY

         5          JOHN MORABITO

         6                       *  *  *  *  *



















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

         2                                              (1:05 p.m.)

         3               CHAIRMAN GILMORE:  Good afternoon,

         4     ladies and gentlemen, and welcome to the

         5     third meeting of the Advisory Commission on

         6     Electronic Commerce.  I'm Governor Jim

         7     Gilmore of Virginia, the chairman of the

         8     Commission, and I would like to call the

         9     meeting to order.

        10               I would like to remind everyone

        11     that this meeting is open to the public and

        12     is being Webcast over the Internet and can be

        13     viewed on our Web site.  I also want to

        14     welcome C-SPAN and all C-SPAN viewers who are

        15     here with us today watching these proceedings

        16     in the third meeting of the Advisory

        17     Commission.

        18               Our Web site where this is being

        19     cast is --


        21               Now, I want everybody to know that

        22     this is my second day in California.



         1     Yesterday I was in Santa Monica, where I was

         2     chairing the National Advisory Commission on

         3     Terrorism and Weapons of Mass Destruction.

         4     So I thought it was a good tune-up for

         5     chairing this meeting here today, although I

         6     think that we can expect a pretty friendly

         7     exchange and a lot of information from all of

         8     us.

         9               One good thing is that the

        10     Commissioners, I think, at this point have

        11     had an opportunity to get to know each other

        12     a little bit and work together.  So I'm

        13     confident that we're going to have a very

        14     productive meeting and discussion.

        15               Now, just a bit of the history for

        16     those who are tuning in for the first time.

        17     This is the third meeting of the Advisory

        18     Commission on Electronic Commerce.  The

        19     Commission was established by Congress to

        20     study the array of taxes on the Internet in

        21     electronic commerce.

        22               In two prior meetings, the



         1     Commission has covered an awful lot of

         2     ground.  We discussed many of the tax issues,

         3     from international taxes and tariffs on

         4     electronic commerce, to telephone taxes, and

         5     the sales tax.  In the process, we've heard

         6     testimony from more than 30 organizations and

         7     experts.

         8               In the last meeting in New York, I

         9     was encouraged by the Commission's ability to

        10     come to a consensus on some of the policy

        11     recommendations.  We agreed that there should

        12     be no international taxes or tariffs on

        13     electronic commerce conducted over the

        14     Internet, although that anticipates some of

        15     the discussions that we are going to have

        16     today on this issue.

        17               From discussions with other

        18     Commissioners at the meeting, it's my sense

        19     that there may be some other areas of

        20     consensus as well that we will be able to

        21     reach.  Like closing, for example, the

        22     digital divide, reducing regressive telephone



         1     taxes, eliminating taxes on Internet access.

         2     These may be places where consensus can

         3     emerge, while the application of sales taxes,

         4     to the sale of goods and services over the

         5     Internet, continues to present some

         6     disagreement.

         7               I'm hopeful that our conversations

         8     here in San Francisco will help us to define

         9     further areas of consensus and refine areas

        10     where we might disagree.

        11               As we continue to move towards our

        12     requirement, to submit recommendations to

        13     Congress by the end of April 2000, we have

        14     two more meetings, this one and a final

        15     meeting in Dallas on March 20th and 21st.

        16               My intention is to follow the work

        17     plan crafted by Mr. Pottruck, David Pottruck

        18     of Charles Schwab, and to accommodate the

        19     presentations of the proposals that have been

        20     submitted to the Commission pursuant to

        21     Governor Mike Leavitt of Utah's motion, that

        22     he made in New York, which was adopted.



         1               Let me point out to everyone who is

         2     on the Commission that as we have established

         3     the agenda, we have accommodated each

         4     Commissioner's requests for the agenda,

         5     leaving nothing behind.  We've incorporated

         6     all recommendations and requests into the

         7     agenda.

         8               So with that objective, let me walk

         9     through the agenda for today and tomorrow for

        10     the members of the Commission so we can get a

        11     road map of where we are going.  First, we

        12     explore the issues of international taxes and

        13     tariffs and the impact of taxes or tariffs on

        14     transactions facilitated by the Internet on

        15     U.S. companies' global competitiveness.

        16               Following that discussion, the bulk

        17     of the meeting for today and tomorrow will

        18     focus on presentations of the proposals which

        19     members of the public have submitted to the

        20     Commission and discussion among the

        21     Commissioners.  Toward the end of the day

        22     tomorrow, we will spend a considerable amount



         1     of time discussing the proposals we have

         2     heard and the information that will be

         3     contained and the question of whether or not

         4     there's anything we wish to alter as a result

         5     of the information we're receiving today and

         6     tomorrow.  And we will review the policy

         7     options outlined in the issues and options

         8     paper drafted by the report drafting

         9     subcommittee.

        10               It is not my intention to call for

        11     votes on those policy options at this

        12     meeting, although there may be some sense of

        13     consensus, either for or against some issues

        14     that emerge from our deliberations.  But on

        15     closer questions, it's not my plan to call

        16     for votes on these policy options.  But the

        17     work plan does call for us to have an open

        18     discussion on those options and all of those

        19     issues that all of you have in the issues and

        20     policy paper.

        21               We also will take up several

        22     resolutions offered by Commissioner Norquist,



         1     and then close tomorrow's meeting by

         2     addressing some of the administrative matters

         3     as well.  Without objection, the agenda will

         4     be adopted and then we will proceed.

         5               First, then, I would like to

         6     introduce our first group of speakers.  The

         7     first group begins with Mr. Andrew Marsland, I

         8     believe -- is that correct, Mr. Marsland? --

         9     of the OECD, the Organization of Economic

        10     Cooperation and Development; Mr. Michel

        11     Aujean of the European Union; and Mr. Fred

        12     Smith of the Competitive Enterprise

        13     Institute.

        14               Now, following these presentations,

        15     I will call on two members of the Commission:

        16     Commissioner Robert Novick, to update the

        17     Commission on the activities of the World

        18     Trade Organization, pursuant to the agenda,

        19     and Commissioner Joe Guttentag, to update us

        20     on the U.S. involvement in the EU and the

        21     Organization of Economic Cooperation and

        22     Development.  At the conclusion of the panel



         1     presentations, so everyone has their

         2     opportunity to do that, then we will have

         3     questions from the Commissioners.

         4               Gentlemen, each of you has been

         5     designated 10 minutes.  If you could help us

         6     with that and keep your comments in that

         7     amount of time, it would be appreciated,

         8     because we do have a fairly tight timetable

         9     for the next two days.

        10               Mr. Marsland, please begin.  Thank

        11     you.

        12               MR. MARSLAND:  Thank you, Mr.

        13     Chairman.

        14               Mr. Chairman and members of the

        15     Advisory Commission, on behalf of the

        16     Secretaries of the OECD, I'd like to thank

        17     you for this opportunity to appear before you

        18     today and to inform you about the work at the

        19     OECD in relation to taxation questions

        20     touching on electronic commerce.

        21               The OECD's work in this field is

        22     just one part of a comprehensive program



         1     aimed more generally at encouraging the

         2     positive developments of the information

         3     society and of E-commerce.  The program

         4     includes work to foster a stable and

         5     predictable regulatory environment, to

         6     promote the enhancement of the information

         7     infrastructure and access to the 
         8     infrastructure, and to address constructively

         9     such issues as consumer protection privacy.

        10               In terms of taxation, the OECD is

        11     fulfilling a well-established role in

        12     relation to the international taxation issues

        13     by helping to coordinate the examination of

        14     these issues.  Recognizing that electronic

        15     commerce is a global issue, the OECD has very

        16     deliberately sought to involve both business

        17     and non-OECD member economies in a

        18     comprehensive dialogue.

        19               The input of business is recognized

        20     as especially important.  Whatever

        21     governments decide to do, it must take

        22     account of the realities of the business



         1     world and must ensure that taxation

         2     provisions operate in such a way as to

         3     minimize the compliance burden on business.

         4     Equally, the involvement of nonmember

         5     counties in Latin America, in Asia and in

         6     Eastern Europe is a vital part of identifying

         7     and pursuing options which are as far as

         8     possible capable of global amplification.

         9               The overall objective lies in

        10     achieving a fiscal climate within which

        11     E-commerce can flourish, but which at the

        12     same time protects the revenue base.

        13               It's important to point out that

        14     OECD does not make laws in relation to

        15     international taxation matters.  Rather, it

        16     provides a forum and mechanism for debate and

        17     helps when necessary to establish certain

        18     norms.

        19               An important example of such a norm

        20     is the OECD model tax convention, which

        21     serves as a basis for a very large number of

        22     bilateral tax treaties dealing with the



         1     taxation of the income and capital.  Against

         2     this background, then, the international

         3     community selected the OECD to take the lead

         4     in the examination of taxation implications

         5     of electronic commerce in the international

         6     context, and to work towards international

         7     consensus on what should be done, either to

         8     adapt existing tax norms or to develop new

         9     ones.  Of course, in the field of indirect

        10     taxation, the European Commission plays an

        11     important role in Europe and, therefore, the

        12     OECD is working closely with the Commission

        13     on this.

        14               All 29 OECD countries are actually

        15     involved in this process.  As I mentioned,

        16     nonmember countries, and in particular,

        17     businesses are being drawn into it.  In

        18     practice, this is managed through the

        19     establishment of five technical advisory

        20     groups looking at issues from technology to

        21     the practical detail of how consumption tax

        22     systems will be applied in practice.  Each of



         1     the groups has 20 or so members with a

         2     majority from the business community.

         3               The core starting point of the

         4     OECD's work in this area lies in the taxation

         5     framework conditions, which were endorsed by

         6     OECD Ministers and in Ottawa in October '98.

         7     These key principles already represent, in

         8     effect, an important international consensus

         9     which has gained acceptance beyond OECD

        10     states.  For example, they were welcomed by

        11     APEC finance ministers in May of this year

        12     and have been noted with interest by a number

        13     of regional organizations.

        14               The framework conditions include a

        15     number of key conclusions, including -- and

        16     importantly -- that the same principles that

        17     governments apply to the taxation of

        18     conventional commerce should equally apply to

        19     E-commerce:  Namely, neutrality, and that

        20     taxation should seek to be neutral and

        21     equitable between forms of E-commerce and

        22     between E-commerce and conventional commerce,



         1     so avoiding double taxation and unintentional

         2     non-taxation.

         3               Efficiency in the compliance cost

         4     of business and administration costs to

         5     government should be minimized as far as

         6     possible.  Certainty and simplicity in the

         7     tax rules should be clear and simple to

         8     understand.  Effectiveness and fairness, in

         9     that taxation should produce the right amount

        10     of tax at the right time and avoidance and

        11     evasion should be as far as possible

        12     minimized.

        13               And, finally, flexibility, in that

        14     the taxation system should be flexible and

        15     dynamic and ready to adapt and keep pace with

        16     technological and commercial change.  The

        17     firmer conditions noted that these principles

        18     can be applied through existing tax rules,

        19     and that any new or revised administrative

        20     measures should be directed towards the

        21     application of existing mechanisms and should

        22     not be intended to impose a discriminatory



         1     tax treatment on electronic commerce.

         2               The conditions also noted that the

         3     technologies underlying electronic commerce

         4     offer significant opportunities for improved

         5     taxpayer service which government should

         6     actively pursue.  And finally, that the

         7     process of putting flesh on these principles

         8     should involve intensified dialogue with

         9     business, with non-business taxpayer groups,

        10     and with non-OECD countries.

        11               It's worth stressing the important

        12     distinction between tariffs and taxes.

        13     Internationally, there's world consensus

        14     amongst developed countries that tariffs

        15     should not apply to electronic commerce

        16     services, and it reflects in large part the

        17     status quo.  The taxes whether direct or

        18     indirect are an entirely different matter.

        19     In effect, tariff-free does not equal

        20     tax-free.

        21               The work program at the OECD has

        22     three broad components in relation to



         1     consumption taxes, -- sorry,

         2     international direct tax rules, and tax

         3     administration.  The first thing in respect

         4     to consumption taxes, it's worth noting that

         5     28 out of 29 member countries of the OECD

         6     operate a national consumption tax system,

         7     such as a evaluated tax or a goods and

         8     services tax.

         9               Such systems are generally

        10     comprehensive in scope, applying in principle

        11     to all goods and services, subject to certain

        12     release that are usually very narrowly --

        13     narrowly defined.  Consumption taxes account

        14     for a significant part of the revenue yield

        15     in these OECD countries.  In this context,

        16     the OECD that work in consumption taxes is

        17     examining how the principles agreed to at

        18     Ottawa, the framework conditions for the

        19     treatment of international transactions, can

        20     be translated into practice.

        21               The principles in relation to

        22     consumption tax were that rules for



         1     consumption taxation of cross-border

         2     transactions shall result in taxation and the

         3     jurisdiction where consumption takes place,

         4     thus avoiding double taxation and

         5     unintentional non-taxation.  For the supply

         6     of digital products should not be treated as

         7     the supplies of goods for consumption tax

         8     purposes.  For the cross-border,

         9     business-to-business transactions of

        10     intangible services, self-assessment

        11     collection mechanisms or direct-payment

        12     mechanisms are a viable means of safe

        13     guarding revenues.

        14               And finally, the countries should

        15     ensure that appropriate systems are in place

        16     to collect tax on the importation of physical

        17     goods, and that such systems should support

        18     efficient delivery of goods to consumers.

        19               As a basic principle, then,

        20     electronic commerce transactions already fall

        21     to be taxed under consumption tax systems in

        22     common with their conventional commerce



         1     counterparts.

         2               So what is at issue, really,

         3     especially for international transactions, is

         4     whether the rules provide for the desired

         5     outcome -- that is, taxation in the place of

         6     consumption -- and then how should such rules

         7     apply in practice.  This is the main focus of

         8     the OECD work at the debate going on at the

         9     OECD.

        10               The choice of consumption principle

        11     already works quite readily in many instances

        12     for international transactions.  For example,

        13     imported goods are subject to -- generally to

        14     consumption taxes when they enter a country.

        15     But of course the picture gets less clear

        16     when you look at services.  Following through

        17     the logic of taxation in place of

        18     consumption, online transactions of digitized

        19     products should be subject to consumption

        20     taxes in the country of the customer.  But

        21     the challenge lies in identifying clear and

        22     practical arrangements to make that happen.



         1               Most business-to-business

         2     transactions can be probably be administered

         3     under a self-assessment system.  It's the

         4     sales to private consumers, especially of

         5     digitized products, that present a particular

         6     challenge.  And it's in this field that the

         7     primary, although not exclusive, focus of the

         8     OECD work in consumption taxes is focusing.

         9               Currently this work is examining

        10     how the principle of taxation at place of

        11     consumption should operate in practice.  How

        12     will consumption in the case of a private

        13     consumer be established?  And how will that

        14     be determined in the real time, online

        15     environment?

        16               Linked to that set of questions is

        17     how tax that is due should be calculated and

        18     paid over.  In terms of direct taxes, the

        19     work is looking at the extent to which

        20     E-commerce can impact some on existing

        21     principles of international direct taxation.

        22     These principles are widely accepted and are



         1     reflected in large part in the extensive

         2     network of bilateral tax conventions.

         3               One important issue in this area is

         4     the application of E-commerce -- the existing

         5     principles for taxing business profits which

         6     are based on the concept of permanent

         7     establishment.  The OECD recently issued a

         8     document that it seeks to clarify how the

         9     existing definition of permanent

        10     establishment applies to E-commerce.  In

        11     outline, the document suggests that a Web

        12     site alone cannot constitute a permanent

        13     establishment, and that situations in which

        14     the server at a fixed location could

        15     constitute a permanent establishment are

        16     quite limited.

        17               Comments have been invited on the

        18     documents, and we hope to finalize it next

        19     year.  But that only addresses an issue of

        20     narrow legal interpretation.  Far more

        21     important is the work that the OECD is doing

        22     through the relevant technical advisory



         1     groups examining the application of existing

         2     tax treaty rules, including both of

         3     determining where business profits ship --

         4     when business profits should be taxed in a

         5     country and how much of them should

         6     be taxed.

         7               Finally, on tax administration, the

         8     OECD's work is looking at how tax systems can

         9     be made to work better, harnessing the new

        10     technology opportunities.  For example, how

        11     best can the information needs of revenue

        12     authorities be integrated with normal

        13     business practices, especially in the

        14     electronic systems, so that governments'

        15     needs on that with the minimum compliance

        16     demands?

        17               To what extent, for example, can a

        18     minimum common framework of tax-related

        19     record requirements be identified which is

        20     consistent ideally with commercial systems?

        21     Equally, how can the new technologies

        22     available to governments best be used to ease



         1     compliance with business?  There's obviously

         2     a host of possibilities here, from electronic

         3     filing, online information, interactive

         4     systems, which many countries are already

         5     exploring.  So here the OECD is looking

         6     towards the sharing of experience and of best

         7     practice.

         8               In terms of the timetable for this

         9     work, the post-Ottawa agenda was framed

        10     around a two-year period.  So technical

        11     advisory groups with business, for example,

        12     each have a two-year mandate.  Through 2000,

        13     the aim will be to intensify dialogue with

        14     business and nonmember economies, to expose

        15     more ideas and options for public comment,

        16     and so to move towards international

        17     consensus.

        18               CHAIRMAN GILMORE:  Mr. Marsland, I'll

        19     have to ask you to wrap up.

        20               MR. MARSLAND:  Okay.  So in

        21     summary, our work is directed at establishing

        22     an international consensus on the application



         1     of taxation norms and practices which will

         2     serve the interests of governments, business,

         3     and consumers, particularly in terms of

         4     certainty, consistency, and simplicity; doing

         5     that through a comprehensive dialogue with

         6     the aim ultimately of delivering an

         7     international fiscal environment which

         8     fosters the develop of growth and growth of

         9     electronic commerce, and at the same time

        10     safeguards the revenue yields of governments.

        11               Thank you.

        12               CHAIRMAN GILMORE:  Thank you, Mr.

        13     Marsland.  And there'll be a few moments also

        14     for some questions and answers at the end

        15     where you may which to elaborate on some of

        16     this.  Thank you for your presentation.

        17               Mr. Aujean?

        18               MR. AUJEAN:  Thank you, Mr. Chairman

        19     and members of the Advisory Commission.

        20     Thank you for the invitation to talk today.

        21               I'm Michel Aujean, director of tax

        22     policy of the European Commission in



         1     Brussels, and my responsibilities are with

         2     initiating and negotiating common tax

         3     legislation in the EU and monitoring its

         4     implementation in the member states.

         5               The EU has, with their European

         6     Commission, the sole responsibility of

         7     initiating the legal measures which are

         8     needed for the efficient and free-functioning

         9     of what we call our single markets.  Such

        10     proposals for tax legislation must pass

        11     though a legislative process involving the

        12     representative of our member states, and may

        13     be a long process, given that taxation area

        14     is always submitted to the principles of

        15     unanimity of member states.

        16               Nevertheless, we have a

        17     well-established common legal framework for

        18     both customs and indirect taxation in the EU.

        19     Let me explain how it works today.  First of

        20     all, we have the customs union, which has

        21     been in place for many years and which is

        22     characterized by a common external frontier,



         1     a single harmonized tariff system, and no

         2     internal borders within the EU.

         3               Then we have a common legal phase

         4     for VAT and excise duties.  I will talk

         5     mainly of the Value Added Tax, of course.

         6     The Value Added Tax covers the definition of

         7     what constitutes a taxable base and the

         8     approximated range of tax rates which member

         9     states are allowed to apply.  In essence, it

        10     provides for the taxation of all goods and

        11     services supplied for consumption within the

        12     territory of the EU.

        13               Therefore, for us, E-commerce

        14     doesn't give rise to any particular questions

        15     of principle as the mode of delivery of a

        16     supply for consumption, or the means by which

        17     the parties communicate is simply not an

        18     issue.

        19               Let me talk about the EU VAT in

        20     practice in the EU.  First of all, it's clear

        21     that in spite of being a consumption tax, VAT

        22     is a tax for which businesses are responsible



         1     for charging and collecting the tax.  How

         2     does it work in practice?  Let me take goods

         3     first.

         4               For goods coming from outside the

         5     EU, we collect VAT at the point of import,

         6     subject for certain allowance for low-value

         7     imports -- around $20 -- which are and can be

         8     exempted.  And then the goods circulate

         9     freely within the EU without further

        10     formalities.

        11               Within the community and between

        12     member states, we have a special arrangement

        13     for what we could call in comparison with the

        14     US situation "interstate commerce."  With

        15     this in mind, we have a very straightforward

        16     system by which, irrespective of the way the

        17     order is placed, whether through a Web site

        18     or through mail order, we have always

        19     application of VAT taking place in the EU,

        20     either through the country of origin, where

        21     the seller is established for sales under a

        22     certain threshold -- around 100,000 Euros, or



         1     dollars, if you prefer -- today's right --

         2     with a very simple system for start of

         3     businesses, because they are not required to

         4     tax in the country of destination up to this

         5     threshold.

         6               When the threshold is passed, then

         7     the seller must register in the country of

         8     destination, in the member state of

         9     destination, within the EU.  So that at the

        10     end of day, whatever the kind of sale is

        11     made, each sale is taxed at origin or

        12     destination, whatsoever.  So interstate

        13     commerce within the EU, with private

        14     consumer, is not an issue, whatever the

        15     format of the order.

        16               VAT also applies to services.  VAT

        17     applies to all services without regard to the

        18     manner of their delivery.  So once again, in

        19     general terms within the EU, we don't have a

        20     specific problem in applying the VAT to

        21     E-commerce.  We certainly need to update our

        22     system for services, and there we must come



         1     to other area, the export and import of

         2     services.

         3               Concerning the export of services,

         4     it's clear that the EU system was based on a

         5     concept of the '60s or '70s, by which to be

         6     able to control the taxable person, the place

         7     of taxation, the place where taxation had to

         8     be applied was a place of registration or

         9     establishment of the seller.  Which means

        10     that today, exports, for most of them, of this

        11     new services of electronic commerce are taxed

        12     within the EU at present.

        13               We need to revise this legislation.

        14     We need to change this legislation to be

        15     adapted to the new place of consumption:

        16     principles of taxation, and that will be the

        17     subject of a legal proposal, to exempt the

        18     supply of services through the net.

        19               Conversely, we need to think of our

        20     scheme for import of services into the EU.

        21     And, as I said before, we apply VAT to goods

        22     and services, which means that services are



         1     the way we deal with digitized products.

         2     They are considered to be services.  That is

         3     one of the two categories that we have for

         4     applying VAT.

         5               Concerning imports of services, two

         6     schemes must be envisioned.  First of all,

         7     business-to-business.  Most of the services

         8     dealing with business-to-businesses must see

         9     revision of the way we have been dealing with

        10     these, because the principle of taxation of

        11     the place of establishment of the supplier

        12     means that today services imported within the

        13     EU are often not taxed.  And there we will

        14     rely on the principle of the reverse charge

        15     mechanism for business-to-business

        16     operations.  This is a very simple,

        17     straightforward way of dealing with these

        18     services.

        19               Converting our legislation into

        20     this area will allow to us effectively deal

        21     with that question.  That we certainly need

        22     other adaptations lies the possibility for



         1     third-country traders to have access to the

         2     identification database, allowing to know

         3     who their customer is, to know in terms of

         4     taxable status.  That will be allowed by

         5     having access through the Internet to the

         6     identification status, tax status of

         7     customers.

         8               Concerning business-to-consumer,

         9     which is today an extremely limited segment

        10     of the trade taking place on E-commerce, we

        11     need to revise our legislation to make sure

        12     that we will be able effectively to collect

        13     taxes on E-commerce -- online E-commerce with

        14     private final consumers.  That part of our

        15     legislation will be revised in order to allow

        16     effective taxation to take place, which will

        17     mean means of effectively registering in a

        18     single place of registration for all the EU

        19     for third-country traders.  This is very

        20     important step forward which we have to take

        21     in proposing legislation, to make sure that

        22     effectively through a single place of



         1     legislation, third-country traders may offer

         2     and supply services within the EU without too

         3     burdensome administrative or bureaucratic

         4     activities.

         5               As you heard from Andrew, we are

         6     pursuing this issue in line with the Ottawa

         7     principles and in close connection with what the

         8     OECD is developing on inside.  The European

         9     Commission is in charge of making sure that

        10     the VAT legislation of all its 15 member

        11     states can be changed and adapted to the need

        12     of this economy.  And E-commerce is a major

        13     challenge, but opportunity as well for

        14     development of the E-commerce activity within

        15     the EU from the other member states and from

        16     a general point of view, making sure that we

        17     have developed all the elements necessary to

        18     this effect.

        19               We have been launching a series of

        20     initiatives in this respect, dealing with the

        21     possibility notably of initiating electronic

        22     invoicing for VAT delivered -- products



         1     delivered online, and for developing the

         2     possibility of electronic return to take

         3     place with a single place of registration

         4     which should be enforced in the community.

         5               We are looking at present all the

         6     questions of implementation.  We know that we

         7     must remove or ameliorate a number of aspects

         8     of the existing VAT system.  We know that we

         9     have to take care of rapidly changing the

        10     system for business-to-business and

        11     business-to-consumer in a way which is simple

        12     to effectuate, simple to understand and

        13     sustain for the operators.  The message we

        14     heard from our business community is quite

        15     clear.  They need certainty.  They need

        16     certainty as to which kind of general system

        17     is to be applied.  The system of taxation

        18     according to the principle of the country of

        19     consumption will certainly be the best way

        20     forward for applying VAT in the future.

        21               Thank you.

        22               CHAIRMAN GILMORE:  Thank you,



         1     Mr. Aujean.  And again, we will have some

         2     time for some questions and answers in a

         3     short while.

         4               Mr. Smith, I understand you were

         5     kind enough to come to New York to offer a

         6     presentation and we didn't get to you because

         7     of the hurricane.  So I want to thank you

         8     very much for coming back and being with us

         9     again.  We appreciate it.

        10               Oh, by the way, you're familiar

        11     with these assists to you down here, the ones

        12     that show you the amount of time that you

        13     have remaining and so on, that are before

        14     you.  Green means you're on your way, wrap up

        15     means wrap up, and when red flashes up, it

        16     means it's over.

        17               Isn't there a television right in

        18     front of you there?  It's not on that screen?

        19     So much for the E-commerce, okay?  We won't

        20     be paying sales tax on that television, okay?

        21               All right.

        22               Thank you, Mr. Smith, and my



         1     apologies to Mr. Aujean and Mr. Marsland.

         2     Please proceed.

         3               MR. SMITH:  Thank you very much.

         4     I'm glad to be here, Governor and members of

         5     the Commission.

         6               I was recently at the World Trade

         7     Organization where reluctantly we did, in

         8     fact, extend for at least temporarily, the

         9     no-tariff on E-commerce.  CI has also

        10     recently completed a financial privacy

        11     conference where we dealt with some of the

        12     difficulties of reconciling U.S. concepts

        13     with European concepts, particularly in the

        14     area of individual privacy.  And in earlier

        15     career, I almost made it to OECD as a excise

        16     tax expert, so it's kind of an interesting

        17     world.

        18               We've heard a lot about -- it's

        19     there now.  We've heard a lot about how the

        20     Internet is one of the most promising

        21     technologies ever to come forth.  And indeed,

        22     if anything, that's understated.  You know,



         1     it eliminates space and time, and by doing

         2     so, it lowers transaction costs.  It makes it

         3     possible for the world to be a much smaller

         4     place.  That is, it makes it possible unless

         5     we kill off that promise by too quickly

         6     rushing in to tax, to regulate this promise

         7     out of existence.  The United States has a

         8     major lead here.  We should be careful before

         9     we blow it.

        10               It also offers promise in a way

        11     that was never seen before to the world's

        12     poorest people.  Unlike earlier revolutions,

        13     this gives us an opportunity to have a

        14     low-capital form of creative wealth creation

        15     in India and the countries of the world.  And

        16     the unanimity promised by this technology

        17     makes it possible for pariah groups around

        18     the world -- minority groups often at risk in

        19     their own countries -- to create wealth

        20     without the risk we see here -- we see in the

        21     world today.

        22               My major point, and the reason I



         1     think that this Commission should focus very

         2     carefully before it rushes in to extend taxes

         3     across the country, across the globe, is that

         4     the concept of taxing people to whom you're

         5     not politically accountable violates one of

         6     the basic principles of good government, the

         7     no-taxation-without-representation concept.

         8               People need to be accountable to

         9     the people they lay burdens on, whether those

        10     burdens be tax burdens or those burdens be

        11     regulatory burdens.  When you can extend the

        12     tax reach to people who do not have the

        13     chance to vote you out of office, it is far

        14     too tempting, and I think it's far too

        15     politically attractive, but it's wrong.

        16               Also, I think -- and this is

        17     relevant on this panel -- U.S. markets are,

        18     in world terms, very consumer-friendly.

        19     European markets are considerably less so.

        20     In Europe, discounting, advertising between

        21     nations and other nation -- if you're a

        22     Wal-Mart, you can't say our prices are better



         1     and they're not as high quality as we are.

         2     Hours of services are highly restricted.  The

         3     Internet, by eliminating time and space, or

         4     reducing it, has made it possible to

         5     breakdown some of these rigid barriers which

         6     are so anti-consumer.  Barriers which

         7     essentially have restricted the ability,

         8     especially of lower-income Europeans and

         9     people throughout the world, to benefit in

        10     the consumer society that we in America have

        11     so long had.  That's particularly true in

        12     more oppressive regimes outside of Europe and

        13     the United States.

        14               One example:  The Germans have been

        15     complaining because doesn't keep

        16     business hours.  You can actually buy after

        17     the night closes.  Well, that's very good,

        18     and Europe should be seeking the competitive

        19     forces that the Internet brings, because

        20     they've got to modernize their economies if

        21     they're going have any role in the 21st

        22     century.  And we can help, if Internet is not



         1     blocked.

         2               The taxation without representation

         3     issue, I think, is a key one.  Let me just

         4     spend a little time on that.  In a democratic

         5     society, there are two ways of accounting

         6     for -- making the political system

         7     accountable:  Exit and voice.  Both of those

         8     are harmed if we expand Internet taxing to

         9     out-of-state.  It's hard to exit if everybody

        10     has the same tax as you do, or you can be

        11     reached by the arm of the state, even when

        12     you're not subject to that state's

        13     jurisdiction.

        14               Exit is closed or reduced

        15     dramatically, even more so, if we go to

        16     worldwide global Internet taxing.  And voice,

        17     the ability to say, "I thank you very much,

        18     but I don't want any more taxes.  I think

        19     we're overtaxed already," is weakened if the

        20     people you're taxing who are requiring to

        21     collect taxes for you are not in your own

        22     political jurisdiction.  All politicians want



         1     to tax other people.  We shouldn't allow them

         2     to do it.

         3               Moreover, taxing frontier sectors

         4     is particularly silly, because this is a

         5     field which you've heard over and over again

         6     is in flux.  Everything is changing.  Who's

         7     involved, how we go about closing out

         8     transactions, how we basically clear the

         9     books.  I rode out here with an individual,

        10     one of the many silicon gurus, and I was

        11     explaining what I was going to try to do

        12     here.  And I said, "Now they tell us that

        13     software manufacturers have got a new way

        14     that will magically allow us to collect these

        15     taxes seamlessly, error-free, and so on."

        16               He said, "Yeah, they promised that

        17     to me, too, in a dozen other areas."  He

        18     said, "I'm in a really simple area.  All I do

        19     is collect monies for telephone

        20     communications in various cities around the

        21     world.  The error rate is 60 percent in that.

        22     And this is a simple transaction with both



         1     sides trying hard to make it work well."

         2               Promise -- I mean -- trust --

         3     verify, I think some other Americans once

         4     said.  If we try to capture the dynamism of

         5     this industry -- what is, after all, a fairly

         6     rigid political net -- we run the risk of

         7     losing the dynamism of this world and only

         8     capturing a stagnating economy.  Applying

         9     yesterday's tax policies to today's growth

        10     industries is only going to endanger the

        11     hopes of a better world which I hope we all

        12     believe in.

        13               Don't blame the Internet.

        14     America's problems are not that too many

        15     people are escaping taxes; it's that we're

        16     too taxed already.  Jack Kemp, one of our

        17     senior fellows, tells of the promise of the

        18     Internet on the global scale.  He tells of a

        19     Chinese elderly couple coming in and trying

        20     to put their blankets down in Tiananmen

        21     Square.  There's a crowd there; they can't do

        22     it.  They wander into a store -- it's an



         1     Internet store.  Two Chinese brilliant kids

         2     are putting it together.  The kids sort of

         3     look at this elderly couple and respectively

         4     say, "Well, what do you guys do?"

         5               "We sell garlic," they said.

         6               "Well, what do you do?"

         7               "Well, we sort of sell things

         8     internationally."

         9               He says, "Well, can we help?"

        10               And he said, "Sure."

        11               So they put on

        12     the Internet, and within a matter of two days

        13     these two elderly illiterate Chinese are

        14     world businessmen.  That's the promise of the

        15     Internet.  That's the promise that we're

        16     threatening by taxing.

        17               Privacy.  Privacy is one of the

        18     greatest values that is at risk in this

        19     Internet situation, at home and abroad -- and

        20     civil rights, also, I might add.  The

        21     technologies that are now emerging --

        22     anonymous, digital money, encryption -- all



         1     of those are far too likely to be viewed as

         2     risky propositions, making it too easy for

         3     people to evade tax liabilities.  They're

         4     not.  They're ways of making it possible to

         5     live in a world where government knows what

         6     it needs to know and we keep the other things

         7     we want to know private.

         8               Trusted third-parties is an

         9     interesting term, and I don't know what it

        10     means.  But it clearly suggests that a level

        11     of trust that most of us don't have in our

        12     sister-in-law and brother-in-law, not much

        13     less than government out there.

        14               Look, there's a real question

        15     here -- and I think we have an example in

        16     America, the "know your customer rule."  The

        17     "know your customer rule" was an idea that,

        18     "Hey, people are evading the money-laundering

        19     rules of the United States.  Let's just

        20     require all banks to be sort of enforcement

        21     agencies for the agency involved."

        22               We put that out and a firestorm of



         1     opposition occurred.  You've never seen a

         2     firestorm of opposition that it will

         3     occur if you try extend this tax around the

         4     world to all the small businesses, to all the

         5     people now who feel it's their right to try

         6     to get the best deal in a complex world they

         7     can.

         8               But that's in the United States.

         9     Around the world there's much greater

        10     problems.  We're a society that has a lot of

        11     respect for individuals, a lot of respect for

        12     the civil rights of citizens.  Anonymity

        13     promises people in areas where there are

        14     minorities -- Chinese, in Indonesia, or

        15     blacks in a -- in many racist societies,

        16     Indians, in some areas of the world -- the

        17     ability to create wealth, to link up with the

        18     world's economy, but anonymously.  Not

        19     letting their governments know how vulnerable

        20     they are, how much revenues they could

        21     contribute to the state if we knew exactly

        22     what their bank accounts were.



         1               Do we really want to have the

         2     United States act as tax collector for the

         3     world?  There are countries out there that I

         4     would be ashamed to be tax collector for.

         5     Indeed, I think we ought to think very

         6     carefully before we go in that direction.

         7               And, incidentally, does government

         8     need more taxes?  I don't think so.  Most of

         9     us think that Internet offers a promise of

        10     reducing the burden of government and

        11     reducing tax burdens, not closing it down.

        12               You know when I started in tax policy

        13     when I was a young naive economist, and I

        14     thought efficiency of tax collection and

        15     administrative burdens were all that counted.

        16     One of the old guys at the Office of Tax

        17     Analysis said, "Fred, you don't understand."

        18     He says, "Remember, I've been in this game a

        19     long time.  A good tax is a bad tax and a bad

        20     tax is a good tax."

        21               And what he meant by that is, a tax

        22     that is good from the economist perspective



         1     is a tax that is easy to collect and makes

         2     the job of the tax collector very, very

         3     simple.  But it also is a tax that is very

         4     easy to collect.

         5               Let me tell a little story about a

         6     Frenchman of an earlier age.  A French

         7     Minister, Cobert (phonetic), once stated that

         8     the goal of the politician is to pluck the

         9     feathers from the goose in such a way that

        10     the goose barely squeals.  That is

        11     essentially the definition of an

        12     administratively good tax.  It is not the

        13     definition of a democratically good tax.  A

        14     democratically good tax is one that basically

        15     has some pain, has some suffering associated

        16     and is not hidden, is not buried, and is not

        17     collected by people who can vote you out of

        18     office.  That kind of tax is one that if it's

        19     worthwhile, the voters will vote it in, and

        20     if it's not worthwhile, it will vote the

        21     politicians out.  That's the tax we want to

        22     see in America.



         1               We want to make politicians as

         2     accountable as they are and more so in the

         3     future world.

         4               Let me just summarize.  Look, we

         5     don't need -- see, I've actually timed

         6     myself.  We don't need new tax revenues.  We

         7     do not -- it is premature to tax at this

         8     time.  Some of you read my earlier testimony,

         9     and I used the analogy of the wonderful

        10     movie, I think, the "Seven Samurai" movie,

        11     the movie about the Japanese, sort of cowboy

        12     guys, who defend a village from bandits.  The

        13     beginning of the movie starts off with this

        14     bandit tribe riding down and looking at the

        15     poor vulnerable village below.  And one

        16     bandit says, "Let's go down and rob, rape,

        17     and pillage the village."

        18               And the leader says, "No, that

        19     would be wrong."

        20               And the guy says, "Why?"

        21               He says, "Well, the rice isn't ripe

        22     yet.  It's not harvested yet."



         1               Let's at least wait until this

         2     industry matures and grows up and freezes

         3     before we go out and try to kill it.

         4               Thank you very much.

         5               CHAIRMAN GILMORE:  Thank you, Mr. Smith.

         6     Thank you.

         7               The next place on our agenda calls

         8     for a presentation by Commissioner Novick.

         9     If you will indulge me for just a moment,

        10     Robert, I'm going to just be sure that

        11     everyone -- since C-SPAN is covering this --

        12     has an opportunity to know exactly who is on

        13     this panel.  If you gentlemen would just

        14     stand fast for a few moments?

        15               If you'll bear with me a minute,

        16     Fellow Commissioners, I want to make sure

        17     that I get all of your titles exactly right.

        18     To my immediate left is Delna Jones.  Delna

        19     is the county commissioner of Washington

        20     County of the State of Oregon.

        21               David Pottruck, the president and

        22     co-chief executive officer -- I believe,



         1     David -- of the Charles Schwab Corporation.

         2               The next individual is Governor

         3     Gary Locke.  He is Governor of the State of

         4     Washington.

         5               The next is Ted Waitt.  Ted is the

         6     chairman and chief executive officer of

         7     Gateway, Incorporated.

         8               The next is Governor Mike Leavitt.

         9     He is Governor of the State of Utah.

        10               The next is John Sidgmore.  He is

        11     vice chairman of MCI Worldcomm and Chairman

        12     of UUNet.

        13               The next is Ron Kirk.  Ron is the

        14     Mayor of the City of Dallas in Texas.

        15               The next is Joe Guttentag.  Joe is

        16     the senior advisor of the Office of Tax

        17     Policy of the United States Treasury

        18     Department.

        19               Beginning on the other side, we

        20     begin with our next presenter.  Mr. Robert

        21     Novick is the general counsel, the Office of

        22     the United States Trade Representative of the



         1     delegate of Embassador Barchefsky.

         2               The next is Andrew Pincus.  Andrew

         3     is the General Counsel of the United States

         4     Department of Commerce.

         5               The next is Stan Sokul.  Stan is

         6     the independent consultant for the

         7     Association for Interactive Media.

         8               The next is Gene Lebrun.  Gene is

         9     the president from 1997 through '99 of the

        10     National Conference of Commissioners on

        11     Uniform State Laws.

        12               The next is Grover Norquist.  He is

        13     the president of Americans for Tax Reform.

        14               The next is Paul Harris.  Paul is a

        15     member of the House of Delegates, a member of

        16     the state legislature for the Commonwealth of

        17     Virginia.

        18               The next person seated is directly

        19     to my right, and that individual is Dean

        20     Andal.  He is chairman of the California

        21     Board of Equalization.

        22               Absent today is C. Michael



         1     Armstrong.  Mike Armstrong is chairman and

         2     CEO of AT&T.

         3               Also absent today -- but I think

         4     only temporarily; I believe he will be

         5     joining us in a short while -- is Richard

         6     Parsons.  He is the president of Time Warner,

         7     Incorporated.

         8               And the final member is Robert

         9     Pittman, who is absent today.  He is

        10     president and chief operating officer of

        11     America Online.

        12               This is a very distinguished board,

        13     and I hope I haven't left anybody out.  I

        14     don't think that I have.

        15               This is obviously a very

        16     distinguished panel, appointed by

        17     representatives of the United States

        18     Congress.  And of course, our task is before

        19     us now and will be concluded the first part

        20     of this year.  But as you can see, this is a

        21     distinguished group of people to hear this

        22     information from you gentlemen, from the



         1     others who previously presented, and the

         2     others.

         3               Now, I would like to ask

         4     Commissioner Novick, the General Counsel of

         5     the Office of United States Trade

         6     Representative, to provide the Commission on

         7     an update on the progress of World Trade

         8     Organization negotiations.

         9               And, remember, the Governor of

        10     Washington is here, Robert.

        11               MR. NOVICK:  Thank you, Governor.

        12               I'm pleased to have the opportunity

        13     to provide the Commission a brief update on

        14     the status of customs, duties, and electronic

        15     commerce, particularly in light of our recent

        16     discussions at the third WTO ministerial in

        17     Seattle.

        18               As I indicated in our previous

        19     meetings, the administration's primary goal

        20     with respect to electronic commerce is to

        21     ensure that trade over the Internet can

        22     develop unimpeded.  With respect to trade



         1     policy, our most immediate objective is to

         2     achieve a duty-free cyberspace.  That is,

         3     preventing the imposition of tariffs --

         4     otherwise known as customs duties -- on

         5     electronic transmissions.  This goal has been

         6     broadly endorsed, including by this

         7     Commission at our last meeting.

         8               This is an immediate goal for a

         9     very important reason.  Currently no member

        10     of the WTO considers electronic transmissions

        11     as import subject to duties for customs'

        12     purposes.

        13               In addition, the goal has obvious

        14     benefits for American firms, consumers and

        15     workers.  It avoids the costs associated with

        16     imposing customs duties on electronic

        17     transmissions.  For a delivery mechanism

        18     based on an open network where borders are

        19     meaningless, imposing customs duties at the

        20     border would be a crushing burden that would

        21     slow the growth of electronic commerce,

        22     leaving aside the question of its



         1     administrability.

         2               Our trading partners broadly agree

         3     with the administration's objectives.  The

         4     countries recognized early on that imposing

         5     duties on electronic transmissions would only

         6     hurt their ability to attract the investment

         7     and technology necessary to build their

         8     E-commerce infrastructure.  As a result,

         9     member governments of the WTO agreed in May

        10     of 1998 to continue their practice of

        11     refraining from imposing customs duties on

        12     electronic transmissions.

        13               Since that time, we have worked

        14     with our trading partners to carry this

        15     consensus forward.  We have achieved broad

        16     consensus with our trading partners that the

        17     moratorium should continue, and its formal

        18     extension was an important goal at the WTO's

        19     third ministerial conference.

        20               Given the many complex issues that

        21     remained open at the Seattle ministerial, WTO

        22     members did not conclude a formal



         1     declaration, and as such, did not take formal

         2     action on the moratorium.  There was,

         3     however, substantial consensus on the path

         4     the trading community should take on

         5     E-commerce going forward.

         6               WTO members generally agreed on a

         7     carefully balanced set of E-commerce

         8     principles, a key component of which is the

         9     continuation of the moratorium on electronic

        10     transmissions.  Given the conflicts of

        11     interests on the part of our trading partners

        12     with respect to E-commerce generally and the

        13     moratorium specifically, we fully expect that

        14     countries will neither deviate from their

        15     current practice nor jeopardize this balance.

        16               As you may recall, duty-free

        17     cyberspace is only one of several

        18     E-commerce-related trade initiatives the

        19     administration has been pursuing.  At

        20     Seattle, we also worked with our trading

        21     partners on building consensus on other key

        22     U.S. objectives.  Those are outlined in my



         1     written comments.

         2               The administration looks forward to

         3     formalizing the broad consensus reached in

         4     Seattle.  It will continue to push both

         5     multilaterally and bilaterally for an

         6     environment in which E-commerce can flourish.

         7               Thank you, and I'm happy to take

         8     any questions.

         9               CHAIRMAN GILMORE:  Thank you, Mr.

        10     Novick.  And we will, in fact, come back to

        11     some questions and answers.

        12               Commissioner Guttentag is with us.

        13     He represents the United States Treasury

        14     Secretary.  He has graciously agreed to

        15     inform the Commission about the

        16     administration's involvement and the

        17     Organization for Economic Cooperation and

        18     Development.

        19               Joe, thank you.

        20               MR. GUTTENTAG:  Thank you, Mr.

        21     Chairman.

        22               I propose to limit my presentation



         1     as much as possible, in line with the

         2     Chairman's comments and all.  I will make a

         3     few brief comments now, and would like to

         4     reserve the balance of my time, as may be

         5     required, for the conclusion of the

         6     discussion of these international issues.

         7               You will recall that I presented

         8     the administration's views on the

         9     international aspects of electronic commerce

        10     at the June meeting of the Commission.  I

        11     then described the work being done by the

        12     OECD and urged the Commission to support

        13     these efforts.  We've had the opportunity

        14     today to hear in more detail the work of the

        15     Committee on Fiscal Affairs of the OECD, and

        16     the issues facing the European Union and the

        17     coordination by these two bodies.

        18               The international aspects of

        19     electronic commerce taxation are, of course,

        20     important.  The OECD is doing an excellent

        21     job in hearing from all of the affected

        22     stakeholders, the member countries and



         1     nonmember countries -- and, of course, the

         2     business community.  Again, at this meeting,

         3     I urge the Commission to support the

         4     framework conditions which the OECD's

         5     Committee on Fiscal Affairs has adopted and

         6     which you have just heard described, as well

         7     as to support the Committee's continuing

         8     efforts to develop a consensus around

         9     desirable norms.

        10               As noted, many of the multinational

        11     companies represented on the Commission, and

        12     otherwise in this room, are participating in

        13     the work of the Committee on Fiscal Affairs.

        14               I believe that the approach set

        15     forth in Mr. Aujean's paper, as to the work of

        16     the European Commission with respect to

        17     indirect taxes, can greatly help to inform our

        18     deliberations.  He told us that the EC relies

        19     heavily on taxes imposed at the place of

        20     consumption, where the recipients of the

        21     goods and services and those who pay the tax

        22     also receive the benefits resulting from the



         1     taxes imposed.

         2               Additionally, in his paper, you'll

         3     notice the proposed reliance on voluntary

         4     cooperation and compliance and the desire to

         5     minimize sanctions.  This approach mirrors, to

         6     a significant extent, some principles

         7     contained in proposals that we will discuss

         8     tomorrow.

         9               In addition, we would do well to

        10     emulate the basic principles which guide the

        11     OECD work:  Neutrality, efficiency,

        12     certainty, simplicity, fairness, and

        13     flexibility.  There should be no

        14     discriminatory taxation permitted, and we

        15     should use our new technologies to simplify

        16     and improve the administration of all of our

        17     tax system.

        18               In the international consumption

        19     tax arena, the key ingredient will be

        20     cooperation between governments, between

        21     governments and vendors.  We should rely on

        22     existing principles that have governed our



         1     tax system generally and avoid being forced

         2     into adoptions of new taxes or new tax

         3     systems.

         4               Technology and E-commerce

         5     transactions are changing as we speak.  We

         6     must move now to assure that we will have the

         7     needed revenues for our tax jurisdictions and

         8     for the benefits they provide.  At the same

         9     time, we must move cautiously and make sure

        10     that we understand the nature and dimensions

        11     of any tax problems with respect to

        12     international cross-border sales before we

        13     move to solve them.

        14               We should attempt to use existing

        15     approaches to tax compliance, adapted to

        16     today's world, and to new problems that arise

        17     before heading out into unchartered seas.

        18               Thank you, Mr. Chairman.

        19               CHAIRMAN GILMORE:  Mr. Guttentag, thank

        20     you very much.  We have now ample time for

        21     the members of the panel to discuss any of

        22     the international issues raised by any of the



         1     presenters, and including, of course, our two

         2     Commissioners.

         3               The floor is now open for any

         4     questions, comments, speeches.

         5               Dean Andal?

         6               MR. ANDAL:  Okay.  I was delighted

         7     to hear what seems like wide agreement that

         8     there should be no customs duties, no

         9     international tariffs, on

        10     digitally-transferred products.  But you were

        11     careful -- and I'm interested in hearing

        12     Mr. Marsland and Mr. Aujean and Mr. Novick's

        13     response, that you were careful to

        14     distinguish between customs duties and

        15     consumption taxes.  And it seems like -- and

        16     I understand the fundamental difference

        17     between those two types of taxes.

        18               But it seems like America and

        19     Europe are heading in different directions on

        20     that score.  It looks like existing practice

        21     and what you have in mind for the future

        22     anticipates Europe having consumption taxes



         1     on digitally-transferred products and

         2     services, whereas most of the 45 states in

         3     America who have a sales tax do not tax

         4     digitally-transferred goods and services.

         5               If that holds and America doesn't

         6     change its mind and Europe doesn't change its

         7     mind, aren't you going to be faced with

         8     compliance problems in Europe as a result of

         9     Americans selling digitally-transferred

        10     products to Europeans?  We don't collect it

        11     here.  And unless you want to understand the

        12     consumer buying habits of every European, you

        13     won't be able to collect it there.

        14               I'm interested in Mr. Marsland,

        15     Mr. Aujean, and Mr. Novick's response to that

        16     scenario.

        17               MR. MARSLAND:  Thank you.  I think

        18     the key starting point is that the Value

        19     Added Tax systems adopted by most OECD

        20     countries are a very comprehensive tax basis.

        21     They tax essentially everything with a few

        22     exceptions -- usually food and items like



         1     that.  So that these tax bases are defined

         2     very broadly, and therefore, they seek in

         3     terms of neutrality to the tax every aspect

         4     of consumption, whether it be delivered

         5     digitally or physically.  And there are

         6     systems in place to deal with physical

         7     goods, to capture that tax at the border.

         8     There are systems in place to deal with

         9     business-to-business transactions, in terms

        10     of the self-assessment mechanism.

        11               It's clear that the key challenge,

        12     if one is to continue to tax those, is to

        13     develop a mechanism to capture the sales from

        14     businesses to consumers of digitized

        15     products.  That's the key -- the focus,

        16     essentially, of the OECD's work in this area.

        17               It's also clear that there are no

        18     simple solutions.  The OECD is looking at a

        19     range of options that might present

        20     themselves to deal with that, and no

        21     conclusions have been drawn as yet.

        22               MR. AUJEAN:  Well, I have very



         1     little to add to this.  I mean, it's clear

         2     that in the EU we have been used to the

         3     individuals charged for business-to-business.

         4     And we will continue and extend the scope of

         5     this business-to- business scheme.

         6               It is very straightforward and it

         7     works, and it has produced good results.  And

         8     it has been recently broadened to deal with

         9     telecommunication services.  Because, as you

        10     may know, we had exactly the same difficulty

        11     with telecommunication services.  It's now

        12     resolved and it works.

        13               And the same should also be done

        14     with business-to-consumer.  That is, we need

        15     to change our legislation, and we have been

        16     studying carefully the possibilities and the

        17     situation, and we consider that it's

        18     necessary to establish a level playing field

        19     between the EU and the rest of the world in

        20     both directions.

        21               MR. ANDAL:  Would you care to

        22     outline briefly some of the alternatives



         1     you're considering for the problem of

         2     business-to-consumer digitized product sales

         3     over the Internet?

         4               MR. AUJEAN:  First of all, it

         5     should be clear that, as I said before, this

         6     is a very limited segment of existing trade

         7     today.  And, secondly, even if we agree that

         8     the principle of taxation should be

         9     implemented as soon as possible, so as to

        10     have a level playing field, we still are in

        11     the process of discussing and dialoguing with

        12     the business community.

        13               Along the typical solutions, the

        14     solution which is envisaged and on which the

        15     working people of the Commission -- which is

        16     a valuable Web site -- is that it engraves

        17     the principle of registration, and none of

        18     the possibilities are explored of electronic

        19     registration of traders on the Net,

        20     delivering online product to final consumers

        21     in the EU.

        22               That means an application of the



         1     common existing VAT legislation through a

         2     single place of registration for all trade

         3     taking place within EU.  This solution is a

         4     solution on which we have been working at

         5     present.  It doesn't preclude the

         6     possibilities mentioned -- and none of the

         7     mentioned inter-works of this Commission, of

         8     third-parties being involved in helping this

         9     process.  That may be, as well, a very

        10     competitive solution which needs to be

        11     explored.

        12               CHAIRMAN GILMORE:  Did anyone else wish

        13     to comment on any of that?

        14               Robert?

        15               MR. NOVICK:  I actually think the

        16     question is better addressed to my colleague

        17     from the Treasury Department, because I

        18     didn't hear in either of the comments a

        19     suggestion that the European Union is

        20     thinking about tariffs on digitized goods.

        21     And that certainly is consistent with what I

        22     believe the consensus is, and certainly



         1     consistent with the U.S. practice.

         2               So I don't think we're moving in

         3     different directions when it comes to

         4     treatment of digitized goods at the border,

         5     assuming you can even treat them at the

         6     border.  The question of the consumption tax

         7     and registration requirements and other

         8     aspects of the European system that they're

         9     considering raises a whole set of other

        10     issues that may actually implicate trade

        11     concerns.  But I reserve that until we see

        12     what that system is.  But with respect to the

        13     tax treatment of digitized goods, that's --

        14               MR. ANDAL:  I'm always thrilled to

        15     hear from the entire Clinton administration.

        16               So Joe, do you have a view on that?

        17     I'm delighted that we've resolved this

        18     question of tariffs and customs duties.  But

        19     that belies a more fundamental question,

        20     which is, if we're not taxing digitally

        21     transferred products and services in the

        22     United States, and they are in Europe, does



         1     that not create a significant problem for the

         2     Internet taxing system around the world?

         3               MR. GUTTENTAG:  I guess -- well, I

         4     can't speak for the entire Clinton

         5     Administration.  I don't think you want all

         6     of them speaking here, Dean.  But I --

         7     certainly, I agree with my colleagues from

         8     the EU and the OECD.  First, we are dealing

         9     with a relatively small amount of business at

        10     this time.

        11               Secondly, I think it is up to the

        12     jurisdictions involved, the European Union,

        13     which has responsibility for Value Added Tax

        14     within the -- with their 15-member countries,

        15     they have determined that they wish to impose

        16     a tax on services, including digitized

        17     products.

        18               In the U.S., those decisions are

        19     made by each one of the states and by local

        20     taxing jurisdictions.  They should be free to

        21     make their decision as to how to tax them.

        22               Since the taxes that we're talking



         1     here are consumption taxes, and we have

         2     agreed that those are based on the place of

         3     consumption, the fact that in one

         4     jurisdiction they're not subject to tax and

         5     in the others they are is a matter for the

         6     local jurisdiction, it seems to me.  It

         7     really is not too relevant, Mr. Andal, as to

         8     whether we're talking about goods or

         9     services.  That's a matter for the EU to

        10     determine.

        11               Once we deal with cross-border

        12     issues and collection problems, then it is a

        13     matter for us to be able to discuss them and

        14     cooperate internationally to agree on the --

        15     to try to deal with that in the best ways

        16     that we can, with the guidelines that we

        17     have.  To provide certainty, to minimize the

        18     sanctions and to rely to the maximum extent

        19     on cooperation.

        20               MR. NORQUIST:  I had a question, I

        21     think, for Mr. Novick.

        22               I'm very happy that this Commission



         1     voted almost unanimously in support of the

         2     Clinton administration's negotiating position

         3     with WTO and others on not having tariffs on

         4     electronic commerce.  And I'm glad to hear

         5     you say that you think we're coming towards a

         6     consensus on it.

         7               I was wondering if you could tell

         8     us, when you say "getting towards the

         9     consensus," I guess I thought we had a lot

        10     more consensus on free trade that seemed to

        11     show up in Seattle recently.

        12               So I'm wondering where the sticking

        13     point is where you say it looks like we're

        14     getting to consensus.  Is there a country or

        15     region or industry group that is not

        16     cheerfully moving towards a tariff-free

        17     electronic commerce internationally?

        18               And others, if you want to answer

        19     that as well.

        20               MR. NOVICK:  No, the issue is

        21     really the way the WTO third ministerial

        22     process worked.  And that is to say that the



         1     going-in assumptions about the ministerial

         2     were that we would end up with a declaration

         3     which would address the entire range of trade

         4     issues, both going forward and certain issues

         5     that people wanted resolved in Seattle, of

         6     which the electronic commerce consensus was

         7     won.

         8               There were a range of

         9     disagreements, as I think was well

        10     publicized, regarding a range of trade

        11     issues.  Agriculture being among them, for

        12     example, that led to the ministerial being

        13     suspended, rather than reaching a final

        14     declaration, which would have included the

        15     consensus on E-commerce.  So the issue is

        16     really one of process and the time of which

        17     the consensus will be formalized.

        18               But what was clear during the

        19     discussions in Seattle was that there was a

        20     broad consensus on these issues.  Countries

        21     always, for tactical reasons and for

        22     negotiating reasons, try to get something for



         1     agreeing.  And since nothing is agreed until

         2     everything is agreed, the E-commerce

         3     moratorium was not formalized at Seattle.

         4     But we would expect that during the course of

         5     next year, it will be.

         6               So I haven't seen any indication of

         7     countries that don't believe that continuing

         8     their current practices in their interest, as

         9     well as the interest of the technology moving

        10     forward.

        11               CHAIRMAN GILMORE:  Mr. Lebrun?

        12               MR. LEBRUN:  Mr. Marsland, if I

        13     understood you correctly, you said that 28 of

        14     the 29 OECD countries have consumption taxes.

        15     I assume that those are nationally-imposed

        16     and collected taxes, and you don't have the

        17     situation in any of those countries, as we do

        18     in the United States, where you have 50 or 51

        19     jurisdictions that have the authority and the

        20     jurisdiction to choose whether or not to

        21     impose such consumption taxes.  Am I correct

        22     on that?



         1               MR. MARSLAND:  You're correct.  I

         2     was referring to national consumption tax

         3     systems.  And in answer to the second part of

         4     your question, I believe there's only one

         5     exception, which would be Canada, which has

         6     provincial sales tax systems.

         7               MR. LEBRUN:  The other countries,

         8     the individual sub-governments, if you will,

         9     do not have either the jurisdiction or the

        10     authority to impose and collect taxes at the

        11     local level; would that be correct?

        12               MR. MARSLAND:  I must admit I'm not

        13     an expert.  In Canada, the provincial

        14     governments have the authority to levy sales

        15     taxes.  I'm not sure if that's the case in

        16     other federal jurisdictions, such as

        17     Australia.

        18               MR. LEBRUN:  If I recall, the

        19     Canadian Constitution is just the opposite of

        20     our Constitution.  In Canada, the reserve

        21     power is with the federal government and the

        22     provinces have the delegated power; isn't



         1     that correct?

         2               MR. MARSLAND:  In Canada, the

         3     provinces have the authority to levy direct

         4     taxes, which has been interpreted as including sales

         5     taxes -- retail sales taxes, and the federal

         6     government has the authority to levy any form

         7     of taxation.

         8               MR. LEBRUN:  Thank you,

         9     Mr. Chairman.

        10               CHAIRMAN GILMORE:  Were you driving,

        11     Gene, that the other countries of the

        12     European Union -- the different provinces,

        13     for example of France or Germany, is that

        14     what you were inquiring of?

        15               MR. LEBRUN:  It's my understanding

        16     that that's the case.  If I go to France -- I

        17     just got back from Italy and Turkey and

        18     Greece, and the taxes there are nationally,

        19     federally-imposed taxes, not Athens or

        20     Istanbul or Florence or Milan or something

        21     like that.

        22               CHAIRMAN GILMORE:  So the local units --



         1     provinces, states, or whatever of the various

         2     European states -- do not have the power to

         3     impose taxes?

         4               MR. LEBRUN:  That's my

         5     understanding, but I stand to be corrected if

         6     these gentlemen tell me otherwise.

         7               MR. AUJEAN:  Yes, if you will allow

         8     me.  With the adoption of the EU VAT system

         9     in the '60s, it was clearly in the

        10     legislation that no other alternative taxes

        11     could be imposed -- or sales taxes could be

        12     imposed that the EU -- within the EU by

        13     member states.  So the response is no, there

        14     is no other alternative or sales taxes within

        15     the EU legislation.

        16               CHAIRMAN GILMORE:  That was a dramatic

        17     surrender of sovereignty by each of the

        18     states, isn't that right?

        19               MR. AUJEAN:  Each of the member

        20     states agreed to have this common, general

        21     rules for VAT, but kept sovereignty over the

        22     rate within certain limitations and conceded



         1     during this, they agreed not with the

         2     abolition of border controls in 1993 within

         3     the union, to effectively agree on a minimum

         4     set of rules concerning the rates, but kept a

         5     very large room for maneuver.  And they have

         6     different rates in each of the 50 member

         7     states.

         8               CHAIRMAN GILMORE:  You don't mean the

         9     VAT's different for each individual state, do

        10     you, each individual nation?

        11               MR. AUJEAN:  Every member state has

        12     the right effectively to keep different

        13     rates.  And this is one of the reasons,

        14     certainly, why in some areas they are so keen

        15     to have taxation at the level of country of

        16     consumption.

        17               CHAIRMAN GILMORE:  You have taxation on

        18     services all through the European Union, is

        19     that correct?

        20               MR. AUJEAN:  Concerning taxation of

        21     services, which also was introduced in the

        22     late '60s when the VAT system was adopted,



         1     all services are subject to taxation.  There

         2     are also rules determining the rate, and also

         3     the rules concerning the place of taxation

         4     which, as I said before, are based on the

         5     principle of taxation as a country of

         6     establishment of the trader, which is a great

         7     simplification of EU trade until the

         8     business-to-business enters the scene, for

         9     which we have this reverse charge mechanism

        10     in order to simplify the collection of tax in

        11     the country of consumption.

        12               CHAIRMAN GILMORE:  So you have a level

        13     playing field between goods and services all

        14     throughout the European Union with respect to

        15     taxation, is that right?

        16               MR. AUJEAN:  Yes, absolutely.  And

        17     the reason for this is that all transactions,

        18     be they goods or services, are effectively

        19     taxed, even in interstate commerce between

        20     business and consumers of different states.

        21               CHAIRMAN GILMORE:  Let me ask

        22     Mr. Marsland and Mr. Aujean a question -- and



         1     I'll keep my eye open for other Commissioners

         2     as well, of course.

         3               If a person in France buys an

         4     object or a good from America and it is

         5     shipped to France, you would rely upon

         6     interdicting that good at the border at

         7     customs, identifying it, and then charging

         8     the VAT tax to the consumer who ordered it;

         9     is that correct what I understood you to say?

        10               MR. AUJEAN:  Yes.  If goods are

        11     shipped from any country outside the

        12     community, they are subjected to formalities

        13     at importation within the community.  Then

        14     they will pay VAT at the place of importation

        15     and will be able to move freely within the

        16     rule of the community of the 50-member state.

        17               CHAIRMAN GILMORE:  Well, I'm sure it

        18     would.

        19               The other question, though, is

        20     what's the difference between that and a

        21     tariff?  A tariff is a duty imposed on a

        22     large box of goods that would be



         1     imported-exported from one country to the

         2     other.  It affects, of course, the ultimate

         3     price, because the tariff is being added to

         4     it.  It's designed to do that for some

         5     reasons.  Sometimes it's revenue, other times

         6     it's something else.  It's an effort to do

         7     protectionism.

         8               But that would be a tariff.  But on

         9     this single good purchased by this

        10     individual, and by the aggregate millions of

        11     individuals, isn't that the same way of
        12     imposing a tariff by a VAT tax proposal?

        13               You're imposing an additional cost

        14     on the good at its point of entry.

        15               MR. AUJEAN:  No, we are simply --

        16     by imposing VAT at importation, we are simply

        17     putting all the goods that were produced

        18     within the EU or imported on a level playing

        19     field.  And that has nothing to do whatsoever

        20     with any kind of protectionism given the

        21     level playing field which results from the

        22     application of this taxation at importation.



         1               All the goods suffer exactly the

         2     same rate of taxation, whether they're

         3     domestically-produced or imported.

         4               CHAIRMAN GILMORE:  But the good in

         5     America might be cheaper.  And the reason is

         6     it's not produced subject to a VAT tax at its

         7     point of sale.  But when it enters one of the

         8     nations of the EU, an additional charge is

         9     placed on it for the consumer in the EU.

        10     Isn't that right?

        11               MR. AUJEAN:  No, because if the

        12     price in the United States is lower, the

        13     application of the VAT at importation will

        14     bear on the lower price, and consequently

        15     will keep this product competitive, vs-a-vs

        16     of domestically-produced goods.

        17               CHAIRMAN GILMORE:  In the EU.

        18               MR. AUJEAN:  According to your

        19     assumption of a higher price.

        20               CHAIRMAN GILMORE:  Yes.  The last

        21     question I have is what do you do about

        22     someone in Germany who decides to buy,



         1     download, a digital product from America?  He

         2     purchases and downloads an album:  "Duke

         3     Ellington in Paris," for example, or

         4     something like that.  He downloads that

         5     product.  Or for that matter, a pamphlet or a

         6     report, that otherwise he would have to go

         7     downtown and purchase.

         8               How do you tax that under the

         9     system?

        10               MR. AUJEAN:  Under the present

        11     system, if this supply is made from another

        12     member state or domestically, whatever,

        13     within the Union, it is taxed at the place of

        14     establishment of the supplier.

        15               CHAIRMAN GILMORE:  How do you know about

        16     it?

        17               MR. AUJEAN:  It's quite simple, and

        18     that's why the system works within the EU

        19     this way.  Because every supply of service on

        20     the net will be invoiced with VAT by the

        21     supplier.  And the compliance is effectively

        22     easy, because the supplier can be controlled



         1     by the tax authorities of the same member

         2     state where he is established.

         3               CHAIRMAN GILMORE:  What if the supplier

         4     is an American company?

         5               MR. AUJEAN:  Then when the goods or

         6     services, more precisely, in our

         7     denomination, are brought into the United

         8     States at present, given our rules of

         9     taxation at the place of establishment, there

        10     is no taxation taking place.  And this is why

        11     we are thinking to changing this rule, as

        12     well as reversing the situation for European

        13     trade, which today is taxed when exporting

        14     services to the U.S.

        15               CHAIRMAN GILMORE:  Delna Jones?

        16               MS. JONES:  A couple of questions.

        17     First of all, let me see if I'm correct.  In

        18     your explanation of the difference between a

        19     tariff and a tax, it wouldn't matter whether

        20     the product came from China, the U.S., or any

        21     other country.  You would impose a

        22     consumption or use tax or sales tax on that



         1     product at the border, no matter its country

         2     of origin; is that correct?

         3               MR. AUJEAN:  Let me be clear.  If

         4     this is a good which is effectively a

         5     material good imported within the EU, we will

         6     apply customs, duties and VAT at importation.

         7     The tariffs will be -- the tariff, which is a

         8     common, external tariff for the EU -- it will

         9     be the same whatever the country of

        10     importation within the EU is.

        11               And the VAT will be applied at the

        12     same time and will be dependant upon the

        13     member states of importation.

        14               MS. JONES:  I know you were

        15     attempting to clarify, and I thought that

        16     that was what I was doing, but I don't know

        17     that I came away with the same clear

        18     understanding.

        19               Let me pose another question, if I

        20     may.  Currently your producers of product are

        21     being taxed, or suppliers, as I think you

        22     used the term.  And that tax rate can vary



         1     among the countries, but they are all under

         2     the same system; correct?

         3               MR. AUJEAN:  Absolutely.

         4               MS. JONES:  Okay.  Do they also

         5     have the same system of taxation in

         6     relationship to the income produced by those

         7     businesses?  And do they tax that at a

         8     varying rate?  Do they have a unifying system

         9     of taxation?  Or how do they determine the

        10     other piece of that taxation?

        11               MR. AUJEAN:  Concerning income

        12     taxation, there is no harmonization at all

        13     within the EU.  And consequently, income

        14     taxation or company taxation is something

        15     which is totally left to the will and

        16     sovereignty of each member state.

        17               MS. JONES:  Thank you.

        18               CHAIRMAN GILMORE:  Mayor Kirk?

        19               MAYOR KIRK:  Mr. Smith, you looked

        20     like you were off the board over there, so,

        21     Fred, I want to go back on your analogy of

        22     our Chinese garlic sellers.  Help me through



         1     that.  And it's obviously you believe in a

         2     fairly tax-free, at least, economy and

         3     society in that sense.  But in the case of

         4     the Chinese garlic sellers or my wife or, you

         5     know, somebody's wife here.  One of us.  We

         6     cook.  We want garlic.  We order Chinese

         7     garlic.  How does that garlic get here?  How

         8     does that garlic physically get from my

         9     Chinese garlic sellers to Dallas, Texas?

        10               MR. SMITH:  I assume it gets here

        11     the same way that other goods would, by

        12     Parcel Post or one of the mail systems out

        13     there.

        14               MAYOR KIRK:  But through the mail

        15     systems and then carried, presumptively, on a

        16     ship or an airplane, and then over streets or

        17     roads or whatever?

        18               MR. SMITH:  It's a physical good.

        19     Some of the problems we're dealing with here

        20     earlier about informational goods don't

        21     involve that.

        22               I think it was -- one of the



         1     points -- I wasn't quite bored.  I was trying

         2     to understand -- there's a man named Michael

         3     Sailor who was just interviewed in Business 

         4     Week, and he makes this incredible global use

         5     of this.  He suggests that we're about an

         6     eight and a half trillion-dollar economy,

         7     about half of which is wasted, he says.

         8     People having the wrong train, the wrong

         9     operation, the wrong goods, the wrong time.

        10     And he thinks we will be able through this

        11     Internet system to create about a $4 trillion

        12     reduction in the cost.

        13               How in the hell are we going to tax

        14     that?  I don't know.

        15               MAYOR KIRK:  My point to you is

        16     that -- and I agree with you, I think it may

        17     grow to a $4 trillion.  I hope it grows to a

        18     $10 trillion economy.  But whatever the

        19     point -- I mean, unless at some point far in

        20     the future, you and I can't materialize or

        21     envision at some point those goods still have

        22     to be delivered by some way, usually over



         1     streets, highways, air transport.  And in the

         2     general sense, we still have to find some way

         3     to build those streets and to pay for those

         4     highways and those airports.  I mean, you

         5     would agree with that.

         6               So even you would agree that some

         7     level of taxation is necessary to make sure

         8     that we have roads and highways just to

         9     deliver all of the stuff we're going to buy;

        10     is that right?

        11               I mean, just -- because in your

        12     broader sense -- it's real fun to laugh about

        13     no taxes and -- the only thing I would just

        14     commend to you, since you're a movie buff --

        15     I haven't seen "The Seven Samurai," but since

        16     I have a 10- and a 7-year-old, I have seen

        17     "The Lion King" 4 or 500 times.  And I must

        18     admit I liked it the first 100 times I saw

        19     it.  But you might go -- if you haven't seen

        20     it, you ought to see it.  There's two

        21     wonderful characters in the movie, Timon and

        22     Pumba.  I know it real well.  And they have



         1     this wonderful, dangerous philosophy that

         2     they live by, that to some degree sounds like

         3     the same song as these anti-tax advocates.

         4     It's called acumba matada (phonetic).  We

         5     have no problems, no worries, everything's

         6     fine.  We live in this paradise.  We don't

         7     give a damn about anybody else.

         8               And the message of the story is

         9     that that's a pretty great philosophy for

        10     fun, but not a good, real way to build a

        11     community.  And only until you come back and

        12     everybody pays their fair share, you can't

        13     grow and prosper as a community.

        14               So in that sense, I might commend

        15     "The Lion King" for you the next time you're

        16     sitting on top of your hill thinking where

        17     you might want to rape and pillage next.

        18               MR. SMITH:  What we want to do is

        19     probably exchange movies.

        20               But you raised a very interesting

        21     point, and I think it's a serious one.  The

        22     question is, obviously there is -- I mean, I



         1     live in Washington, D.C., and I recognize bad

         2     roads can be a problem in any major city.

         3               It's obviously a question of how we

         4     go about providing the essential services of

         5     our communities?  And not just cities, of

         6     course -- counties and states and national

         7     governments.

         8               The challenge is whether or not the

         9     way we've done it in the past has to be given

        10     some kind of sacred status.  I think as the

        11     administrative costs and the potential risk

        12     we face change -- I mean, we used to fine the

        13     United States by tariffs.  We decided that

        14     that wasn't the best way to do it.

        15               I mean, the point I'm trying to

        16     make is just because it's an owed tax doesn't

        17     mean it's a good tax.  And I do believe in

        18     the area of like some of the services there

        19     is the potential of creating some alternative

        20     ways, like highway pricing and so on,

        21     through -- your city has one of the more

        22     innovative toll road systems in America, and



         1     getting better and better.  And you're one of

         2     the centers of the Internet commerce in the

         3     world.  All of which allow us potentially to

         4     do a much more creative job, rather than

         5     broad taxes, to move us toward taxes which

         6     actually -- where the beneficiary actually

         7     directly benefits from the thing he's paying

         8     for.

         9               CHAIRMAN GILMORE:  Stan Sokul?

        10               MR. SOKUL:  Thank you.  Plus

        11     there's always the gas tax.

        12               I have -- I'm not an expert on

        13     international tax.  I have some -- just a

        14     couple of really basic questions here.

        15               When a person in France orders a

        16     book from, let's say,, and you

        17     stop the book at the border to collect tax,

        18     the VAT tax, who does the collection?  Is

        19     there a French official at the post office or

        20     do you want -- in your ideal world, would

        21     Amazon do the collecting of that and remit it

        22     to you?



         1               MR. AUJEAN:  First of all, today

         2     Amazon is established in Europe, because they

         3     found it more economical to effectively run

         4     their stock there.

         5               MR. SOKUL:  Let's talk about

         6     Chinese garlic, then.

         7               MR. AUJEAN:  At the end of the day,

         8     their current application would be much more

         9     simple, because Amazon will deliver the goods

        10     from within the EU, and will just do this

        11     under our distance-setting regime, which is

        12     extremely simple to apply.

        13               But would that be the case,

        14     effectively, if the goods were imported from

        15     the U.S., it would have to go through the

        16     customs procedure to be imported within the

        17     EU.  And once again, I repeat, then there

        18     would be application of the current tariff

        19     from book, external tariff of the EU from

        20     book, and application of VAT at the point of

        21     importation.

        22               If the point of importation is,



         1     let's say, Rotterdam, which is one of our

         2     main harbors for such imports, it would be

         3     the Dutch VAT rate which would be applied.

         4     If the point of import is France, it would be

         5     the French VAT rate which would be applied.

         6               And that being done, the book will

         7     circulate after that without any other burden

         8     within the EU.

         9               MR. SOKUL:  But how is it applied?

        10     In other words, the French citizen paid by

        11     American Express and on the Amazon web page

        12     paid, submitted the information and thought

        13     the transaction was over.  How do you get the

        14     extra tax -- not the extra tax, but the VAT

        15     tax applied to that transaction?

        16               MR. AUJEAN:  Usually quite simply,

        17     because there are agreements between the

        18     customs administration and most of the

        19     Express carriers to have expressed delivery

        20     and the VAT -- and the customs apply on the

        21     invoicing price provided to the Express

        22     carrier who will take care of the --



         1               MR. SOKUL:  So Fed Ex or UPS?

         2               MR. AUJEAN:  Absolutely.

         3               MR. SOKUL:  Okay.  Not -- well,

         4     putting aside from Amazon.  Not Amazon, it

         5     would be Fed Ex or the common carrier?

         6               MR. AUJEAN:  Well, it might be

         7     Amazon or it might be a third party

         8     designated by Amazon who would be in charge

         9     of making the duty and respecting the

        10     procedure for customs.

        11               MR. SOKUL:  I guess in our country,

        12     where we have states' taxation -- if a

        13     citizen from Virginia bought some wine for

        14     someone in France, they would have to submit

        15     a use tax.  You don't expect a French company

        16     to figure out which tax might apply in one of

        17     the 50 states and collect that for the state

        18     of Virginia, do you?

        19               MR. AUJEAN:  That might be the case

        20     in some cases, that the company has

        21     effectively, first of all, to know what rate

        22     of duty.  But moreover, because you talk



         1     about wine, what rate of excise duties and

         2     sales taxes might have to be applied in some

         3     jurisdictions.

         4               MR. SOKUL:  I have one other quick

         5     question, which isn't based upon anything

         6     that either of you have said today.  It's

         7     based upon something, as I try to follow

         8     what's going on in the OECD or the EU, I read

         9     officials saying -- and I don't believe I've

        10     read either of you saying this, but it has to

        11     do with the notion of harmful tax

        12     competition.  That you're setting up these

        13     systems because everyone has to cooperate,

        14     because we can't have harmful tax

        15     competition.

        16               To whom is harmful tax competition

        17     harmful?  And what is wrong with it?

        18               MR. AUJEAN:  Well, I don't really

        19     think that this is a subject for today, but

        20     I'm totally available to respond to this

        21     question.

        22               The harmful tax competition project



         1     is a matter dealing with spatial schemes

         2     provided between member states of the union

         3     by some tax administration in favor or

         4     notably, namely non-resident companies and

         5     with some kind of re-fencing of these

         6     measures, vis-a-vis of domestic tax bases.

         7               And, this was considered to be harmful

         8     to the extent that, in fact, it implies real

         9     and effective distortion of competition through

        10     very low effective level of taxation being

        11     reserved to transactions made with only

        12     non-residents.

        13               So this is a kind of situation in

        14     which we have been dealing with in terms of

        15     harmful tax competition.

        16               MR. ANDAL:  Instead of a book from

        17, what if someone in Paris bought

        18     the soundtrack to "The Lion King"?  And

        19     instead of it being delivered in physical

        20     form, it was sent from Burbank, California,

        21     to Paris in digital form, one computer to

        22     another and downloaded by the French



         1     customer.  How would you enforce a VAT tax on

         2     that transaction?

         3               MR. AUJEAN:  Well, it depends on

         4     whether the customer is a business or a final

         5     consumer.

         6               MR. ANDAL:  In this case it's an

         7     individual.

         8               MR. AUJEAN:  In the case of an

         9     individual --

        10               MR. ANDAL:  Presuming, of course,

        11     that French businesses don't have much need

        12     for the soundtrack of "The Lion King."

        13               MR. AUJEAN:  In that case,

        14     effectively this is a case of we are trying

        15     to -- this is effectively rather a difficult

        16     case for getting a simple system of voluntary

        17     compliance.

        18               MR. ANDAL:  It's taxed now, right?

        19               MR. AUJEAN:  No.  At the present,

        20     it will not be taxed, because it does not

        21     belong to this category of services for which

        22     a place of supply is already within the



         1     community.  It is, for the time being, a kind

         2     of supply for which the place of supply is at

         3     the place of the establishment of the

         4     supplier in the United States, in the case

         5     you gave.

         6               We should change our legislation in

         7     this respect, based on the scheme on

         8     voluntary compliance by trader, by making as

         9     simple as possible the registration and, as I

        10     say, registration should certainly be made in

        11     a single place for all the 15 EU member

        12     states who ask to be instrumental.

        13               MR. ANDAL:  In my example, you

        14     really only have two places you can assert

        15     that tax obligation.  You'd be either

        16     counting on Walt Disney to voluntarily

        17     collect it for you, or you'd be counting on

        18     the French customer to identify the sale for

        19     you.  That's basically your two options, and

        20     those are unappealing, I think.

        21               MR. AUJEAN:  We have at the present

        22     explored more options than that, and we are



         1     studying in more detail two options.  One is

         2     to request the U.S. supplier to register

         3     within the EU through either a direct simple

         4     way of electronic registration or through a

         5     fiscal representative which you could design

         6     within the EU.

         7               MR. ANDAL:  And that's where I'm

         8     getting lost.  Who would register?

         9               MR. AUJEAN:  The supplier of the

        10     service.

        11               MR. ANDAL:  In this case, Walt

        12     Disney?

        13               MR. AUJEAN:  In that case, the U.S.

        14     supplier of service.

        15               MR. ANDAL:  Okay.

        16               MR. AUJEAN:  Would register in the

        17     EU.  As it -- you know, this is exactly the

        18     situation where today a number of American

        19     companies are involved in transactions taking

        20     place within the EU as intermediaries in

        21     these transactions, and they register and

        22     they pay and collect VAT when they are



         1     implied into this kind of intermediary

         2     situation.  And we have no major problem of

         3     compliance with these companies.

         4               CHAIRMAN GILMORE:  Okay.  I understand.

         5     Mr. Smith?

         6               MR. SMITH:  This, I think, is the

         7     nub of what we're wandering around, and the

         8     Governor made the point earlier.  In a world

         9     where everything is physical and lumpy --

        10     big, big suppliers and so forth -- and then

        11     the kind of world where you have a handful --

        12     well, thousands of suppliers in the United

        13     States and around the world registering with

        14     the OECD or with EU it makes a lot of sense.

        15               But when you literally think of the

        16     bulk -- the liberating force of the Internet,

        17     where literally our wives, our children, our

        18     friends can all be suppliers.  The idea that

        19     they're going to be able to create tax agents

        20     in Europe boggles the mind, especially when

        21     these things can be encrypted, when they can

        22     be -- you know, the difference between I'm on



         1     the phone with my sister-in-law for an hour;

         2     has she downloaded three books or has she

         3     just been talking to me?  We don't know those

         4     kinds of things, and I think we're going to

         5     have to move to a different tax system.

         6               I can understand why they liked the

         7     old tax system, but it seems to be

         8     increasingly unlikely in the modern world.

         9               MR. ANDAL:  Mr. Smith, just one

        10     final question.  I'm sorry to do so much of

        11     this, but it's going to be relevant to what

        12     we do later.

        13               Mr. Aujean, take my example one

        14     step further.  And that is if we're going to

        15     count on Walt Disney to collect the tax for

        16     you, voluntary or otherwise, how does Walt

        17     Disney know that their customer's in France?

        18               MR. AUJEAN:  Quite easily, because

        19     he will have received an order with an E-mail

        20     address which will indicate elements which

        21     conveys the place of taxation to be for

        22     delivery within the EU to an E-mail address



         1     which can be effectively assessed.

         2               But these are just examples of the

         3     way we are still thinking to this question.

         4     And we have not yet reached a final decision

         5     nor a final conclusion on this.

         6               CHAIRMAN GILMORE:  The first hand up was

         7     Mr. Pincus' and then Mr. Pottruck.

         8               Andrew?

         9               MR. PINCUS:  Thank you, Governor.

        10     I was going to ask a question similar to

        11     Commission Andal's, because I guess I differ

        12     a little bit from Mr. Smith.  It seems to me

        13     the multiplicity of sellers is one issue, but

        14     if there is a physical good, at least there

        15     is a place.  But I was going to raise this

        16     question of how do you know where the

        17     recipient is?  Because I don't think actually

        18     that there's a way to tell, necessarily,

        19     where the E-mail address of the recipient is

        20     from.  And there are people on this

        21     Commission more versed than I in technology.

        22     But I know enough to know that there are



         1     enough techniques that you can use to mask

         2     where you are and intermediaries that one can

         3     go through.

         4               And so it's always seemed to me

         5     that one of the big issues in this area is

         6     determining -- even if you can get over a lot

         7     of other hurdles -- where the recipient is.

         8               MR. SMITH:  One point in that is a

         9     point that you encompass, I know a lot.  One

        10     of the geniuses of the Internet and the

        11     electronic information sharing it provides

        12     is, for example, the U.S. credit database

        13     industry, which by creating a lot of

        14     information sharing, makes it possible to

        15     democratize credit, and so forth, lower

        16     credit costs and so on.

        17               If those sharing arrangements are

        18     subject to a subpoena from a taxing

        19     authority, we're going to chill a lot of

        20     voluntary information sharing arrangements.

        21     And I think in many ways impoverished our

        22     ability to reach down to the less well-served



         1     people in our very societies, because we'll

         2     be trying to collect taxes.

         3               MR. PINCUS:  Well, I just -- I know

         4     you want to respond, but I think there are

         5     also -- again, with physical goods, one has

         6     to give the address to which they're going to

         7     be delivered.  And therefore, some personal

         8     information has to be provided to make the

         9     transaction work.

        10               With respect to digital delivery of

        11     goods, I think there is an issue about how

        12     you require the recipient to provide

        13     information, and what it is that really is

        14     essential for the completing of the

        15     transaction.

        16               MR. MARSLAND:  I think you've

        17     touched upon one of the challenges and, you

        18     know, the term -- if you want to apply the

        19     place of consumption principle, how do you

        20     determine that in a practical way?

        21               That's one of the issues we're

        22     looking at with the technical advisory groups



         1     with business, and I think there are a number

         2     of criteria that you look at.  The place

         3     declared, obviously that's not going to be

         4     enough in itself.  The credit card

         5     information, because there has to be means of

         6     payment.  Perhaps various other issues, but

         7     we're working with the business community to

         8     look into those.

         9               CHAIRMAN GILMORE:  Mr. Pottruck?

        10               MR. POTTRUCK:  Well, I think that

        11     whether you are for or against taxes on the

        12     Internet, it's clear that the issue of

        13     unknown outcome is this whole issue of how

        14     you deal with digital products.  Because of

        15     the problems of capturing their movement, the

        16     question of whether you really know where the

        17     buyer is -- and E-mail addresses in

        18     cyberspace may or may not be identifiable.

        19     And I'm sure we could spend a lot of time

        20     giving one example after another of a digital

        21     record or a digital book or something else

        22     delivered as a reason why we can't solve the



         1     problem.

         2               But I would suggest that we still

         3     are going to live in a world of lumpy objects

         4     for a long time.  I continue to like to eat

         5     lumpy food, and I can't imagine digital food

         6     or living in a digital house.

         7               My son plays digital golf, but I

         8     prefer those little round balls, which I have

         9     to buy somewhere.

        10               So I'm just -- I just would like to

        11     suggest that as we try to come at this

        12     problem, we can easily get hung up with the

        13     examples that are almost imponderable at this

        14     point, that no one has a solution for, that

        15     we will have to continue to examine.  But we

        16     are going to continue to live in a world of

        17     enormous physical objects for a long time.

        18     And if we can come up with any approach -- or

        19     decide that we should not do, if that's the

        20     decision we reach, looking at physical

        21     objects -- whatever we decide, I think we

        22     should -- I think we'd be well-served to see



         1     what -- to examine the world of the solvable

         2     and try to figure out what can be done or

         3     choose that we think the right answer is to

         4     continue with the tax moratorium, but not

         5     because we can't figure it out, but because

         6     we have figured it out and this is the

         7     approach we think is best for the economy and

         8     the American people, if not the people of the

         9     world.

        10               CHAIRMAN GILMORE:  Governor Leavitt?

        11               GOVERNOR LEAVITT:  I'd like to just

        12     address the panel on the same subject as

        13     Mr. Pottruck.

        14               It seems evident that this problem

        15     of digital -- digitally-transmitted

        16     information and product is a sticky and

        17     difficult one.  You have chosen to have your

        18     tax system in the EU be a very broad system.

        19     This whole debate seems to me to boil down to

        20     a question of whether the sales tax is

        21     feasible in the next century.

        22               It may not be or it may be in



         1     degrees.  One alternative on digital products

         2     might be to eliminate sales tax or the VAT

         3     tax on matters that are -- that have the

         4     physical equivalent.  Maybe that we decide

         5     that video movies downloaded aren't -- don't

         6     have tax, nor does the version that you get

         7     at the video store.  That a book may not be a

         8     sales-taxable item, nor will the

         9     digitally-delivered version.

        10               Is that entering into your

        11     discussions at all?  It would be a diversion

        12     from your -- from your philosophy of a

        13     broad-based tax system.  But have you had

        14     discussions on that?

        15               MR. AUJEAN:  That was clearly

        16     discussed before the Ottawa meeting within

        17     the EU and the European Council -- the

        18     European Council of Ministers -- came to a

        19     clear decision that first of all no new taxes

        20     would apply to electronic commerce, and that,

        21     on the contrary, the existing VAT system

        22     should be adapted to be able to deal with



         1     these new challenges and opportunities.

         2               And that's clearly what we're doing

         3     at the present.  That being said, it's clear

         4     that we have not yet every piece of every

         5     solution ready yet.

         6               CHAIRMAN GILMORE:  Joe Guttentag?

         7               MR. GUTTENTAG:  Thank you,

         8     Mr. Chairman.

         9               I certainly agree with

        10     Mr. Pottruck.  Right now, the volume of sales

        11     that we're talking about on these digitized

        12     goods, I doubt if they exceed 1 percent of

        13     all of the goods that are being bought and

        14     sold through electronic commerce.  I think

        15     all of us would agree that we shouldn't allow

        16     those transactions to guide us with respect

        17     to the other 99 and some odd percent.

        18               My comments -- this is a

        19     complicated area.  My comments and my

        20     discussions with Mr. Andal were based on the

        21     EU system, which Mr. Aujean described, which

        22     was going to go in place, because changes are



         1     taking place there.

         2               We are looking now -- and one of

         3     the processes which they've described that's

         4     going on at the OECD is the United States is

         5     actively participating in this -- in these

         6     meetings at the OECD where we have the

         7     business community there, we have the

         8     experts, we have the technical help, and we

         9     have the European Union to discuss what is

        10     the best way to deal with these issues,

        11     taking into account the factors which have

        12     been agreed upon.  And certainly the

        13     simplicity, the certainty, is important.

        14               There's no question as goods flow

        15     across the borders and flow internationally

        16     that we are going to need more cooperation

        17     internationally.

        18               We don't want to encourage people,

        19     Mr. Chairman, to buy overseas in order to

        20     avoid a tax which they would incur if they

        21     buy from a local merchant.  That doesn't seem

        22     to me to be a sound way of proceeding.



         1               Can I suggest, Mr. Chairman, that

         2     the papers, because of the time limits here,

         3     the papers which were prepared by

         4     Mr. Marsland and Mr. Aujean were not

         5     completely presented.  And I suggest that

         6     those papers be included in the record of

         7     this meeting, and that also they be -- and

         8     maybe Mr. Smith's, too, if he spoke very

         9     quickly -- and that they also be invited to

        10     further respond to any of the questions that

        11     came up and submit those for the record?

        12               Thank you, Mr. Chairman.

        13               CHAIRMAN GILMORE:  Certainly people

        14     should be permitted to submit their paperwork

        15     and also any responses to questions that come

        16     before the panel.  I think they will be very

        17     helpful to us as we move towards Dallas.

        18               And we still have more time here

        19     today as well for some additional commentary,

        20     as well as questions.  But we have people who

        21     do want questions.

        22               Let's see.  Mr. Sokul, then



         1     Mr. Pottruck, and then Mr. Norquist.

         2               MR. SOKUL:  I have another

         3     question.  First, just to pick up on

         4     something that Mr. Guttentag just said -- and

         5     this isn't a question, it's just a comment.

         6     Under present rules, as I understand them, if

         7     I'm living in Virginia and I buy a good from

         8     the European Union or OECD nation that has a

         9     VAT, I owe a U.S. or Virginia state use tax,

        10     but there's no means of collecting it unless

        11     I self-report it.  So that good is

        12     essentially tax-free.

        13               If we establish a major collection

        14     system in the United States, which captures

        15     those items, is that going to drive U.S.

        16     purchases offshore?  I don't know, I'm just

        17     asking.

        18               My specific question is as to

        19     privacy, one of the proposals that were

        20     submitted to us -- I think it was called the

        21     Easy Clear Proposal.  I don't -- I know

        22     you're not familiar with it.  There was a



         1     line in it which caught my attention that

         2     said -- and that proposal would allow U.S.

         3     businesses -- it was a software package to

         4     know what the appropriate VAT so that it

         5     could be collected and remitted to VAT

         6     states.  And it said, you know, the U.S.

         7     merchant would buy the software, of course

         8     adopt our privacy policy, and then, you know,

         9     go into operation.

        10               And maybe questions for Mr. Pincus

        11     is -- because I know that you're involved in

        12     this -- to what extent would a tax collection

        13     software internationally versus United

        14     States, and what's going on with privacy

        15     negotiations, require U.S. businesses to

        16     adopt European privacy rules?

        17               MR. PINCUS:  Well, obviously,

        18     nothing right now does.  And I think, you

        19     know, it would be a question of how this all

        20     plays out as we move forward.  But, you know,

        21     the administration has taken the position

        22     consistently that privacy is an important



         1     value.  But we believe that in the United

         2     States we have a different way of protecting

         3     that important value.  And it's through a

         4     combination of government regulation for very

         5     sensitive information, but industry

         6     self-regulation in other contexts.

         7               And we're proud of the way that

         8     that system is developing.  So I don't think

         9     that we would want to junk it for something

        10     else.

        11               Our negotiations with Europe?

        12     They're still ongoing.  I mean, right now we

        13     have an agreement that was reached at either

        14     the last or the EU/U.S. summit before last

        15     with respect to enforcement, while those

        16     discussions are ongoing, and that's still in

        17     place.

        18               CHAIRMAN GILMORE:  Mr. Pottruck?

        19               MR. POTTRUCK:  I have a question.

        20     I thought it was interesting to listen to the

        21     presentation on the EU VAT tax.  If I

        22     understood what Mr. Aujean said, originally



         1     the different states had different sales tax

         2     or VAT tax structure, and they got together

         3     and agreed on a common structural framework,

         4     definitions, what's in and what's out, what

         5     products are.  But each country retains the

         6     sovereignty to set the rates.  And those

         7     rates can be different by product, or it's

         8     one rate per country?

         9               MR. AUJEAN:  No, the rates are

        10     fixed according to the following rules.

        11     First of all, there is a minimum rate under

        12     which no one can go.  And moreover, there is

        13     the possibility of applying reduced VAT rate

        14     to a given release of goods or services which

        15     are a low-level reduced rate.  And no one

        16     could apply a reduced rate to a good or

        17     service which is not on this list.  At the

        18     same time, no one is obliged to apply a

        19     reduced rate to these goods.  And some member

        20     states have a single VAT rate across the

        21     board, with no reduced rate, while others

        22     have decided to have a minimum reduced rate



         1     and some goods and services on the list, and

         2     a standard VAT rate that will be given to all

         3     other goods and services.

         4               MR. POTTRUCK:  So if I'm

         5     understanding what you're saying, there was a

         6     set of definitions, and in fact, one rate was

         7     applied to everyone, and then the countries

         8     had the opportunity to reduce those rates if

         9     they wanted to charge something less than the

        10     so-called standard EU VAT.

        11               Am I hearing that correctly?

        12               MR. AUJEAN:  Provided the good or

        13     the service is on the list agreed together.

        14               MR. POTTRUCK:  Right.  So I realize

        15     this was all done in the '60s.  This was set

        16     up in the '60s.  How long did it take -- I

        17     mean, we talk about our states, which are at

        18     least theoretically part of the same

        19     country -- trying to come up with something.

        20     So here's a set of foreign countries, totally

        21     separate nations coming together to form

        22     something like this.  Is this part of our



         1     dialogue in the three meetings we've had and

         2     in some of the papers we have, the ability of

         3     a bunch of countries to pull this off is

         4     something that I think would be of interest

         5     to some people here.

         6               How many years did this discussion

         7     take to actually negotiate and set this up?

         8               MR. AUJEAN:  From the late '60s,

         9     beginning of the '70s, the VAT system was

        10     introduced in all member states, but with

        11     border controls, which meant that in that

        12     case, there was total freedom concerning the

        13     rates, because you had to go across border

        14     control to import goods from another member

        15     state, including for private citizens.

        16               Then since 1993, we have abolished

        17     border controls.  We have put into force this

        18     minimum rate regulation, and since then there

        19     is a total freedom to purchase everywhere

        20     within the EU with this system of rates.

        21               So you can say that between '70 and

        22     1992, we have elaborated on the system so as



         1     to reach this new situation, which is total

         2     freedom of separation within the EU.

         3               MR. POTTRUCK:  Thank you.

         4               CHAIRMAN GILMORE:  Mr. Norquist?

         5               MR. NORQUIST:  What is the minimum

         6     rate for the VAT in Europe?

         7               MR. AUJEAN:  The minimum rate for

         8     the reduced rate is 5 percent.  And, for

         9     example, it's applicable to food stuff.  And

        10     the standard minimum rate is 15 percent.  So

        11     we have rather high rates, and they

        12     contribute to about 40 percent of the total

        13     tax receipts in the community.

        14               MR. NORQUIST:  Okay.  And the rate

        15     in France?

        16               MR. AUJEAN:  The rate in France is

        17     5.5 for the reduced rate and 20.6 for the

        18     standard rate.

        19               MR. NORQUIST:  Okay.  When you

        20     started imposing the VAT country-by-country

        21     in Europe, I once did a study in each country

        22     after the VAT was imposed.  Not only did the



         1     VAT increase over time, so that each one came

         2     in at one rate and increased, but all other

         3     taxes increased more rapidly in the 10-year

         4     period -- 20-year period after VATs were

         5     imposed than in the previous period.  So

         6     these taxes weren't replacements, they were

         7     more money going in and the government used

         8     it actually to extract additional revenues.

         9               I'm curious as we look at Europe.

        10     In the United States we tend not to tax

        11     services with consumption taxes and in the

        12     future -- it would be a European future, if

        13     we were to move in your direction -- we would

        14     be taxing services, the sale of stocks, the

        15     sale of medical goods or a doctor or buying a

        16     house, other products.

        17               And we'd end up a minimum rate of

        18     15 percent in Europe -- a minimum for

        19     standard rate, 20 percent.  And in France, we

        20     see rates significantly higher.

        21               Then there's the question of

        22     centralization.  Senator Hollings, a Senator



         1     from South Carolina, has introduced

         2     legislation set up at 5 percent, a national

         3     sales tax here in the United States.  We

         4     might all go to Washington and then be

         5     attributed by the politicians in Washington

         6     out to the states, as I understand Germany

         7     does with its money.  It comes into the

         8     federal government and goes out to the states

         9     or to the very areas in France where the

        10     government -- the central government collects

        11     and controls all the money and then hands it

        12     back to local governments.

        13               Was this a good idea, to expand the

        14     taxation from goods to goods and services?

        15     Did Europe find it was helpful to go from

        16     lower rates up to higher rates and the

        17     centralization that flowed with it?  Or do

        18     you wish, upon reflection, that you had

        19     stopped somewhere on that path?  Or do you

        20     think this is exactly where you want it to

        21     be?

        22               MR. AUJEAN:  This is a matter of



         1     political choice, which has been made by

         2     member states.  And what we can see today is

         3     that most of the 98 countries in the world

         4     who have a VAT system have extended this VAT

         5     system to goods and services, because they

         6     consider that all economic activity should be

         7     subject to a Value Added Tax system, because

         8     that was a clear and a straightforward way of

         9     collecting receipts.

        10               Whether this is a more efficient

        11     way of doing it is something which probably

        12     very few people could demonstrate one

        13     direction or another, and is very open to

        14     political judgment.

        15               CHAIRMAN GILMORE:  Joe Guttentag.

        16               MR. GUTTENTAG:  Thank you,

        17     Mr. Chairman.

        18               I just want to first note that with

        19     respect to goods and services, certainly a

        20     factor is that our economy, which was

        21     predominantly goods -- even relatively a few

        22     years ago -- is now a majority of services.



         1     So that if you were not going to tax

         2     services, I think you'd have to rethink the

         3     entire system.

         4               Just as a point of information,

         5     Mr. Sokul, let me note that you

         6     mentioned someone in Virginia bringing goods

         7     into the state of Virginia from Europe.  They

         8     would not be subject to Value Added Tax in

         9     Europe; there would be an exemption from

        10     that.

        11               How would the tax in Virginia --

        12     because there would be a use tax applicable

        13     in Virginia.  Virginia does have an agreement

        14     with the United States Customs Service that

        15     when goods are brought into Virginia, the

        16     Virginia tax authorities are notified that

        17     those goods have been brought in with the

        18     name of the Virginia resident, whether

        19     business or individual, and the Virginia tax

        20     collectors can then send a reminder to that

        21     person that there is a Virginia use tax due.

        22     Now, other states have similar agreements



         1     with customs.

         2               Now, the extent to which Virginia

         3     uses that system and the amount of tax they

         4     collect is something, Mr. Chairman, that I'm

         5     not familiar with.  But obviously, this

         6     system has been established and is being

         7     used.

         8               CHAIRMAN GILMORE:  Well, Joe, we don't

         9     tax services in Virginia.  That is a very

        10     significant, I think, point -- particularly

        11     as you point out with the shift of sales tax

        12     issues shifting more and more to services.

        13     You know, that's something that perhaps has

        14     to be thought about.

        15               Fred Smith?

        16               MR. SMITH:  I think whether one

        17     likes a use tax or not is a separate

        18     question.  But it is, it seems to me, a

        19     constitutionally-acceptable form of tax,

        20     because the people you collect the tax from

        21     are the people who can vote for you or

        22     against you.  And generally those taxes



         1     aren't widely collected.

         2               I think I missed a wine bottle when

         3     I came back from France the last time myself.

         4               But the reasons are is because, I

         5     think, the administrative costs would be

         6     high.  But also I think the political costs

         7     would be high.  Most people would regard that

         8     as a wrong thing to do.  I was shopping in

         9     France.  I had a right to buy that and accept

        10     the lower price.

        11               So I think the major issue is

        12     accountability.  If you have someone else

        13     collect that tax who is not politically

        14     accountable to Governor Gilmore -- or Gilmore

        15     is not accountable to -- then I think you run

        16     the risk of having more taxes in the

        17     citizenry than we really want.

        18               I think, as the Mayor mentioned

        19     earlier, there is an appropriate level of

        20     taxes.  But it is a complex decision between

        21     the citizenry and their politicians.  And I

        22     think accountability is the key reason why



         1     that works better than it would otherwise

         2     work.

         3               CHAIRMAN GILMORE:  Paul Harris and then

         4     Gene Lebrun.

         5               MR. HARRIS:  I have a question for

         6     Mr. Guttentag.  And it's related to the whole

         7     discussion that goes back to our discussions

         8     about the EU and taxing services, and

         9     basically having a broad tax base.

        10               If we decide to go down the road of

        11     taxing services -- online transactions that

        12     are services -- in the name of equity and tax

        13     fairness, which are two of the principles

        14     which we've been discussing, wouldn't we also

        15     have to go back here in the United States and

        16     revisit how we're going to tax services that

        17     are done in more traditional forms?  And how

        18     would that take place?

        19               MR. GUTTENTAG:  Yes, certainly.  I

        20     think that when we talk about taxing

        21     services, I think there has to be a level

        22     playing field, whether the goods -- that



         1     would include haircuts, which probably are

         2     not going to be digitized, and also the

         3     services delivered over the Internet.

         4               Certainly in that way we should be

         5     able, Mr. Harris, to end up with an overall

         6     lower tax rate.  That the broader our tax

         7     base -- which is something I think most tax

         8     economists agree with -- the broader the tax

         9     base, the lower the rates can be.  And I

        10     believe that we should include all

        11     economically-similar transactions within the

        12     tax base, and then keep the rate as low as we

        13     can.

        14               MR. HARRIS:  Okay.  That sounds

        15     wonderful in theory.  But my question really

        16     is, where does the authority lie for

        17     reforming our entire tax system, for example,

        18     on a state-by-state basis, where services are

        19     not taxed, haircuts are not taxed in

        20     Virginia?  How are we going to get to a

        21     uniform system?  Where does the authority

        22     lie, for example, for Congress to push the



         1     states towards some sort of system where we

         2     tax stock trades by Charles Schwab?  Since

         3     this seems to be such a good idea, I'm

         4     wondering how we practically get to this

         5     point?

         6               MR. GUTTENTAG:  I'm sorry if I

         7     meant anything other than that's a matter for

         8     the state and local governments to decide how

         9     they're going to tax.  I think when we were

        10     talking about trying to harmonize the

        11     systems, I think we would probably be in

        12     agreement that if the question of what goods

        13     should be taxed, what services should be

        14     taxed, should be a matter for the state and

        15     the local governments and not the federal

        16     government to decide.

        17               MR. HARRIS:  But if in the name

        18     of -- we keep talking about simplification.

        19     But everything we talk about seems to be

        20     anti-simplification.

        21               If we talk about taxing services

        22     online as something that is practicable, then



         1     my question is, in the name of tax fairness,

         2     we are also saying -- I guess you would

         3     agree -- that services that are done in

         4     traditional forms, that are not conducted

         5     online, ought to be subject to the same tax

         6     requirement.  Isn't that true?

         7               MR. GUTTENTAG:  Yes, and I'm sorry.

         8     Maybe I'm missing your point, Mr. Harris.  I

         9     think the goods should be -- the services

        10     should be taxed.  That should be a matter for

        11     local decision.  And whether they're

        12     delivered online or whether they're delivered

        13     in person, the taxes and the tax rate should

        14     be the same.  But that's a local decision to

        15     make.

        16               When we talk about simplification,

        17     I think everyone would agree that there's a

        18     lot of simplification that can be done.  But

        19     with our present technology, we can leave

        20     substantial variances to allow one state to

        21     tax services, to allow one state to tax food,

        22     to allow another state not to tax food.



         1               MR. HARRIS:  Right.  I just wanted

         2     to clarify the point that as we discuss this,

         3     I think there are some members here at the

         4     table who might have a particular interest in

         5     this.  That is, the move towards taxation of

         6     services.

         7               If we're going to promote as an

         8     ideal or concept that services ought to be

         9     taxed, at the state level or the local level,

        10     in the decision of what the tax rate is going

        11     to be, also lies at both state and local

        12     jurisdictions, then they had better be

        13     prepared, as well, in the name of tax

        14     fairness to have their services that are not

        15     conducted online in more traditional forms to

        16     be subjected to taxes as well, and be

        17     prepared to explain those to their

        18     stockholders.

        19               CHAIRMAN GILMORE:  Before I go to Delna

        20     Jones, Joe let me ask you a question.

        21     Usually governments want to get as much

        22     revenue as they can get.  The general feeling



         1     of governments is that they can always do

         2     more with more revenue.

         3               Are there examples that you're

         4     aware of of where additional taxes have been

         5     extended to additional forums, like services,

         6     and then the rate has been reduced?  I can't

         7     think of any government that's ever reduced a

         8     rate because they decided to put taxes on

         9     something else.

        10               MR. GUTTENTAG:  Well, I think

        11     our -- again, we don't deal with the federal

        12     government with our state taxes.  But I think

        13     an example was the Revenue Act of 1986, when

        14     we broadened the base, eliminated certain --

        15     what we considered to be inappropriate

        16     deductions, and were able to lower rates

        17     substantially.

        18               But, Mr. Chairman, please, I'm not

        19     proposing that services be subject to tax.

        20     I'm just pointing out that if we are going to

        21     subject them to tax, it should be across the

        22     board, and that that can be done.  That's,



         1     again, a decision that each jurisdiction

         2     should be made, and that's the decision which

         3     the EU made.  And it has -- that does not

         4     mean that that's a decision which our states

         5     should also make.

         6               CHAIRMAN GILMORE:  Delna Jones?

         7               MS. JONES:  This is really an

         8     interesting discussion we're going through,

         9     but I wouldn't want to start taxing haircuts,

        10     because we have an aging population and we'd

        11     probably have a reduced revenue stream.

        12               So I think that it seems to me,

        13     unless I'm misjudging this discussion, we've

        14     gotten a little far afield from our mission.

        15               I wouldn't be in a position to tell

        16     Europe how to tax their citizens or whether

        17     their system is good or not good.  I think I

        18     only care when it affects our citizens, and

        19     how it affects our economy.  And I think when

        20     we've had the example of the bottle of wine

        21     coming from France to somebody in Virginia,

        22     or let's make it Oregon -- because we don't



         1     have a sales tax.  The tax is paid with a VAT

         2     tax.  And I think we've lost track of this --

         3     by the supplier or the manufacturer.  So that

         4     winery has already paid the tax, whether our

         5     citizens pay a tax or not.

         6               Is that not correct?

         7               MR. AUJEAN:  No, for goods which

         8     would be exported from the EU to the U.S. and

         9     imported by a final consumer within the U.S.,

        10     there is, of course -- if they are goods,

        11     there is an exemption of tax at exportation

        12     from Europe.  And consequently, the only tax

        13     which they could bear would be taxes like

        14     excise duties or sales taxes supplied by the

        15     state where the citizen is residing.

        16               MS. JONES:  Do I understand

        17     correctly that you aren't taxing the wine

        18     that leaves France?

        19               MR. AUJEAN:  We are taxing every

        20     product which is exported from the EU.

        21               MS. JONES:  That's what I thought.

        22     Okay.



         1               CHAIRMAN GILMORE:  Mr. Smith, do you

         2     want to respond also?

         3               MR. SMITH:  I'm not sure.  You have

         4     the tax removed when you leave -- I mean, if

         5     you want to.  When you leave Europe, you can

         6     have your tax refunded to you.  That's right,

         7     isn't it?

         8               MS. JONES:  I'm talking about when

         9     it's shipped.  You order -- I don't care what

        10     method you use to order it.  If it's sent to

        11     me in Oregon or to our Chairman in Virginia,

        12     the winery has paid a tax already in Europe.

        13               MR. AUJEAN:  No.

        14               MS. JONES:  Well, I thought you

        15     just said they did.  It's de-taxed?

        16               MR. AUJEAN:  De-taxed.

        17               MS. JONES:  Okay.  So it's not

        18     taxed if it's exported.  So you do not

        19     collect the tax, period?

        20               MR. AUJEAN:  When we are talking of

        21     goods, yes.

        22               MR. SMITH:  And to follow up on



         1     that, there is a complexity here which we

         2     haven't gotten into, but probably the people

         3     from the trade group.  The United States, as

         4     you can see, has a different tax structure

         5     than Europe does.  And one of the attempts

         6     the United States has done, for various

         7     reasons, to try to handle trade-related taxes

         8     as a foreign sales corporation, and that gets

         9     us into a whole set of complexities, which I

        10     will say.

        11               MS. JONES:  And I realize that, and

        12     I also realize having dealt with the issue of

        13     wines and a winery, that's another issue all

        14     together, and I shouldn't have ever used that

        15     example.  Thank you.

        16               CHAIRMAN GILMORE:  I believe that --

        17     Robert, did you have your hand up?  No.

        18               MR. NOVICK:  I was just seeking to

        19     clarify the point that the European Union

        20     de-taxes -- takes the tax back, the VAT on

        21     goods, when it's exported.

        22               CHAIRMAN GILMORE:  Thank you, gentlemen.



         1               Governor Leavitt?

         2               GOVERNOR LEAVITT:  I'd like to ask

         3     Mr. Smith, as we were having this discussion

         4     about digitized data and the question of

         5     whether or not the sales tax in the next

         6     century is really going to be a feasible tax,

         7     I got the impression from your testimony that

         8     you don't believe that it is?

         9               MR. SMITH:  You know, like

        10     everything, yes and no.  I think it's going

        11     to be very hard to have, as Mr. Guttentag

        12     suggested, a broad-based sales tax.  That

        13     necessarily wouldn't be a bad thing.  There

        14     were salt taxes in Europe and so on.  And the

        15     argument that a bad tax is a good tax and a

        16     good tax is a bad tax.

        17               It might make sense to have some

        18     specific items that would be retained for

        19     sales tax.  There would be a lot of people

        20     who would picked a digitized alternative in

        21     those areas.  But it might be a part of the

        22     tax base.



         1               We have a lot of taxes that have

         2     survived, even though there are no longer

         3     dominant taxes any longer in our

         4     society.

         5               But I do believe that, as was

         6     mentioned earlier, we've moved from a goods

         7     society to a service society.  I do believe,

         8     very much so, in the 21st century we'll be

         9     moving from a service society with physical

        10     goods associated to a largely information

        11     society.

        12               Just one last point on that:

        13     Taxing a good that is inherently not

        14     scarce -- which informational goods are.

        15     They can be used everywhere.  An idea --

        16     Ethial De Solo Pool (phonetic) argued that

        17     ideas want to be free.  And therefore,

        18     potentially we have a tremendous ability for

        19     the developing world to leapfrog over,

        20     because they don't have to use resources to

        21     get physical goods.

        22               So in a way, I think that the sales



         1     tax will be a declining tax in the future.  I

         2     think we'll have to find alternative ways of

         3     dealing with it.  And I think we will.

         4               I just think that we shouldn't be

         5     trying to salvage a tax at the cost that we

         6     seem to be trying to do.

         7               GOVERNOR LEAVITT:  Any thoughts about

         8     what the alternatives might be?

         9               MR. SMITH:  Now, for me to

        10     recommend a tax policy is obviously not my

        11     normal situation.  But we could obviously

        12     have conservative income taxes or other kinds

        13     of taxes out there that could be done.  I

        14     mean, in effect, a consumed income tax is a

        15     Value Added Tax that deals with all.  You

        16     have exceptions, you can go for investments

        17     and so on.  And then everything else is

        18     considered part of your non -- the part of

        19     your tax that you haven't invested.

        20               I think we're going to have to

        21     investigate that.  I don't have a positive

        22     tax alternative.  I just think that it's



         1     going to be -- just as a tariff became harder

         2     to collect, I think the sales tax is going to

         3     be a much harder tax to equitably and, and in

         4     a politically-accountable way, collect in the

         5     future.

         6               GOVERNOR LEAVITT:  So if we ended up

         7     with a situation as we move into the 21st

         8     century where this sales tax just turns out

         9     to be infeasible -- we just can't work with

        10     the complexities, we can't work with the

        11     inequities, we can't work with all of the

        12     inefficiencies -- what I hear you saying is

        13     we're going to ultimately have to find some

        14     alternatives.  We could raise the income tax.

        15     We could fuss around and maybe raise the

        16     property tax a little more.  We might use

        17     tolls on roads.

        18               Those are the kinds of things that

        19     you're thinking of?

        20               MR. SMITH:  Well, I think I'm a

        21     little more optimistic than that.  I think

        22     it's possible that the electronic age could



         1     actually see us moving back towards a smaller

         2     government.  And part of those Internet

         3     savings could be used to allow us to have a

         4     less -- a larger tax take.

         5               I think tax rates are -- don't have

         6     to be the size they are in America in the new

         7     economy we're moving into.  I think

         8     inherently the burden of collective goods

         9     could be less, because individuals will be

        10     able to do so much more in a world where

        11     transaction costs are dropping dramatically.

        12     And there's emerging literature out there

        13     that we can talk about, but it illustrates

        14     just how many areas we can substitute

        15     informational resources for physical

        16     resources.  And including in some of the

        17     goods that have historically been government:

        18     Environmental protection, fire protection,

        19     road maintenance -- road monitoring and so

        20     forth.

        21               And so I'm optimistic that we could

        22     have a smaller, better government, and less



         1     taxes at the same time.

         2               CHAIRMAN GILMORE:  Gene Lebrun?

         3               MR. LEBRUN:  I come from a state

         4     which does have a sales tax on services.  It

         5     has had for many, many years, including such

         6     things as attorney's fees.  This is the

         7     decision that the state of South Dakota made

         8     many years ago.

         9               That tax base, including taxes on

        10     services, has been broadened several times,

        11     and as a result of that there's been a

        12     substantial reduction in real estate taxes.

        13     So yes, sometimes when you do broaden the tax

        14     base, there is a offsetting reduction in

        15     other taxes.  Our state has chosen to reduce

        16     real estate taxes by broadening the sales tax

        17     on services.

        18               Now, if I as a lawyer, I'm writing

        19     a brief on a case and I want the expertise of

        20     a lawyer, let's say in California.  So I

        21     associate that California lawyer to help me

        22     write this brief to file in court in South



         1     Dakota, that California lawyer has to charge

         2     sales tax on his fee -- his or her fee.  If

         3     he doesn't charge it and collect it, I'm

         4     responsible for it.

         5               We have no problem with finding

         6     lawyers in other states, if they want to do

         7     business in South Dakota, to go ahead and

         8     recover a revenue stream from that business,

         9     to charge a sales tax and to pay it to the

        10     state of South Dakota.

        11               Now, what if that lawyer writes

        12     that brief and submits it to me over E-mail,

        13     over the Internet, rather than in hard copy?

        14     Should there be a distinction?  I don't think

        15     so.  I don't see why a digitalized brief done

        16     in California for service in South Dakota

        17     should be treated any differently than a hard

        18     copy brief.

        19               That again, though, I think, should

        20     be and is a decision of the individual

        21     states.  That California lawyer doesn't get

        22     to vote on the tax scheme in South Dakota,



         1     but he chooses to do business there because

         2     he's getting a revenue stream from it.

         3               When I checked into the hotel here

         4     in San Francisco, I noticed there's a 14 -- I

         5     think a 14 1/2 percent sales tax on my hotel

         6     room.  Now, I didn't get to vote on that.

         7     But if I want to come to San Francisco and

         8     enjoy the beautiful weather and the beautiful

         9     city of San Francisco, I voluntarily pay that

        10     tax.  I don't voluntarily, I have to pay it

        11     because I'm here.

        12               I just came back from Europe.  I

        13     was taxed on my food and my motel rooms and

        14     other things.  But if I chose to go to those

        15     countries and enjoy the benefits of those

        16     countries, I shouldn't be able to say, "I

        17     don't want to pay your taxes."

        18               You know, one of the first things

        19     that I learned when I was a political science

        20     major in college was the sovereignty of state

        21     governments, of national governments.  If I

        22     choose to go to Ireland and Ireland has a



         1     different speed limit than we have in South

         2     Dakota, I should have to obey that speed

         3     limit.  I should have to pay the taxes, if

         4     I'm going to enjoy my trip to Ireland.

         5               I think if we're going to retain

         6     the sovereignty of our individual states, as

         7     we've had under our Constitution, the states

         8     have the reserved powers, if a business wants

         9     to do business in South Dakota or California,

        10     they should have to abide by the laws of that

        11     state.  And I don't think it should make any

        12     difference whether it's a hard copy, a

        13     digitalized copy, or information.

        14               Thank you.

        15               CHAIRMAN GILMORE:  Mr. Sokul?

        16               MR. SOKUL:  Thank you, Governor.  I

        17     have a more, maybe speculative question with

        18     respect to the EU.  You've come to agreement

        19     on collection of taxes within the European

        20     Union -- VAT taxes -- for each other's

        21     countries.  But one of the advantages you've

        22     had is that every member state has a VAT.  In



         1     the United States, not every state has a

         2     sales tax.  I'm from New Hampshire which --

         3     originally from New Hampshire -- which

         4     doesn't have a sales tax.  Delna Jones is

         5     from Oregon, you know, Delaware -- that's two

         6     other states.  46, including the District,

         7     out of 51 state-level jurisdictions have a

         8     sales tax, but 5 don't.  And there are

         9     businesses in those states which don't deal

        10     with a sales tax, but under some people's

        11     view in the world, should have to deal with

        12     46 others.

        13               I often wonder how different this

        14     debate would be if it was 5 states had sales

        15     taxes and 46 didn't.  You know, what would

        16     the drive be then?  How important would the

        17     vote of the 5 be as compared with the vote of

        18     the 46?  We probably wouldn't be here, is one

        19     thing.

        20               So what do you think would have

        21     happened -- this is a speculative question.

        22     What do you think would have happened had one



         1     country, say France, not had a VAT and the

         2     other countries were trying to force it into

         3     this system, the French businesses into this

         4     system?

         5               As a follow-on, if we do come up

         6     with a collection system for our country

         7     and -- among the states and by some process;

         8     I'm not sure what it would be -- we reach an

         9     agreement with European Union, do you think

        10     the European Union's ready to force its

        11     businesses to collect state sales taxes for

        12     the U.S. states?

        13               MR. AUJEAN:  The principles agreed

        14     in Ottawa makes it clear that this is a

        15     question which should be dealt with the

        16     principles of taxation and consumption.  In

        17     such a system, there is certainly a big need

        18     for cooperation and mutual assistance between

        19     countries and between tax administrations.

        20     This is nothing new.  This has always

        21     existed, simply.  As we come to the world of

        22     digitized products, we should certainly come



         1     to the world of digitized taxation through

         2     mutual assistance and cooperation.

         3               So the need for reinforcement of

         4     cooperation has been quite clearly indicated

         5     in all the areas, and I think in the OECD

         6     already.  And we should base certainly a lot

         7     of activity on this cooperation, cooperation

         8     between tax administration and cooperation

         9     also between the business and the tax

        10     administrations.

        11               MR. SOKUL:  But that cooperation is

        12     based on the fact that every member country

        13     has a VAT.  Maybe if you imagined a world

        14     where France didn't have a VAT, what would

        15     your position be on cooperation then in terms

        16     of having the businesses of France collect

        17     taxes that they don't deal with for their own

        18     country?

        19               But maybe you can't answer my

        20     second question.  If the United States

        21     resolved the issue domestically, do you

        22     foresee the European Union agreeing to



         1     collect 46 state sales taxes, with the

         2     assumption being that we'll do it by source.

         3               MR. AUJEAN:  As I say, it would not

         4     be for the European Union to collect the

         5     taxes for the 46 states.  But it would be for

         6     these states to effectively have a system of

         7     voluntary compliance to make it easier for

         8     the European trader to effectively be part of

         9     that system.  And this is where certainly

        10     there is a need for general cooperation,

        11     designing systems of taxation which can

        12     enforce this principle of voluntary

        13     compliance.

        14               CHAIRMAN GILMORE:  Mr. Norquist?

        15               MR. NORQUIST:  Yeah.  I think

        16     Governor Leavitt was asking, gee, what would

        17     we do if we couldn't raise the same amount of

        18     money from certain revenues?  And I'm glad

        19     that Fred came up with a suggestion that

        20     maybe government shouldn't necessarily grow

        21     without limits.  And also that perhaps the

        22     new technologies that we look at, that have



         1     been so helpful for creating jobs and

         2     opportunities and reducing costs for

         3     businesses and for individuals all around the

         4     country, everybody finds that they have more

         5     ability to do more things, perhaps it's time

         6     to talk to state and local governments and

         7     suggest that they also should be reducing

         8     their cost to every other business in the

         9     country, and creating some of those

        10     productivities that the rest of the world is

        11     enacting.

        12               This is all an argument for not

        13     having taxes and spending continue to go out

        14     of line.  And then the question, can you

        15     produce the same quality of government for

        16     less spending?  I think if you look at the

        17     difference between the United States and

        18     Europe, which had similar levels of

        19     government spending back in the '70s and

        20     don't now, we see both higher growth and

        21     higher standards of living, and more

        22     opportunity is created in a country that has



         1     lower tax rates rather than the one with a

         2     minimum sales tax of 15 percent now.

         3               And there are two different

         4     directions that we can go as a country.  We

         5     can follow the path that Europe did, of

         6     centralizing our tax code, of harmonizing our

         7     tax code, of making the decisions for more

         8     taxes and higher taxes, rather than leaving

         9     decisions with individuals.  Or we -- and the

        10     path that Senator Hollings has put forward

        11     for us rather clearly in federal legislation.

        12     I'm glad he did, so that we can look at that

        13     discussion.  Do you want to put all the money

        14     in Washington and let it parcel out money to

        15     state and local governments or do we want to

        16     go in the path that we've taken in the United

        17     States -- and I hope that we'll stay on -- of

        18     allowing state and local governments to

        19     compete with each other, to provide the best

        20     quality government at the lowest cost and

        21     take advantage of the new technologies?

        22               I'm hopeful -- even the federal



         1     government has dropped spending as a

         2     percentage of the GNP over the last five

         3     years, from 21.5 percent down to 19.5

         4     percent.  I don't think that we miss the

         5     government that we don't have out of

         6     Washington.  We actually have more freedom

         7     and more wealth as a result of that.

         8               State and local government over the

         9     last 20 years has moved in the other

        10     direction, taken more resources from

        11     citizens.  Perhaps if they became as

        12     efficient -- towards efficiency as the feds

        13     have picked up, that we wouldn't have some of

        14     the problems that some politicians see in not

        15     having enough money to spend on things that

        16     they'd like to.

        17               CHAIRMAN GILMORE:  This may be

        18     tomorrow's speech.  We're coming to a close,

        19     Fred.  If you could keep it brief, I think

        20     we're about ready to stop and take a break.

        21     Go right ahead.

        22               MR. SMITH:  This is just -- I think



         1     I want to speak against harmonization,

         2     basically.  Because it seems to me -- this is

         3     a point that I obviously made inadequately,

         4     but there's a value of having competition

         5     between political jurisdictions, just like I

         6     think we all realize there's a value having

         7     competition between private individuals.

         8               South Dakota, as you know well, has

         9     become -- or was the center of credit cards

        10     in the world, because South Dakota tried

        11     something different that the other states

        12     didn't rush into.  California and Nevada have

        13     tensions because their tax rates are

        14     different, and that encourages California to

        15     think twice about how many people it wants to

        16     lose to Nevada and so forth.

        17               I think creative competition in the

        18     private sector and the political sector is

        19     one of the best ways to get a better world.

        20     I think harmonization seems to suggest that

        21     if everything works smoothly, there will be

        22     no incentives to be a bit perverse.  I think



         1     there really are.

         2               CHAIRMAN GILMORE:  Ladies and gentlemen,

         3     I think we've come to the end of our time.

         4     We can continue this.  We have another day

         5     and a half still to work on these issues.

         6               We also -- the next panel which is

         7     awaiting us is the presentation of tax

         8     proposals, which were solicited in New York

         9     and were requested pursuant to Federal 

        10     Register notice.

        11               So we have another panel that is

        12     coming.  Gentlemen, thank you very much.  You

        13     can tell that you have made a major

        14     contribution to the forward discussion of

        15     this panel.  I think it's a congressional

        16     charge that we examine the international

        17     issues.  You have helped us facilitate that,

        18     and I want to thank you and our federal

        19     representatives, especially, very much for

        20     what you have done today.

        21               Gentlemen, we will reconvene

        22     at 3:40.  Thank you.



         1                    (Recess)

         2               CHAIRMAN GILMORE:  As we begin to move

         3     closer in towards the fundamental tax issue

         4     on goods and services on the Internet, at the

         5     Commission's meeting in New York City,

         6     Governor Leavitt suggested that we should

         7     develop a list of criteria and ask the public

         8     to submit tax proposals responsive to the

         9     criteria.

        10               The full Commission agreed -- and

        11     we established a set of benchmarks that were

        12     deemed important -- to any tax treatment of

        13     electronic commerce.  The list of criteria

        14     reflects the priorities of the Commissioners

        15     as it was set down that day.  While each

        16     criteria is not to be considered a litmus

        17     test, each criteria is important to certain

        18     Commissioners as they evaluated each proposal

        19     that has been submitted.

        20               The Commission solicited proposals

        21     from the general public and received 37

        22     responses.  The report drafting subcommittee



         1     was tasked with reviewing the proposals and

         2     recommending those that are being presented

         3     at this meeting today.

         4               All of the proposals, however, are

         5     available electronically on the Commission's

         6     Web site, which is


         8               I want to thank everybody who took

         9     the time to prepare the proposals and to come

        10     and see us today.  All the proposals, whether

        11     selected for presentation today, all of them

        12     were thoughtful and creative.  The number and

        13     quality of the responses indicate that this

        14     Commission is, in fact, successfully engaging

        15     the public.

        16               Today and tomorrow we will hear and

        17     have considerable discussions about the

        18     various proposals.

        19               Additionally, there are many others

        20     in the room today who are intending to be on

        21     hand as experts, should individual

        22     Commissioners wish to ask them a question.  I



         1     think the format that we've really gotten

         2     down here is that any individual Commissioner

         3     who seeks an expert probably has them here

         4     and is aware that they are here.  A list of

         5     the attending experts is available on the

         6     Commissioners' Web site, and I want to thank

         7     each of the experts for joining us, as well

         8     as the individual people who are here today.

         9               So let's get started here.  The

        10     first group of proposals include the

        11     presentation of Internet tax elimination

        12     acts, submitted by Congressman John Kasich of

        13     Ohio, that will be presented today by Chris

        14     Wysocki, president of the Small Business

        15     Survival Committee.

        16               Welcome Chris, thank you for being

        17     here.  The E-Freedom Coalition's proposal, by

        18     Mr. Adam Thierer of the Heritage Foundation,

        19     on behalf of the E-Freedom Coalition.

        20     Welcome, glad you're here.  Saw you on

        21     C-SPAN; you were terrific.

        22               Uniform Jurisdictions Standard and



         1     a prohibition of discriminatory ad valorem

         2     taxation on interstate telecommunications, by

         3     Mr. Dean Andal, the California State Board of

         4     Equalization and a fellow Commissioner, who

         5     has indicated his desire to make his

         6     presentation from his Commissioner's chair.

         7               A proposal for state and local

         8     taxation of the telecommunications industry

         9     by Mr. Keith Landry, general attorney, Bell

        10     South, and Ms. Stacey Sprinkle, assistant

        11     vice president for tax, ComNet Cellular, on

        12     behalf of Air Touch, AllTell, AT&T, Bell

        13     Atlantic, Bell South, ComNet Cellular, Global

        14     Crossing, GTE, SBC, Sprint, US West and

        15     Western Wireless.

        16               So thank you all very much for

        17     being here, as well.

        18               A proposal for fostering the fast

        19     and efficient development and operating of

        20     Internet Web-hosting facilities, by

        21     Mr. John Morabito, the vice president

        22     of Federal, Legislative and Regulatory



         1     Affairs of Global Crossings.

         2               John, welcome, thank you very much.

         3     Now, ladies and gentlemen, I think these

         4     machines are pointing to someone besides just

         5     me.  So I would just remind you that we're

         6     going to ask each of you to go at about 10

         7     minutes.  There will be a warning on this, I

         8     think, that we'll just warn you when you're

         9     getting close, and then finally when we would

        10     ask you to stop.  The longer you go on -- if

        11     you can't yourself within 10 minutes, you're

        12     just taking away from the other presenters.

        13     So -- and Q&A time from the Commissioners.

        14               So thank you very much.  Let's

        15     begin with Chris Wysocki.

        16               MR. WYSOCKI:  Mr. Chairman,

        17     Commissioners, on behalf of the more

        18     than 50,000 small businessmen and women who

        19     make up the Small Business Survival

        20     Committee, I want to thank you for this

        21     opportunity to address the Advisory

        22     Commission on Electronic Commerce regarding



         1     Congressman John Kasichs Internet Tax

         2     Elimination Act.  My name is Chris Wysocki,

         3     and I am president of the Small Business

         4     Survival Committee, a small profit -- small,

         5     nonprofit advocacy organization representing

         6     the interests of entrepreneurs across

         7     America.

         8               The world is in the midst of a new

         9     age, and Americans are leading what is being

        10     called the digital revolution.  More than

        11     half of all American homes have personal

        12     computers today, and according to a

        13     Department of Commerce study, 32.7 percent of

        14     the U.S. population currently enjoys Internet

        15     access.  The ease and convenience of the

        16     Internet has truly been the cornerstone of an

        17     economic and cultural revolution that has

        18     brought people from across the nation and

        19     around the world together in a way that has

        20     never been done before.

        21               The growth of E-commerce on the

        22     Internet, and technological advances in



         1     general, have largely contributed to the

         2     economic growth we have seen over the past

         3     several years.  According to a recent report

         4     issued by the Department of Commerce, more

         5     than one-third of America's economic growth

         6     between 1995 and '98 can be attributed to

         7     information technology.  Consumers are

         8     clearly embracing and responding to the ease

         9     and convenience of electronic commerce, and

        10     small businessmen and women across America

        11     are working both hard and smart to meet an

        12     increased demand for new and exciting

        13     products.

        14               The growth of the Internet and

        15     E-commerce has made the legislation

        16     introduced by John Kasich essential to allow

        17     for future growth in America.  His

        18     legislation would specifically make the

        19     existing ban on Internet taxes permanent, and

        20     would also prevent state and local

        21     governments from imposing taxes on

        22     E-commerce.  The policy Mr. Kasich proposed



         1     will guarantee that the small business owner

         2     and entrepreneurial sector of our economy can

         3     continue creating new jobs, while at the same

         4     time, providing consumers with added benefits

         5     and convenience.  I strongly urge this body

         6     to adopt Mr. Kasich's legislation as part of

         7     your final recommendation.

         8               But first, let me take a few

         9     minutes to outline some of the broad

        10     principles SBSC believes should be considered

        11     and adopted by this group.

        12               First, we must recognize the

        13     importance of electronic commerce in the new

        14     digital economy.  Technology and the Internet

        15     have given millions of people around the

        16     country to strike out on their own and bring

        17     their entrepreneurial endeavors to the

        18     marketplace more quickly and efficiently than

        19     ever.  This has helped improve the financial

        20     future of these individuals, created more

        21     high-paying jobs and has added tremendously

        22     to America's economic growth and



         1     competitiveness in the global economy.

         2               In addition to the benefits to

         3     small business owners and entrepreneurs,

         4     consumers are greatly benefiting from the

         5     added efficiencies and convenience that

         6     E-commerce has brought to our lives.

         7     Allowing the taxation of E-commerce would

         8     jeopardize the growth of the new digital

         9     economy and hamper the ability of

        10     entrepreneurs across America to strike out

        11     and start a small business.

        12               The Internet and E-commerce are

        13     quickly becoming essential tools for people

        14     around America.  An estimated 81 percent of

        15     all small businesses have personal computers

        16     in their offices today, and according to a

        17     recent Bank One study, half of those

        18     companies with 10 or fewer employees with

        19     revenues between $50,000 and $1 million a

        20     year have Internet access, and 20 percent of

        21     those have their own Web sites.  The emerging

        22     digital economy will only drive this figure



         1     up in future years, and attempts to tax

         2     E-commerce will deal a potentially

         3     devastating blow to the future expansion of

         4     the small business community.

         5               We must also consider the harmful

         6     effects on the economy as a whole that would

         7     result from allowing states and local

         8     governments to tax E-commerce.  As University

         9     of Chicago economist Austan Goolsbee stated,

        10     "Applying existing sales taxes to Internet

        11     commerce might reduce the number of on-line

        12     buyers by up to 24 percent."  A market

        13     reduction of this magnitude would be a

        14     tremendous blow to our economy, which is

        15     becoming increasingly dependent on E-commerce

        16     for continued growth and prosperity.

        17               The rapid growth and popularity of

        18     E-commerce is undeniable.  In 1995 the

        19     digital economy was roughly $5.3 billion.

        20     In 1998 that figure jumped to around $301

        21     billion.  With 46 of the 50 states having

        22     reported budget surpluses last year, SBSC has



         1     not found any evidence that E-commerce is

         2     jeopardizing the ability of state and local

         3     governments to fund essential programs.

         4               A common mistake made by policy

         5     makers and politicians engaged in the

         6     discussion of taxing E-commerce is that such

         7     taxation is necessary to make up for lost

         8     revenue.  In preparing for today's testimony,

         9     I was unable to identify any lost revenue at

        10     all to state and local governments.  To the

        11     contrary, the data suggests that state and

        12     local governments are experiencing record

        13     levels of revenue.  A recent Investors 

        14     Business Daily editorial stated that state

        15     revenues have grown 227 percent between 1980

        16     and 1995, and local revenues have grown

        17     by 193 percent over that same period.

        18               According to the Kato Institute's

        19     fiscal policy analysts, Dean Stansel and

        20     Steven Moore, between 1992 and 1998 state tax

        21     revenues grew at nearly twice the rate of

        22     inflation and population growth.  In



         1     addition, a recent study conducted by Ernst &

         2     Young found that an on-line tax would have

         3     generated less than 0.1 percent of all state

         4     and local sales and use taxes collected.

         5               It's important to realize the power

         6     of the Internet when it comes to creating

         7     small businesses.  Not too long ago, starting

         8     a business took large sums of capital.

         9     Access to capital is not and never has been

        10     available to the vast majority of Americans.

        11     In the new digital world of technology and

        12     E-commerce, however, men and women have been

        13     able to combine their good ideas with their

        14     computer with Internet access to search for

        15     previously unavailable and distant markets.

        16     Hundreds of thousands of men and women across

        17     the United States have been able to start a

        18     small business or home office as a result of

        19     technology and E-commerce.

        20               The opportunities that exist for

        21     entrepreneurs have never been more prevalent.

        22     Small businesses that have been built around



         1     technology and E-commerce would be severely

         2     threatened if they were suddenly forced to

         3     collect and distribute sales taxes to the

         4     nearly 7,500 state and local jurisdictions

         5     across America that can impose such taxes.  A

         6     change like this would not only deal a

         7     significant blow to the productivity of small

         8     business, but SBSC believes it would

         9     significantly reduce the number of men and

        10     women who may consider starting their own

        11     company.

        12               According to Ernst & Young tax

        13     economists Robert Kline and Thomas Newbig,

        14     the compliance cost to small retailers for

        15     collecting sales taxes in all 46 states that

        16     imposed them would be roughly 87 percent of

        17     the taxes collected.

        18               However, this figure does not

        19     include the noneconomic cost of sales tax

        20     compliance.  What is largely immeasurable is

        21     the lost productivity.  Time spent filing

        22     forms, working with bureaucrats in distant



         1     areas of the country in collecting taxes for

         2     thousands of jurisdictions, could be much

         3     better spent finding new markets, hiring more

         4     people and expanding the small business.

         5               Representative Kasich's legislation

         6     is simple, and it is clear.  It makes the

         7     current moratorium on Internet taxes

         8     permanent and creates a certain future for

         9     E-commerce.

        10               Arguments that center on the harm

        11     E-commerce will bring to brick and mortar

        12     stores seem to ignore the fact that a new

        13     digital economy is emerging.  There has been

        14     a lot of recent rhetoric about the need to

        15     tax E-commerce as a way to level the playing

        16     field between traditional main street stores

        17     and E-commerce businesses that do not charge

        18     or collect a sales tax.

        19               SBSC believes that Main Street

        20     U.S.A. is not losing customers because of a

        21     tax-free E-commerce world.  Generally

        22     speaking, there is no real economic advantage



         1     to a consumer purchasing goods on-line versus

         2     going to a store and buying the same product.

         3     While a customer who walks into a store to

         4     buy a book must pay a sales tax, where the

         5     same customer could avoid paying sales taxes

         6     by ordering that book from an E-commerce

         7     store, Internet tax proponents conveniently

         8     overlook the fact that the customer who

         9     orders his or her book on-line must pay

        10     shipping to have that book delivered, and the

        11     money spent on shipping is generally more

        12     than the amount of sales tax collected from

        13     the customer.  A customer would spend

        14     hundreds of dollars at once to see any real

        15     price advantage in purchasing books on-line.

        16               It seems clear that supporters of

        17     Internet taxes are using the competitive

        18     disadvantage market in a somewhat

        19     disingenuous manner.  What advocates of

        20     Internet taxes really seem to want is a new

        21     source of revenue for state and local

        22     government.  This is despite the fact that



         1     states have enjoyed a $74 billion surplus

         2     over the last four years.  Technology and

         3     E-commerce are historic opportunities to be

         4     embraced rather than hampered.  At what other

         5     time in history could a mother living in

         6     rural Montana compete with the largest

         7     corporations in the world in a global

         8     economy?

         9               The new digital age is not an

        10     opportunity we can squander.  It has been a

        11     tremendous equalizer between large and small

        12     businesses.  Where large businesses could

        13     only compete in a global economy 10 years

        14     ago, the Internet and E-commerce have enabled

        15     anybody with an idea and a computer with

        16     Internet access to sell their product from

        17     anywhere to any nation in the world.

        18               As a final note, I would simply add

        19     that this commission has responsibility to

        20     craft a well-reasoned and thoughtful

        21     recommendation on policies that will direct

        22     the future of E-commerce.  Past tax and



         1     regulatory models that are increasingly

         2     obsolete will only serve to stifle the

         3     entrepreneurial spirit fueling our economy.

         4     Attempts to tax E-commerce will deal a

         5     devastating blow to the future of a new

         6     economy.

         7               I hope this Commission finds that

         8     any attempts to tax E-commerce will send a

         9     terrible signal to small businesses across

        10     America.  The burdens that would be imposed

        11     are simply unacceptable.

        12               With that, since my time is up,

        13     Mr. Chairman, I will close by just saying

        14     that I want to be -- I want to thank

        15     Congressman John Kasich for introducing the

        16     Internet Tax Elimination Act, and I look

        17     forward to any of your questions.

        18               CHAIRMAN GILMORE:  Thank you,

        19     Mr. Wysocki.  Mr. Thierer, 10 minutes.

        20               MR. THIERER:  Thank you.  Good

        21     afternoon.  My name is Adam Thierer.  I am

        22     the Walker Fellow on Economic Policy at the



         1     Heritage Foundation, where I've spent the

         2     past eight years researching and writing

         3     extensively on issues pertaining to industry

         4     regulation and deregulation, with a

         5     particular focus on communications and the

         6     Internet.

         7               Today I'm here to discuss with you

         8     the conclusions of my own research regarding

         9     the taxation of the Internet, and also to

        10     summarize the proposal constructed by the

        11     E-Freedom Coalition, to which I have

        12     contributed.

        13               The E-Freedom Coalition is an

        14     informal coalition of over 25 public policy

        15     research organizations, or think tanks,

        16     including both national and state-based

        17     organizations.  I should stress, however,

        18     that my testimony before you here today

        19     reflects my own views and not necessarily

        20     those of the Heritage Foundation or the

        21     entire E-Freedom Coalition.

        22               I'll begin my attempting to



         1     faithfully summarize the findings of the

         2     E-Freedom Coalition proposal to the

         3     Commission and then conclude with a few brief

         4     independent thoughts of my own regarding the

         5     National Governors Association's proposed

         6     plan, which I'm currently offering a

         7     comprehensive study of for the Heritage

         8     Foundation.

         9               Part One, Communications Taxes:  On

        10     November 10, the E-Freedom Coalition unveiled

        11     its proposal to the advisory Commission, in a

        12     national press club event in Washington.  The

        13     proposal can essentially be divided into two

        14     sections:  First, communications taxes, and

        15     secondly, sales tax issues related to the

        16     taxation of electronic commerce.

        17               Regarding general communication

        18     sector tax issues, the E-Freedom Coalition's

        19     message is simple.  The telecommunications

        20     industry is no longer being treated as a

        21     regulated monopoly, so we should stop taxing

        22     it as though it was.  That is, as competition



         1     comes to communications in our country, tax

         2     policies based upon the regulated monopoly

         3     model of the past must be radically reformed.

         4               Specifically, the E-Freedom

         5     Coalition proposed five specific types of

         6     communications industry taxes which should be

         7     reformed or abolished immediately.  I won't

         8     go into detail on them, because I know other

         9     presenters will talk about them, but just to

        10     mention them, they include, one, the 100 year

        11     old 3 percent federal excise tax on

        12     telecommunications; two, discriminatory ad valorem

        13     taxation of interstate telecommunication

        14     services; three, Internet tolls or new taxes

        15     and fees levied on telecommunications

        16     providers and their customers when cable is

        17     installed along highways and roads; four,

        18     high state and local telecommunications taxes

        19     in general, complicated auditing and filing

        20     procedures and so on; and fifth, Internet

        21     access taxes.

        22               The combined effect of these taxes



         1     is not only higher costs for companies and

         2     consumers, but perhaps more importantly, a

         3     roadblock to innovation and investment.  As

         4     Progress and Freedom Foundation President

         5     Jeffrey Eisenach has appropriately asked, "In

         6     a world in which building out

         7     telecommunications infrastructure is policy

         8     goal number one, why would we place

         9     discriminatory taxes on telecommunications?"

        10               In other words, if we want

        11     companies to offer innovative new

        12     communications services and develop and

        13     deploy high-speed broad-band networks, which

        14     the public and policy makers alike are

        15     clamoring for, then the Advisory Commission

        16     will need to adopt the tax reforms I have

        17     outlined.

        18               Secondly, moving on to this sales

        19     tax portion of the E-Freedom Coalition

        20     proposal, the plan essentially proposes two

        21     very simple things:  One, extend and make

        22     permanent the Internet Tax Freedom Act's



         1     prohibition on multiple and discriminatory

         2     taxation of electronic commerce, and, two,

         3     establish a clear nexus standard and set of

         4     definitions to determine when companies have

         5     sufficient physical presence such that they

         6     can be required by a state or locality to

         7     collect sales taxes.  In this regard, the

         8     E-Freedom proposal is similar to that put

         9     forward by Commission member Dean Andal.

        10               It is vital, I believe, that the

        11     advisory Commission endorse these two steps

        12     for a very simple reason.  It is the only

        13     plan that rests on sound legal and economic

        14     foundations.  Economically speaking, a

        15     permanent moratorium and firm nexus standard

        16     would remove the uncertainty which currently

        17     exists in this market regarding tax

        18     collection responsibilities.  It would also

        19     do so by prohibiting multiple and

        20     discriminatory taxation and making it clear

        21     that vendors of electronic commerce are

        22     required to collect sales taxes only in those



         1     states or localities where they have a clear,

         2     substantial physical presence.

         3               Moreover, only by keeping the lanes

         4     of interstate electronic commerce free of

         5     cumbersome taxes will America be able to

         6     remain a global leader in the information age

         7     and sustain our record level of economic

         8     growth overall, which has been fueled, in

         9     large part, by the dynamic developments

        10     within the high-tech sector.

        11               I should also add, as Chris

        12     mentioned, that it's the Internet's explosive

        13     growth which, in turn, has helped raise state

        14     and local budget surpluses to record levels

        15     in recent years.  Imposing burdensome tax

        16     collection responsibilities on the Internet

        17     could be the equivalent of shooting the goose

        18     that laid the golden egg by retarding

        19     economic activity in this sector and

        20     discouraging the job creation and business

        21     growth necessary to continue to reap higher

        22     and higher tax revenues for states and local



         1     governments.

         2               Legally speaking, this proposal is

         3     appropriate, because it is consistent with

         4     the constitutional framework put in place by

         5     the Founding Fathers, and then bolstered by

         6     the Supreme Court in a number of important

         7     decisions.  Multiple and discriminatory taxes

         8     on electronic commerce must be permanently

         9     prohibited to ensure the commercial union the

        10     founders enshrined in the Constitution

        11     remains free of unwarranted parochial

        12     interference.

        13               Sales tax collection

        14     responsibilities must continue to conform to

        15     constitutional nexus standards so that remote

        16     commerce is not burdened by extra-territorial

        17     taxation, and, more importantly, so that

        18     vigorous jurisdictional tax competition

        19     remains alive and well throughout the United

        20     States.

        21               Let me just conclude with a very

        22     few brief thoughts of my own about the



         1     proposal submitted to the Commission by the

         2     National Governor's Association, which I'm

         3     currently studying and about to issue a

         4     report on.  I believe there are some very

         5     serious problems with the NGA plan which I'd

         6     like to briefly outline to you, and then we

         7     can maybe talk about later in Q & A.

         8               I believe that in the prevailing

         9     legal and political climate the NGA plan is

        10     untenable for some of the very specific

        11     reasons that I outlined in my study.  Namely,

        12     one, I believe the NGA plan creates a de

        13     facto national sales tax cartel.  I believe

        14     it violates sacred constitutional first

        15     principles regarding tax fairness and

        16     commercial union.  I believe it upsets

        17     existing Supreme Court commercial

        18     jurisprudence.  It threatens America's

        19     federal structure of government by

        20     discouraging jurisdictional tax competition.

        21     It creates a rather untrustworthy trusted

        22     third-party tax collections system, which



         1     could very well compromise individual and

         2     corporate privacy.  It is quite complex and

         3     could be extremely costly to implement.  It

         4     is not voluntary, as the NGA claims.  I also

         5     fear that it is not compatible with emerging

         6     global norms, as well as the administration's

         7     proposed global-free trade zone for

         8     international commerce.

         9               Now, I must again stress that these

        10     conclusions are my own.  But I believe that

        11     with time, as the NGA proposal is more

        12     closely examined by others, that these flaws

        13     will become evident and the NGA will be

        14     forced to significantly revise or come to a

        15     compromise regarding their proposal.

        16               This is due, in large fact, to the

        17     fact that there is simply no logical reason

        18     to expect Congress to take the politically

        19     unpalatable step of altering existing nexus

        20     standards to give state and local governments

        21     the authority to impose sales tax collections

        22     duties on interstate commercial transactions.



         1     While the NGA apparently believes it can

         2     simply evade the will of Congress, ignore

         3     existing Supreme Court precedence, and

         4     unilaterally impose a new system on remote

         5     vendors, I believe they will be in for a

         6     bitter wake-up call when they are forced to

         7     fight a lengthy and losing court battle on

         8     this issue once again, as they have in the

         9     past with mail order.

        10               This may leave those who support

        11     the NGA plan, or proposals like it, to fear

        12     that no alternative plan is available, and

        13     that the Internet will escape all forms of

        14     taxation or tax schemes.  This is not

        15     necessarily the case.  In fact, state and

        16     local governments have in their power right

        17     now, even with current Supreme Court

        18     precedents in place, to tax sales of goods

        19     and services over the Internet which

        20     originate within their own state.  That is,

        21     state and local governments could immediately

        22     move to a uniform origin-based system of tax



         1     collection and abandon their current

         2     destination-based proposals and systems which

         3     create so many legal and political headaches,

         4     which we're debating here today.

         5               Under an origin-based system,

         6     simply stated, sales taxes would be levied at

         7     the source or point of sale instead of at the

         8     destination or point of consumption.  This

         9     would truly level the playing field by

        10     extending to all retailers a de facto

        11     origin-based sales tax system that currently

        12     applies to bricks and mortar retailers within

        13     each state and locality, who are required

        14     only to collect taxes for their home state

        15     regardless of where their customers reside.

        16               By contrast, the NGA plan

        17     discriminates against remote sellers by

        18     placing unique requirements on them that do

        19     not apply to traditional bricks and mortar

        20     retailers.  In other words, the NGA's playing

        21     field is anything but level.

        22               By contrast, an origin-based



         1     system, just to summarize, would solve

         2     virtually all these problems, since it would,

         3     in my opinion:  One, eliminate any threat of

         4     multiple or discriminatory taxation; two,

         5     minimize collection burdens; three, conform

         6     to emerging global norms; four, preserve

         7     local jurisdictional tax rights; five, again

         8     level the playing field by requiring only the

         9     same tax rate be imposed on all carriers --

        10     or for vendors; six, respect buyers' privacy

        11     rights; seven, be constitutionally

        12     permissible; and eight, respect federalism

        13     principles and preserve jurisdictional tax

        14     competition.

        15               To conclude, I should just say that

        16     it is probably also the only most politically

        17     sensible option available, since the courts

        18     and Congress are unlikely to change existing

        19     standards in this field.  To the extent a

        20     compromise position is available, therefore,

        21     to the Commission, I personally believe it

        22     involves a move towards an origin-based



         1     system of sales tax collection.

         2               I should stress again, however,

         3     that these views regarding both the NGA

         4     proposal and an origin-based alternative to

         5     it, are entirely my own and not necessarily

         6     those of the entire E-Freedom Coalition.

         7               Thank you again for the opportunity

         8     to make my views and recommendations to the

         9     coalition -- of the E-Freedom Coalition

        10     known, and I'd be happy to take any questions

        11     when time allows.  Thank you.

        12               CHAIRMAN GILMORE:  Thank you,

        13     Mr. Thierer.  Mr. Andal, you have two

        14     proposals that you filed with the Commission

        15     pursuant to the Federal Register.  I'm going

        16     to ask you to go through both proposals and

        17     give you the floor to do that now, but please

        18     expedite.  Thank you.

        19               MR. ANDAL:  All right.  I wouldn't

        20     think of being other than brief.

        21               The first proposal is much more

        22     detailed, and I'll use the 10 minutes for



         1     that.  I don't think the second, the Four-R

         2     Act proposal will require but a few minutes,

         3     so I won't be using the entire 10 minutes on

         4     that.

         5               My proposal was given the ultimate

         6     insult this morning by Commissioner Sokul,

         7     and that's that it was a moderate proposal.

         8     I'm not used to being called a moderate.

         9     It's deeply offensive to me, I might add.

        10     But it does make an effort to do something

        11     different than the 20 year tax debate that's

        12     been going on in our court systems, in

        13     administrative tax appeals throughout the

        14     state, in Congress, to try to solve the

        15     litigation, the complexity, the compliance

        16     cost of nexus arguments throughout the

        17     country.

        18               The other approaches have been

        19     tried.  Overturning Quill has been introduced

        20     by former Senator Dale Bumpers many times.

        21     One year he couldn't even get it out of his

        22     own committee, and it has failed over and



         1     over and over again.  Now, the courts have

         2     also not been willing to overturn Quill, and,

         3     plus, the physical presence test has remained

         4     in force throughout all those debates.  But

         5     the states continue to pursue theories that

         6     try to break the physical presence test.

         7               I think that what is needed -- I

         8     also think that it will become apparent that

         9     the NGA software proposal is also -- creates

        10     more problems than it solves, but I'll leave

        11     that until tomorrow.  My proposal builds

        12     around substantial physical presence.  It

        13     establishes a series of safe harbors, it

        14     codifies Quill, the Supreme Court decision,

        15     and it also applies a little broader to

        16     Public Law 86272, which has done a lot of

        17     good in resolving business activity, a

        18     portion that nexus questions over the years.

        19               My proposal does it in a unified --

        20     a unified way.  In other words, the same

        21     nexus standard and the same safe harbor from

        22     nexus that you would have for sales tax



         1     collection purposes, would also exist for

         2     business activity, a portion of nexus

         3     purposes.  We use the same safe harbors, we

         4     provide a uniform proposal, and, in a sense,

         5     are combining most of the principles of Quill

         6     with Public Law 86272.

         7               The idea is there is that we need a

         8     bright-line test.  I think part of what

         9     hounds this Commission is our different views

        10     of what the problem is.  Some believe that

        11     there is going to be this mass exodus of tax

        12     revenue off onto the net that is nontaxable.

        13     Others believe that the problem is

        14     complexity, litigation and compliance costs.

        15     I fall into that camp, and I think there are

        16     tangible ways, pragmatic ways, of taking the

        17     principles of existing law and solving those

        18     problems, creating a bright line test.

        19               I'm going to run through the seven

        20     safe harbors that I envision.  One is order

        21     solicitation.  If you do nothing other than

        22     solicit an order in a state, that's not



         1     substantial physical presence.  If you have

         2     nothing but intangible assets in a state --

         3     and I'll list those:  Patents, copyrights,

         4     trademarks, logos, security contracts, money,

         5     deposits, electronic or digital signals, or

         6     Web pages -- that's not enough to create

         7     physical presence under my proposal.

         8               Having a Web page is not enough to

         9     create physical presence because, as we know,

        10     a Web page can be almost anywhere, and that

        11     does not create substantial physical presence

        12     under my proposal.  Using an ISP, an Internet

        13     Service Provider, does not create physical

        14     presence.  Using a telecommunications

        15     provider, using the phones, that does not

        16     create physical presence.  Affiliation with a

        17     person that's not an agent of the company, a

        18     consultant, does not create physical

        19     presence, and warranty or repair.

        20               Now, you'll notice there are

        21     arguments over nexus that are included on my

        22     list, and, I think, create physical presence.



         1     One of those, for instance, is fulfillment

         2     contracts where, for instance, you order over

         3     the -- you order over the net, but you want

         4     to bring it back.  If that occurs in the

         5     state that wants to tax you, that will create

         6     nexus.  So there -- my list is not absolute.

         7               It takes some of the real

         8     controversies that have been occurring in

         9     administrative courts in all 46 states, and

        10     in federal courts, and tries to resolve

        11     those, creating a bright line.  I sincerely

        12     doubt -- even though I know there's

        13     substantial opposition to my proposal on the

        14     Commission -- I sincerely doubt, if we went

        15     around the room, that Commissioners would

        16     disagree with this entire list.  My suspicion

        17     is that you would agree with some.  In

        18     California, for instance, we've specifically

        19     taken Web page off the table.  Many of these

        20     things are existing law in those 46 states.

        21               My proposal would provide clarity

        22     for income tax apportionment nexus cases.  In



         1     other words, we know exactly what's nexus,

         2     exactly what's not.  We pick up and build on

         3     Supreme Court cases.  We're not appending any

         4     of the court's decisions, and we're building

         5     on those principles, mostly in Quill and

         6     Complete Auto Transit.

         7               The proposal is constitutional,

         8     which is something that some of the proposals

         9     can't say, and I think would survive a court

        10     test.  It would dramatically decrease

        11     litigation related to Internet nexus issues,

        12     and it works within the framework of existing

        13     federal statutory law, because it builds

        14     directly from Public Law 86272.

        15               I think that my proposal is the

        16     only workable way of solving the real problem

        17     that we're talking about here.  The real

        18     problem being complexity, litigation,

        19     compliance cost.

        20               The other two problems, I'm

        21     astonished that we're still talking about.

        22     Those are revenue loss and the so- called



         1     uneven playing field.

         2               Revenue loss is just an

         3     extraordinary thing for a Californian to even

         4     imagine these days.  I am on the Board of

         5     Equalization in California.  We collect $27

         6     billion worth of sales tax.  We do that from

         7     basically traditional retailers.  We don't

         8     tax services, we do not -- and we also have

         9     probably the most Internet tax-friendly laws

        10     of any state in the country vis-a-vis the

        11     sales tax.

        12               While we're doing that -- the

        13     receipts aren't in yet, and I'm hoping you

        14     all shop while you're here in California,

        15     you'll help both Willie Brown and the state

        16     with its funding obligations.  But we are

        17     projected to have a rate of increase in our

        18     sales tax this year of 9.5 percent.  Adjusted

        19     for inflation that's the highest increase in

        20     sales tax in one year in California history.

        21               So in the very state where we have

        22     more Internet users than anywhere else in the



         1     world -- we have more electronic commerce

         2     transactions than anywhere else in the world.

         3     We have the most Internet tax-friendly laws

         4     vis-a- vise the sales tax.  You would think

         5     if there's a problem with revenue drain it

         6     would show up here.

         7               In fact, the opposite is happening.

         8     We have our historic high sales tax year this

         9     year.  So I just don't buy it.  This kind of

        10     analysis could be done in almost every state

        11     in the country right now, and there is no

        12     evidence of significant revenue loss.

        13               I will alter my comment somewhat in

        14     saying that I think there are some things

        15     that produced tax revenue in the past that

        16     will not in the future.  But they're modest,

        17     and I'll give you an example, back to Mayor

        18     Kirk's Lion King example.

        19               We currently buy CDs, music CDs.

        20     That's how most people buy their music now.

        21     It's a physical product, it's tangible,

        22     personal property.  When we buy it in



         1     California we pay a sales tax on it.  But in

         2     the very near future people are going to be

         3     downloading those products.  It's quicker,

         4     and it will be tax-free, because it's

         5     digitally transferred.

         6               As a result of that, there a

         7     handful of products that there definitely

         8     will be a tax loss from.  But they're so

         9     modest, given the gains we're making in

        10     California both on an increase in our

        11     traditional sales tax base and boat-loads

        12     full of capital gains tax from our income tax

        13     system.  We have over $2 billion more in

        14     California this year than we expected from

        15     our bank and corporate tax, largely because

        16     of Internet-related businesses producing more

        17     income.  It's being taxed, and we pick it up

        18     through a different tax formula.

        19               Then, finally, I wanted to deal

        20     with the uneven playing field.  I find this

        21     the most remarkable argument of all.  Almost

        22     every state that has a sales tax specifically



         1     exempts sales for export.  That's a great

         2     idea.  I favor that.  But it is clearly an

         3     uneven playing field.  If you're in

         4     California and you produce a product and you

         5     sell it in Utah or Virginia or some other

         6     country, you do not have to pay sales tax on

         7     it in California.  That encourages exports

         8     from California, and it's good policy for

         9     California.  But it also is clearly an uneven

        10     playing field.  If you're in Utah and the

        11     sales tax wasn't paid before you went, then

        12     you have an advantage.

        13               The sales tax system is loaded full

        14     of those uneven playing fields.  Shipping

        15     costs are eating up any of the tax advantage

        16     that you incur.

        17               So -- I'm getting the hook on this

        18     proposal, but my bottom line is, I think my

        19     proposal offers the one legitimate solution

        20     to solving problems:  Less litigation, less

        21     costs, less compliance burden, and I don't

        22     believe there will be any significant revenue



         1     loss, because it is mostly existing law.

         2               I need another green light here.

         3               MR. POTTRUCK:  Can we take a vote?

         4               CHAIRMAN GILMORE:  We can double-back to

         5     Dean Andal, or just let him hold forth for a

         6     few more minutes on his second proposal.

         7               MS. ANDAL:  It is -- it won't take

         8     as long.

         9               CHAIRMAN GILMORE:  Without objection,

        10     we'll give him about three or four minutes,

        11     or something like that, for his second -- if

        12     there's objection, we'll double-back and

        13     give -- I don't know, whatever.

        14               Go ahead, Dean, for a few minutes,

        15     if you would, please.

        16               MR. ANDAL:  The easiest way to

        17     explain this, in our New York meeting -- I

        18     had really lost touch with these subjects

        19     until the New York meeting.  One of the

        20     testimonies we were offered there was by a

        21     group called COST, and they did a study of

        22     telecommunications taxes throughout the



         1     country.

         2               It reminded me of a project I

         3     worked on in California several years ago to

         4     try to sort out what's happening when you're

         5     having the convergence of formerly separate

         6     businesses -- cable television, long distance

         7     telephone, LECs -- local exchange carriers --

         8     satellite dishes -- and they're all merging

         9     into the same business.  They're all going to

        10     be providing the same services.  They all had

        11     different tax formulas, and they still do in

        12     California, and it's something we need to

        13     work on.

        14               But I strongly believe that we need

        15     a Four-R Act for telecommunications.  Four-R

        16     Act is basically a railroad device, and that

        17     says that the railroad's property cannot be

        18     taxed at a greater level than other

        19     businesses in your state.  In other words,

        20     you can't reach out and tax the railroad's

        21     property in your state at a higher rate just

        22     because they don't vote there and they don't



         1     have a presence in your political system.

         2               That was designed to prevent states

         3     from harming railroad transport between the

         4     state and harming interstate commerce.

         5               I think that we need to do that for

         6     telecommunications.  The COST study brought

         7     this home.  There are several states that tax

         8     telecommunications property at a higher rate

         9     than other businesses within their state, and

        10     those were listed.  California actually was

        11     not listed, but does do something different.

        12     In California, most property is assessed by

        13     local county assessors, and they get

        14     Proposition 13 protection.  As a result of

        15     that, they're taxed at a base-year value

        16     plus -- at 1 percent -- plus up to a 2

        17     percent increase every year.  So they're not

        18     taxed at market value, and over time you gain

        19     an advantage.

        20               Telecommunications companies are

        21     state-assessed, actually by the Board of

        22     Equalization.  We have one day every year,



         1     it's a $61 billion day, where we tax all the

         2     property of the state assessees.  They are

         3     taxed at market value.  They receive no

         4     Proposition 13 protection.  What that means

         5     is, companies that are not in

         6     telecommunication, their capital is being

         7     taxed at a higher rate than companies that

         8     are not involved in telecommunications.

         9               I think that is a crazy thing to do

        10     when we expect telecommunications providers

        11     to invest more in the Internet backbone, lay

        12     more fiber optics line, add more switching

        13     stations, have more capital investment so

        14     that we can grow the Internet.  At the same

        15     time, we disproportionately and

        16     discriminatorily tax their property at a rate

        17     that other businesses in those states do not.

        18               So my proposal, if enacted by

        19     Congress, would simply state that every state

        20     in the country could not go higher as far as

        21     the property tax on telecommunications than

        22     they do on other businesses in their state.



         1               That's all I have to offer.

         2               CHAIRMAN GILMORE:  Dean, thank you very

         3     much.  Let's see here -- Mr. Landry and

         4     Ms. Sprinkle?  Mr. Andal had two proposals in

         5     one person, you have one proposal in two

         6     people.  So I would ask you, if you could, to

         7     divide your 10 minutes, and the floor is

         8     yours.

         9               MR. LANDRY:  Good afternoon,

        10     Mr. Chairman and members of the Commission.

        11     My name is Keith Landry.  I'm an attorney

        12     with Bell South Corporation.  To my right is

        13     Stacey Sprinkle, the assistant vice president

        14     of tax for ComNet Cellular.  Stacey is also

        15     the vice chairperson of the Wireless Tax

        16     Group, and represented that organization in

        17     the NTA's telecommunications and electronic

        18     commerce tax project.

        19               We're here today representing a

        20     coalition of telecommunications companies.

        21     That includes our own companies, as well as

        22     Air Touch, AllTell, AT&T, Bell Atlantic,



         1     Global Crossing, GTE, SPC, Sprint, U.S. West,

         2     and Western Wireless.  On behalf of all of

         3     these companies we sincerely appreciate the

         4     opportunity to speak to you today.

         5               The extremely onerous

         6     administrative and high tax burden faced by

         7     telecommunications companies and their

         8     customers in the state and local tax area has

         9     been well documented, most recently by the

        10     comprehensive 50-state study and report on

        11     telecommunications taxes that was presented

        12     to the Commission at its last meeting in New

        13     York by the Committee on State Taxation, as

        14     Commissioner Andal referred to.

        15               In addition, a number of states

        16     have conducted their own studies on

        17     telecommunications taxes, such as Florida and

        18     New York.  There is no dispute that reform is

        19     needed in the state and local taxation of

        20     telecommunications, and there's little if any

        21     disagreement over the ultimate objective of

        22     that reform.  Namely, substantially simplify



         1     the tax system and eliminate the disparity in

         2     tax burdens between the telecommunications

         3     industry and other competitive industries.

         4     The only question is, how do we get there?

         5               Our coalition has submitted what we

         6     believe to be a sound and rational process

         7     for achieving the fundamental tax reform

         8     objectives we all agree on within a

         9     reasonable period of time and, hopefully,

        10     without the need for substantial federal

        11     intervention, but rather through the

        12     cooperation of the industry and state and

        13     local governments.

        14               Our proposal has two basic

        15     elements:  Simplification and the phase-out

        16     of discriminatory treatment.  I'll briefly

        17     outline the simplification element, and then

        18     Stacey will explain our recommendations for

        19     phasing out discriminatory taxes, and the

        20     specific action that we're requesting the

        21     Commission to take.

        22               The simplification portion of our



         1     proposal is in the form of two alternatives.

         2     The first, Option A, is intended primarily

         3     for states in which local governments do not

         4     currently tax telecommunication service --

         5     services, although it's not necessarily

         6     limited to those states.  The hallmark of

         7     this option is a single state level tax on

         8     telecommunications, such as the state sales

         9     tax, part of which could be distributed to

        10     local governments.

        11               From the industry standpoint, this,

        12     of course, is the ideal situation, because it

        13     necessarily results in companies filing only

        14     one tax return in the state and being subject

        15     to only one audit.  As part of this

        16     alternative, it's also recommended that

        17     states adopt nationwide uniform definitions

        18     of terms, such as local telephone service,

        19     mobile telephone service, et cetera.  This

        20     will greatly reduce the number of disputes

        21     over what is and what is not taxable.

        22               In addition, we recommend adoption



         1     by the states of a uniform method of sourcing

         2     telecommunication services which will reduce

         3     the compliance burden and audit exposure

         4     currently faced by carriers, as well as

         5     eliminate the possibility of more than one

         6     state asserting a claim for tax on the same

         7     transaction.

         8               Finally, we recommend that any

         9     changes in the tax rate or the tax base

        10     become effective no earlier than 120 days

        11     after enactment in order to allow enough time

        12     to implement any necessary changes to billing

        13     and accounting systems.

        14               The other simplification model

        15     offered by this proposal, Option B, is

        16     designed for states in which local

        17     jurisdictions are currently authorized to

        18     impose telecommunications taxes.  Given the

        19     burden of complying with the tremendous

        20     number of local taxes throughout the country,

        21     we believe that it's reasonable to try to

        22     avoid increasing that number.  But we



         1     recognize that it would be much more

         2     difficult, primarily because of budgetary

         3     concerns and issues of local autonomy, to

         4     curtail the taxing authority that many local

         5     governments already possess.  In addition, we

         6     feel that it's important to minimize the

         7     possibility of tax increases to customers not

         8     currently paying local taxes.

         9               Therefore, Option B would permit

        10     local governments currently authorized to

        11     impose taxes to continue to do so under

        12     traditions designed to ensure that the

        13     additional compliance burdens are manageable

        14     and that carriers are protected from

        15     competing claims.  This option essentially

        16     includes the same features as Option A,

        17     except that local governments currently

        18     authorized to impose tax would be permitted

        19     to impose no more than one tax per local

        20     jurisdiction on the same tax base as the

        21     state level tax.  Any limitations on the

        22     rates of these local option taxes would



         1     continue to be governed by state law.

         2               We also recommend that exemptions

         3     be the same for the state and all local

         4     taxes, that compliance be through a single

         5     unified return and payment at the state

         6     level, and that unified audits be conducted

         7     by the appropriate state administrative

         8     agency.

         9               Under this option, we're also

        10     suggesting that the state would maintain

        11     databases that would provide carriers with

        12     the rates of all local taxes and the correct

        13     local jurisdiction corresponding to each

        14     address -- street address within the state.

        15     Some aspects of these databases could be

        16     patterned after the database contained in the

        17     Mobile Telecommunications Sourcing Act, which

        18     is currently being considered by Congress and

        19     which has been reviewed and approved by the

        20     wireless industry, as well the number of

        21     organizations representing state and local

        22     government.  Carriers would be entitled to



         1     rely on these databases and would be held

         2     harmless for rate or sourcing errors

         3     attributable to the information contained in

         4     the databases.

         5               Finally, because of the additional

         6     administrative burden and cost of complying

         7     with local taxes, we have included in this

         8     option a recommendation that carriers be

         9     afforded some level of vendor compensation to

        10     be taken as a credit against tax when filing

        11     the return.

        12               That is our simplification plan in

        13     a nutshell.  We believe that it is a fair and

        14     reasonable means of achieving many of the tax

        15     simplification objectives that we all agree

        16     are needed in the area of telecommunications

        17     taxes and that it will ultimately produce

        18     substantial administrative benefits and

        19     efficiencies to state and local governments,

        20     as well.

        21               Now, I'm going to let Stacey

        22     outline our proposal for phasing out



         1     discrimination, but I'll be happy to answer

         2     any questions at the end of the

         3     presentations.

         4               MS. SPRINKLE:  Thank you, Keith.

         5     The second part of our proposal deals with

         6     the discriminatory level of taxation

         7     currently imposed on the telecommunications

         8     industry.  Now we've had several panelists

         9     that have already referred to that and have

        10     also referenced the cost study that was

        11     presented to this Commission in September.

        12               I think one of the things that we

        13     need to keep in mind is that the structure

        14     that applies today definitely migrated from

        15     an era when telecommunications was an

        16     industry that was a rate-regulated

        17     monopolistic utility.  That isn't the case

        18     today.  We are migrating to a competitive

        19     environment and because of the underlying

        20     importance that telecommunications has to the

        21     Internet and electronic commerce,

        22     telecommunication companies and their



         1     services should no longer continue to bear a

         2     greater burden of state and local taxation.

         3               To that resolve, we have pretty

         4     much highlighted three areas of reforms that

         5     need to be considered in trying to reduce the

         6     discriminatory level of taxation that

         7     telecommunication companies pay.

         8               First, in the transaction tax area,

         9     we need to isolate and bring down

        10     telecommunication rates that are higher than

        11     that applied to general business.  In

        12     addition to that we need to identify and

        13     isolate specific targeted taxes that are only

        14     applied to the telecommunication industry and

        15     eliminate those.

        16               In the property tax area, we also

        17     need to look at reducement of the assessment

        18     ratios and the tax rates that Commissioner

        19     Andal alluded to, but just as important we

        20     need to look at the valuation tools that are

        21     being used by state and local governments

        22     today and ensure that the methods that we are



         1     being applied to telecommunication companies

         2     is similar to that applied to other

         3     commercial and industrial businesses, as

         4     well.

         5               This would also take into

         6     consideration, then, the types of property

         7     that could be taxed, so that the

         8     telecommunications property being taxed is

         9     also on the same playing field as other

        10     commercial and industrial business.

        11               The third area of reform is the tax

        12     treatment of business inputs.  Many states

        13     today already exempt various equipment that

        14     companies use, and we're asking that the

        15     exemption be applied to telecommunications

        16     companies, as well.  What this will do is

        17     help avoid the pyramiding of taxes that may

        18     exist today, as well as to continue to

        19     encourage development of the physical

        20     infrastructure used to support the Internet.

        21               I think it's important to note that

        22     at this point in our proposal we are not



         1     seeking a federal legislation mandate to

         2     implement these reform measures.  What we are

         3     proposing to do instead is to work with each

         4     affected state and local government and try

         5     to tailor fit the reform needed for each

         6     jurisdiction.

         7               We've had positive experiences in

         8     the past.  As Keith referenced the Mobile

         9     Telecommunications Sourcing Act, was a joint

        10     venture and we believe that the resultant

        11     outcome was mutually beneficial to both sides

        12     and that there was productive support by

        13     working together to reach that resolve.

        14               Most importantly, too, I think, is

        15     that it needs to be pointed out that I think

        16     a problem has been clearly identified.  That

        17     the telecommunications industry is very

        18     heavily taxed and that there is a lot of

        19     administrative burden currently borne by that

        20     industry.  I think what we're asking for

        21     today is a solution to that problem versus

        22     determining whether another problem exists in



         1     that industry.

         2               So to that end, what we are

         3     specifically asking the Advisory Commission

         4     on Electronic Commerce to do is provide an

         5     endorsement for the reform measures that we

         6     have outlined for you today.  Additionally,

         7     we are asking that you ask Congress to pass a

         8     resolution encouraging state and local

         9     government and industry representatives to

        10     work towards a resolve of these problems, as

        11     well as providing the resources of federal

        12     agencies, if necessary.

        13               Third, we would ask that you

        14     recommend to Congress to enact a law to

        15     establish a review commission, that after a

        16     period of three years would analyze the

        17     effect of state and local government and

        18     industries to work towards accomplishing the

        19     reform measures that we have proposed here

        20     today.

        21               We have considered these reform

        22     measures and we believe that this would bring



         1     substantial simplification to the

         2     telecommunications industry, while also

         3     recognizing the legitimate that local

         4     governments play within our national system.

         5               Additionally, we're working towards

         6     a resolve to try to eliminate the

         7     discriminatory taxation that we believe is no

         8     longer relevant to a system that is a

         9     competitive industry.

        10               So, with that, thank you again for

        11     the opportunity to present this proposal, and

        12     we would be happy to answer any questions at

        13     the end.

        14               CHAIRMAN GILMORE:  Thank you,

        15     Ms. Sprinkle, Mr. Landry.  Last, but not

        16     least, Mr. Morabito?  Is that right?  It's

        17     close.

        18               MR. MORABITO:  Thank you,

        19     Mr. Chairman and Commissioners for inviting

        20     Global Crossing to testify today.  We have a

        21     unique proposal and we greatly appreciate the

        22     opportunity to share our views with you.



         1               By way of background, Global

         2     Crossing is a full-service, all-distance,

         3     telecommunications Internet service provider.

         4     We offer services both domestically and

         5     internationally, and we're building the

         6     world's first global fiber-optic network.  We

         7     are also constructing data centers that will

         8     serve as the electronic hubs around which the

         9     Internet operates.  These data centers, or

        10     Web-hosting facilities, are the bridge that

        11     connect content providers to end users.

        12               Inside the facilities are the

        13     necessary servers and routers that are used

        14     to store and retrieve information on the

        15     Internet.  Walking through a data center is

        16     like walking through an electronic mall where

        17     companies such as Yahoo, The Motley Fool and

        18     E-Toys offer products and services from

        19     servers that sit side-by-side.  The demand

        20     for Web-hosting facilities continues to grow

        21     and the market for such services is highly

        22     competitive.



         1               Overall, the Web-hosting industry

         2     is expected to grow from $2 billion in 1999

         3     to almost $15 billion in 2003.  To date,

         4     Global Crossing has constructed Web-hosting

         5     facilities in four states and two foreign

         6     countries.

         7               With this background, it's

         8     important to recognize the vital role that

         9     Web hosting will play in electronic commerce

        10     and our nation's economy.  The Web-hosting

        11     industry represents part of the foundation

        12     upon which electronic commerce is built.

        13     Vendors, large and small alike, need the

        14     redundancy in power, redundancy in

        15     connectivity, the physical security, and the

        16     technical expertise to make their businesses

        17     reliable and accessible to customers.

        18               The converse is also true.  Without

        19     Web hosting we would likely see a reduction

        20     in on-line consumer confidence, because the

        21     vendors Web sites would not be as fast,

        22     secure, or reliable.  To build on this



         1     foundation we are proposing a modest way to

         2     reduce the cost of Web-hosting operations in

         3     the United States.

         4               The proposal would impose a

         5     moratorium on sales and use taxes associated

         6     with the construction and operation of

         7     Web-hosting facilities.  The proposal also

         8     seeks to impose a moratorium on property

         9     taxes associated with the operation of

        10     Web-hosting facilities.

        11               In practical terms, what this means

        12     is that the raw materials used to construct a

        13     Web-hosting facility, such as the bricks,

        14     mortar, alarm systems, bullet and explosion

        15     proof barriers, specialized vapor barriers,

        16     and other basic materials would be

        17     temporarily exempt from sales and use

        18     taxation.  It also means that both real and

        19     personal property associated with the

        20     operation of a Web-hosting facility would be

        21     temporarily exempt.

        22               Other tax incentives may also be



         1     needed to encourage the deployment and

         2     operation of these sites.  A moratorium of

         3     this nature will provide the proper incentive

         4     to build the facility in a particular state,

         5     thereby allowing for the possibility that Web

         6     site customers will choose that state for

         7     their business.

         8               In addition, the proposal provides

         9     a proper incentive for Web-hosting facilities

        10     to be built in the United States, as opposed

        11     to overseas.

        12               In addition, this proposal will

        13     help spur investment in the United States,

        14     and it's the type of investment that is

        15     necessary to sustain the information economy.

        16     In addition to the current rust-belt

        17     initiatives that try to retain manufacturing

        18     and industrial jobs, government should find

        19     ways to create economic magnets in their

        20     states for purposes of benefiting the

        21     information economy.  Web-hosting facilities

        22     serve as such magnets.



         1               The decision to site a facility

         2     means millions of dollars in direct

         3     investment to a community, to rental fees,

         4     the purchase of sophisticated computer

         5     equipment, and new jobs.  Web-hosting

         6     facilities also bring collateral benefits to

         7     a community when customers commit significant

         8     resources, such as purchasing hardware,

         9     software, and hiring full-time technicians

        10     and programmers to work in and around the

        11     Web-hosting site.

        12               In Chicago alone, we estimate more

        13     than $125 million will be invested either

        14     directly or collaterally in the local

        15     community.

        16               Finally, we can't underestimate the

        17     revenue generated as a result of Web-hosting

        18     facilities.  A significant portion of the

        19     trillion dollar estimates that E-commerce

        20     will be generated as a result of the traffic

        21     originated at Web-hosting facilities in the

        22     United States.



         1               In conclusion, we hope that the

         2     Commission will view our proposal favorably

         3     and make the appropriate recommendations to

         4     Congress.

         5               I'd like to thank the Chairman for

         6     his leadership on this issue and look forward

         7     to working with him and the other

         8     Commissioners as we move forward.

         9               CHAIRMAN GILMORE:  Thank you,

        10     Mr. Morabito.  Members of the Commission, the

        11     agenda has the floor open until about 6:00,

        12     so the floor is open for any questions or

        13     comments that anybody would care to make.  We

        14     have plenty of time.

        15               Mr. Pottruck?

        16               MR. POTTRUCK:  I have a question

        17     for Mr. Morabito.  Don't states already have

        18     the right to do exactly what you're

        19     suggesting, to create a tax exemption for Web

        20     hosting in their state if they so choose to?

        21     To attract economic development exactly the

        22     way you've described?  If so, why would we



         1     need any kind of federal legislation along

         2     these lines?

         3               MR. MORABITO:  Yes, states do have

         4     the current authority to do that.  The idea

         5     here is to promote investment in the United

         6     States, and we're trying to develop and

         7     promote a national policy that would give us

         8     the incentive to continue to deploy these

         9     facilities here, as opposed to locating

        10     overseas.  So we're trying to make this a

        11     national issue.

        12               MR. POTTRUCK:  Does there seem to

        13     be any suggestion that Web hosting is not

        14     growing or that there's not a lot of Web

        15     development?  I mean, is this a problem to be

        16     solved or -- I guess I'm missing the problem

        17     that we're solving.

        18               MR. MORABITO:  We're a

        19     Bermuda-based company, and I don't know if

        20     that answers your question.

        21               CHAIRMAN GILMORE:  Would you like to

        22     elaborate on that or -- we can go to other



         1     questions, unless you wanted to --

         2               MR. MORABITO:  No, no.  I mean the

         3     idea, again, is to come up with a -- I don't

         4     want to -- I think "level playing field" is

         5     not the right term, but the idea is, again,

         6     to create a national policy that would give

         7     us the incentives to locate these facilities

         8     in the United States.

         9               CHAIRMAN GILMORE:  Mr. Lebrun?

        10               MR. LEBRUN:  A follow-up question.

        11     Rather than tinkering or asking Congress to

        12     tinker what the states can do in terms of

        13     their tax base, why don't you just ask

        14     Congress to give you some type of a tax break

        15     at the federal level, whether it's income tax

        16     or some other federal tax?

        17               MR. MORABITO:  Well, I mean, the

        18     research and development tax credit was just

        19     given and just extended, so the federal

        20     government does have a role for the high tech

        21     industry and giving the right incentives.

        22               CHAIRMAN GILMORE:  Mr. Sidgmore?



         1               MR. SIDGMORE:  Yeah, I hate to

         2     disagree with tax breaks for the

         3     telecommunications industry, but I guess, you

         4     know, to sort of parlay off of David's

         5     comment, the real question to me would be,

         6     aren't we already, "we" being everybody in

         7     the telecommunications industry -- building

         8     Web facilities as fast as humanly possible?

         9     Here, in Europe, everywhere where we can do

        10     business.  I'm not sure we can build them

        11     that much faster, number one.

        12               Number two, generally speaking, we

        13     deploy Web facilities where the network gains

        14     efficiency, not necessarily where you get the

        15     best tax breaks.

        16               So I guess I'm not totally sure

        17     what -- you know, what the content of the

        18     proposal is.  I mean, what is the basis of

        19     your suggestion that you would build more

        20     facilities with this break?

        21               MR. MORABITO:  Well, I think I'll

        22     try again to answer that.  We're looking for



         1     a national policy on deploying Web-hosting

         2     facilities in the United States.

         3               MR. SIDGMORE:  Right.  But I guess

         4     I'm, you know -- and I understand the Bermuda

         5     angle, but you know all of the Web-hosting

         6     companies are not in Bermuda.  Most of them

         7     are headquartered here, somewhere.

         8               I'm not trying to be argumentative,

         9     I'm just -- I don't -- it's hard to see

        10     how --

        11               MR. MORABITO:  But it's our goal

        12     and our goal is that the states will fight

        13     with one another to come up with best tax

        14     incentives that will give us the incentives

        15     to deploy facilities in those states.  We're

        16     seeing that today.  We have a couple of

        17     states -- and Virginia is an example --

        18     showing leadership in this area.  New York is

        19     also showing some leadership, and so is

        20     California.

        21               So, yes.  The goal is to have those

        22     states continue to fight, and to raise this



         1     at the national level is part of this forum.

         2               MR. ANDAL:  As one of those states

         3     that's very interested in you coming here,

         4     how would you describe -- how broad is your

         5     definition of Web-hosting facility?

         6               MR. MORABITO:  It could be --

         7               MR. ANDAL:  What types of property

         8     are you -- do you imagine being given an

         9     exemption?

        10               MR. MORABITO:  If you think about

        11     what it takes to construct a Web-hosting

        12     facility, it has to do with the bricks, the

        13     mortar, the -- like I said, the bullet and

        14     explosion proof barriers, the raised

        15     ceilings, the floors -- the special floors.

        16     These sites need to be --

        17               MR. ANDAL:  I'm trying to figure

        18     out how broad your business is.  Are you --

        19     are we talking switching stations and

        20     fiber-optic line networks and --

        21               MR. MORABITO:  I think we're mostly

        22     talking about the servers, the routers, the



         1     racks, the material that goes into

         2     constructing the Web-hosting facility.

         3               MR. ANDAL:  Who are your

         4     competitors?

         5               MR. MORABITO:  I think our largest

         6     competitor is Exodus, but obviously MCI

         7     WorldCom and AT&T and Quest are also in this

         8     business.

         9               MR. ANDAL:  Any states offered tax

        10     exemptions so far?

        11               MR. MORABITO:  I'm not sure.

        12               CHAIRMAN GILMORE:  Another question from

        13     any members of the panel?

        14               Mr. Pottruck?

        15               MR. POTTRUCK:  I had a question for

        16     Mr. Wysocki and perhaps Mr. Thierer.

        17               There was something that was said

        18     before that I found internally in conflict.

        19     On the one hand, I thought I heard you say

        20     that if we had sales taxes on Internet

        21     purchases, that would make a big difference.

        22     The Internet wouldn't grow as much.  People



         1     wouldn't buy on the Internet.  There was an

         2     estimate -- I think you cited from Ernst &

         3     Young, or someone, a 20 percent plus decline

         4     if there was sales taxes on the Internet.

         5               Then you said local companies are

         6     not disadvantaged by charging taxes and that

         7     the fact that the sales -- there's no sales

         8     tax on the Internet doesn't really advantage

         9     the Internet.

        10               Now it seems to me you can have it

        11     one way or the other, but that it's hard for

        12     me to reconcile both of those statements.

        13               Perhaps either or both of you would

        14     comment on that?

        15               MR. WYSOCKI:  I'll just comment

        16     briefly, and then I'll let Mr. Thierer answer

        17     if he wishes.  But the -- to me, the

        18     psychology of a consumer that goes out and

        19     buys something on the Internet, it is

        20     possible that they are buying it to avoid

        21     state sales taxes.  That is a distinct

        22     possibility, and I think -- the reference



         1     that you cited was Austan Goolsbee, the

         2     University of Chicago economist.

         3               There is that possibility that

         4     somebody who purchases on-line is doing so to

         5     avoid state sales taxes.  At the same time,

         6     however, the realities of the market clearly

         7     show that it costs more money generally,

         8     generally speaking, to ship a product that is

         9     exempt from state sales taxes.  So I

        10     understand where it may seem inconsistent,

        11     but when you're dealing with the psychology

        12     of a consumer versus the practical realities

        13     of state tax policy and this situation that

        14     we're facing today, I don't think that in

        15     reality they are inconsistent.

        16               CHAIRMAN GILMORE:  Mayor Kirk and then

        17     Delna Jones.

        18               MAYOR KIRK:  I wanted to follow up on

        19     that line of questioning, and I think you did

        20     make the point that that was the differential

        21     in the shipping versus the sales tax.  But on

        22     the other hand, that retail merchant that has



         1     the Disney Store, that has the Nieman's, the

         2     Macy's, is paying property taxes.  He's got a

         3     bigger employment base.  He's got inventory.

         4     He has a lot more that goes into his

         5     calculating that purchase price that doesn't

         6     exist on the net.  So while the shipping may

         7     outweigh the sales tax, those bill payment

         8     costs can create that disparity that we're

         9     concerned with.

        10               But my concern is one of

        11     specifically -- since you were here to

        12     present Congressman Kasich, is, one, give me

        13     some reason why that Congressman feels that

        14     strongly about it.  He wouldn't -- as I think

        15     I heard Mr. Sidgmore or one of the other

        16     Commissioners recommend, why doesn't Congress

        17     pay for this?  I mean, we all love -- we can

        18     all agree -- the good thing is we all love

        19     the net.  We don't want put access taxes, we

        20     don't want to do anything to hinder this

        21     great growth.

        22               As a mayor, I think the neatest



         1     thing in the world would be for Congress to

         2     propose a tax and Congress to pay for it.

         3               So, first of all, tell me why

         4     Congress won't go ahead and pay for this tax.

         5     Then, secondly, since most state and local

         6     governments have to operate under

         7     constitutional precepts that say we'll tax

         8     everything equally, if you essentially put in

         9     a bill that says we cannot tax sales

        10     transactions on the Internet, help me

        11     understand the constitutionality, then, of a

        12     sales tax that applies to the same

        13     transaction that occurs on Main Street.

        14     Isn't it effectively what you're talking

        15     about is a constitutional ban on all sales

        16     taxes?

        17               MR. WYSOCKI:  If you'll permit

        18     me --

        19               MAYOR KIRK:  This is one of these

        20     long questions.

        21               MR. WYSOCKI:  That's all right.

        22               MAYOR KIRK:  The other thing, you've



         1     also made the point that there's no

         2     diminution in local revenues.  We're in the

         3     infancy of this.  Amuse me.  Just go ahead

         4     and humor me and my other thousands of

         5     mayors, that as more and more people begin to

         6     shop over the net, there will be a

         7     degradation of the state and local sales tax.

         8     How are we supposed to make up that revenue?

         9               MR. WYSOCKI:  Well, if you'll

        10     permit me a few minutes?

        11               MAYOR KIRK:  I would.

        12               MR. WYSOCKI:  If I may, I'd like to

        13     address the constitutionality of the

        14     proposal, first, which is the second part of

        15     your question.

        16               I think while not I'm not an

        17     attorney, and certainly not a constitutional

        18     scholar, on the face of it, Congressman

        19     Kasich's proposal is clearly constitutional.

        20     The reason is that Congress has historically

        21     dealt with intra-state issues on numerous

        22     occasions, in the Cable Television Act,



         1     the 4-R legislation that Mr. Andal is

         2     proposing.  The fact is that the court has

         3     ruled, in doing some cursory analysis,

         4     that -- actually, I'll just quote:

         5               "Wherever the interstate and intra-

         6     state transactions of carriers are so related

         7     that the governing of the one involves the

         8     control of the other, it is Congress and not

         9     the state that is entitled to prescribe the

        10     final and dominant rule.  For, otherwise,

        11     Congress would be denied the exercise of its

        12     constitutional authority and the states, and

        13     not the nation, would be supreme in the

        14     national field."

        15               That's out of Houston and Texas 

        16     Railway v. United States.

        17               It seems clear that when you look

        18     at the history of the commerce clause --

        19     which I think is what's at issue here -- that

        20     Congress has the authority to deal with

        21     issues that are by their very nature

        22     interstate.  It is the position of SBSC that



         1     the Internet, by its very nature, is an

         2     interstate mechanism, just as railroads are,

         3     waterways, et cetera.

         4               So while not a constitutional

         5     scholar and not an attorney, I want to be

         6     very clear on that, it seems on the face of

         7     it to a layman that Congressman Kasich's

         8     proposal is definitely true and

         9     constitutional.

        10               Now, if I can go back to the first

        11     part of your question, which is why doesn't

        12     Congress pay for it?  I think that's the

        13     essence of the question.  Our position at

        14     SBSC is very clear in that this is a proposal

        15     that will bolster E-commerce, it will bolster

        16     job creation, it will enable more people to

        17     earn more, thereby paying more sales taxes.

        18     So it has not been shown to me with any

        19     conclusive -- any level of satisfaction on my

        20     part that there has been a net loss of state

        21     or local revenue as a result of E-commerce.

        22               MAYOR KIRK:  I don't want to be



         1     argumentative, but, Chris, at least from here

         2     you look like a pretty intelligent fellow.

         3               MR. WYSOCKI:  I am.

         4               MAYOR KIRK:  On the topic of consumer

         5     spending habits is that I am, unfortunately,

         6     all of those things.  I am a lawyer and I'm a

         7     Mayor -- and that may make it doubly bad.

         8     But I also grew up in retail.  I promise you

         9     if you walk in a store -- in every grocery

        10     store now.  I mean, if you're single -- maybe

        11     you're not single and you go in and you've

        12     got two items, you're not going to stand in a

        13     line with 100 people.  You're going to go to

        14     a line that says, if you've got fewer stuff,

        15     come over here.  If you have even fewer stuff

        16     and you're going to pay cash, come over here.

        17     We'll get you out faster.

        18               If you've got a line that says pay

        19     your taxes, and a line that says don't pay

        20     your taxes -- I mean in the words of my seven

        21     year old, well, duh.  I think we're all going

        22     to go to the line that says, don't pay your



         1     taxes.  I can accept a lot of what you're

         2     saying, except for the fact that saying

         3     there's not going to be any degradation of

         4     it.

         5               Now, I guess, let me put it another

         6     way.  Would your small business, whom you

         7     represent, would they rather have a system

         8     where they don't have to collect it, but have

         9     a sales tax, which they're not going to

        10     pay -- it's going to be a pass-through -- or

        11     have a 25 reduction in that and then have

        12     their local governments risk the proposition

        13     of either raising property taxes or raising

        14     income taxes?

        15               MR. WYSOCKI:  I'm not --

        16               MAYOR KIRK:  Which is the least

        17     attractive of those three?

        18               MR. WYSOCKI:  Well, I would say the

        19     imposition of any new taxes is clearly wrong.

        20     I'm not sure where most of our members would

        21     be, in terms of which is the less evil of the

        22     tax proposals.



         1               What I do know is that the number

         2     of entrepreneurs that are able to start new

         3     businesses as a result of electronic commerce

         4     is really an exciting thing that ought to be

         5     embraced.  Congressman Kasich's proposal, I

         6     think goes a long way towards bolstering and

         7     increasing the economic productivity of the

         8     country.

         9               MAYOR KIRK:  Chris, let me ask you

        10     one more thing.  I mean, is there any

        11     empirical data out there?  Because we keep

        12     getting these numbers from you and Adam and

        13     others that say state and local revenues have

        14     just gone up explosively.  The Internet's

        15     gone up.  Therefore, the two are related.

        16               I can only relate to my own

        17     experiences at the city, in which we went

        18     through a horrible economic downturn in

        19     the '80s and our tax base has gone up

        20     principally because we've invested in

        21     infrastructure, made the city safe, put

        22     police on the streets, brought people in.



         1     Most of that growth is from property taxes.

         2     A lot of it is sales tax, but it's more

         3     complex than just saying because the

         4     Internet's grown, our revenue's grown.

         5               Is there any empirical data out

         6     there to support that?

         7               Secondly, has anybody gone out and

         8     polled all of the Internet businesses -- of

         9     which we have an extraordinary number in

        10     Texas -- to find out are you going in this

        11     business because you didn't think you'd pay

        12     sales taxes or are you going in this business

        13     because the world is your universe, it's

        14     faster and safe, you don't need the

        15     capital -- all the other reasons you

        16     articulated, that I agree with.

        17               I think the reason that the

        18     Internet's growing is much more related to

        19     the latter than the former.

        20               MR. WYSOCKI:  I'll actually let

        21     Mr. Thierer address that as to research.

        22               MR. THIERER:  The answer to your



         1     question is, no, there's not a lot of

         2     empirical work in this field, because this is

         3     a very new field of economic study.

         4     Unfortunately we're all looking around for

         5     good numbers, good information.  It's tough,

         6     because there's not a lot of economists

         7     working on this, as they should be.

         8     Hopefully things like this will prompt them

         9     to do so.

        10               To go back to some of your points,

        11     though, about what are the other options that

        12     state and local governments have, I think

        13     you've forgotten a couple.  I think,

        14     obviously, it's not a very attractive

        15     proposal, but -- at least to state and local

        16     ears -- but the idea of reforming government

        17     programs or cutting expenditures is an

        18     option.  It's one -- you know, they say,

        19     well, there's a set pie.  We have to pay for

        20     these programs, these functions that the

        21     state and localities provide for.  Well,

        22     apply existing sales taxes more broadly to



         1     those service-based companies or other things

         2     that you exempt them from.

         3               Agriculture, services of any

         4     variety.

         5               MAYOR KIRK:  So we'll let the poor

         6     farmers and the other peoples pay for --

         7               MR. THIERER:  Well, if you want to

         8     talk about level playing fields, shouldn't

         9     everybody pay the same sales tax?

        10               MAYOR KIRK:  I think they should.

        11               MR. THIERER:  Well, but there's a

        12     lot of exemptions at the state and local

        13     levels to sales taxes currently that could be

        14     captured -- revenues could be captured.

        15               MAYOR KIRK:  But you're still talking

        16     a tax shift to pay for a tax cut from one

        17     industry to the other.

        18               MR. THIERER:  I'm not sure about

        19     that.

        20               MAYOR KIRK:  I mean, there's a reason

        21     most people don't tax, say, drugs or food or

        22     medicine or some services.



         1               MR. THIERER:  Right.  Well, again,

         2     we could go on on this for a while.

         3               MAYOR KIRK:  But, I mean, I agree

         4     with you.  You have made my point, that if it

         5     diminishes, we either cut services or we

         6     raise taxes on somebody else to make up for

         7     it.

         8               CHAIRMAN GILMORE:  If I could, Delna

         9     Jones has her hand up, then Governor Locke.

        10     But let me ask a question.  Why do we not tax

        11     food, Mayor Kirk?  Why do we not tax some of

        12     these other exemptions?  Is there a reason

        13     for it?

        14               MAYOR KIRK:  I'm a Mayor.  I have to

        15     live by the rules that you Governors make,

        16     so.

        17               CHAIRMAN GILMORE:  But all humor aside,

        18     there is a reason --

        19               MAYOR KIRK:  There's no humor.

        20               CHAIRMAN GILMORE:  There is a reason,

        21     Mayor Kirk, why we distinguish between one

        22     activity and another, one good and another,



         1     and one form of taxation and another.  There

         2     are policy reasons that we do to either

         3     encourage something, discourage something, or

         4     provide a special benefit.  Especially, for

         5     example, in the nature of the food tax.

         6     Isn't that legitimate?

         7               MAYOR KIRK:  I would agree with you

         8     in every case, Governor.  We go through a

         9     fairly healthy debate when we do that.  So we

        10     sit there and we balance the taxation of food

        11     and drugs versus legal services or toys or

        12     footballs.  Or in Congress right now, in

        13     which we arguably have a surplus.  We're

        14     going through a very healthy national debate

        15     on whether we should put all of the savings

        16     into bolstering social security or help

        17     Medicare.  Maybe we should give more money to

        18     the states to help welfare reform or do

        19     something else.

        20               One of my concerns on this

        21     proposal -- since you gave me this

        22     opportunity -- is we're going to unilaterally



         1     take out an industry that Mr. Sidgmore,

         2     Mr. Waite and others would tell us --

         3     notwithstanding the fact we'd all like a tax

         4     break -- is doing pretty good on its own.  If

         5     we're going to do this, I think we ought to

         6     make that same policy decision that you

         7     referenced and decide do we want to help

         8     E-commerce companies?  Do we want to help

         9     school teachers?  Do we want to help farmers?

        10     Do we want to help other businesses that

        11     aren't doing as well, or more people?

        12               CHAIRMAN GILMORE:  Or perhaps poor

        13     people.

        14               MAYOR KIRK:  Or do we want to help

        15     poor people?

        16               CHAIRMAN GILMORE:  Who shouldn't be

        17     paying food taxes.

        18               MAYOR KIRK:  Absolutely.  But I think

        19     we should make that decision in a broader

        20     perspective, and not just in a narrow one.

        21               CHAIRMAN GILMORE:  That is, indeed, the

        22     debate we're engaged in.



         1               Delna Jones?

         2               MS. JONES:  Isn't this fun?  A

         3     couple of questions.  Most of this is to

         4     Chris.

         5               You really did open the door,

         6     didn't you, Chris?  Where -- you talked about

         7     your organization and an organization that

         8     I'm very familiar with and that is known

         9     nationally that represents small business is

        10     NFIV.  I want you to tell me where they are

        11     and are they a part of your group, or is your

        12     group just a piece of that?  Who do you

        13     represent, really?

        14               The other thing, I think you quoted

        15     something from an economist that said it

        16     might be as much as 24 percent.  I understand

        17     what it means when it says "might be."  It

        18     might not be, too.  So, I guess, there again,

        19     when we make assumptions I think it's very --

        20     I'm concerned that we not assume things that

        21     are not necessarily true.

        22               The other piece that I think is



         1     important, and I'd like to have you comment

         2     on this -- and maybe others, too -- do you

         3     have evidence that the feds do a better job

         4     of tax policy than local governments or state

         5     governments?  Is that why you believe we

         6     ought to have a national policy on Internet

         7     taxation?

         8               MR. WYSOCKI:  If I can address the

         9     three parts of your question in order?  I

        10     want to thank you for the opportunity to do a

        11     commercial for SBSC, first of all.

        12               SBSC, as I mentioned, we have

        13     about 50,000 members.  It was started

        14     in 1994, largely as a result of some members

        15     of the business community that were

        16     affiliated with other groups did not feel

        17     that there was a principle organization that

        18     was aggressive enough.  That was really the

        19     nexus of SBSC coming into creation.

        20               In terms of where NFIB and some of

        21     the other small business organizations are on

        22     this issue, I don't know.  I simply don't



         1     know.  I haven't consulted them.  They may be

         2     on the same side as we are, I just don't

         3     know.  I apologize for not knowing.

         4               CHAIRMAN GILMORE:  Governor Locke?

         5               MS. JONES:  I'd like him to answer

         6     the rest of the question.

         7               CHAIRMAN GILMORE:  Sure, go ahead.

         8               MR. WYSOCKI:  In terms of -- and,

         9     actually, if you could just refresh my memory

        10     on the third point?

        11               MS. JONES:  What evidence do you

        12     have the federal government sets better tax

        13     policy than state and local governments?  Is

        14     that why you're doing this this way?

        15               MR. WYSOCKI:  What we want to do by

        16     supporting the Kasich legislation is really

        17     to create an entrepreneurial environment.  We

        18     believe that by eliminating sales tax on

        19     electronic commerce -- and we do believe that

        20     electronic commerce is national in scope,

        21     even between state -- even within a state,

        22     where a customer and a retailer that are



         1     conducting business on-line, it is our

         2     position that the Kasich legislation is

         3     right-on.  That states should not be able to

         4     tax that transaction, because of the very

         5     inter-state nature of the Internet.  That's

         6     basically where we are on that.

         7               In terms of whether or not the

         8     federal government is more efficient than

         9     state and local governments in collecting and

        10     dealing with tax issues -- tax policy -- I

        11     wish I could say yes, but I certainly can't

        12     say no.

        13               What I'm looking for in terms of a

        14     small business perspective is to create a

        15     situation where entrepreneurs are able to go

        16     out, start a business with minimal government

        17     interference, and deal with the minimal level

        18     of government that gets in their way.

        19               I really don't know if the federal

        20     government in the future is going to be any

        21     better than state or local governments at

        22     collecting sales tax.  But I do think that



         1     this is a national issue and it deserves

         2     national attention.

         3               CHAIRMAN GILMORE:  Governor Locke?

         4               GOVERNOR LOCKE:  For Chris Wysocki, I

         5     have a question.  Congressman Kasich's

         6     proposal is not just dealing with

         7     inter-state, I think as you just said a few

         8     minutes ago, it would apply to even

         9     transactions within a state.  I take it,

        10     then, if there's a company that's located in

        11     one state -- headquartered in that state, has

        12     thousands of outlets and stores, huge

        13     warehouses, that you're saying, then, that if

        14     a citizen were to purchase something from

        15     that major store -- company -- via the

        16     Internet and that citizen is of the same

        17     state, five miles down the road, that there

        18     would be no taxation under the Congressman's

        19     bill on that transaction of any sort?

        20               MR. WYSOCKI:  That's correct.

        21               GOVERNOR LOCKE:  If that citizen called

        22     up that company and made the order, the



         1     Congressman is not saying that no taxes would

         2     be charged?  Taxes would still be applied on

         3     that transaction?

         4               MR. WYSOCKI:  My -- Congressman

         5     Kasich's legislation deals with the Internet.

         6               GOVERNOR LOCKE:  All right.  If the

         7     citizen drove five miles to that store and

         8     physically purchased it, that citizen would

         9     pay the tax?

        10               MR. WYSOCKI:  That is also correct.

        11               GOVERNOR LOCKE:  Aren't the highways

        12     part of the interstate system -- interstate

        13     commerce?

        14               MR. WYSOCKI:  Yes, they are.

        15               GOVERNOR LOCKE:  Aren't the telephones

        16     interstate commerce?

        17               MR. WYSOCKI:  Yes, they are.

        18               GOVERNOR LOCKE:  But Congressman Kasich

        19     would say that using the federal highways to

        20     go to that store five miles, you pay the tax.

        21     You use the telephone, buy that same item,

        22     you pay the tax.  Use the Internet, which is



         1     over the telephone, you don't pay the tax?

         2               MR. WYSOCKI:  That's exactly what

         3     Congressman Kasich's legislation does.  The

         4     reason that he's able to do that is because

         5     that Congress does have the authority to have

         6     that debate.

         7               Now, what I'm suggesting is that by

         8     Congress acting on this measure, they have a

         9     constitutional right to do so.  And --

        10               GOVERNOR LOCKE:  I'm not disputing that.

        11               MR. WYSOCKI:  The policy debate is

        12     something that I think that Congress will be

        13     very -- it will be a very fun debate in

        14     Congress.

        15               GOVERNOR LOCKE:  How about this -- I'm

        16     not disputing the power of Congress issue.  I

        17     just want to make clear what the transactions

        18     would be that are subject or not subject to

        19     taxation.

        20               If the person goes down to that

        21     store -- drives the five miles to that

        22     store -- goes onto the counter, looks at all



         1     the items that the store has, and then

         2     decides to -- at the counter -- at the store,

         3     order the item over the Internet, because the

         4     Internet is on the counter of the store, and

         5     not subject to taxation, then?

         6               MR. WYSOCKI:  That's correct.  But

         7     may I ask a rather simple question in

         8     response?  Why would a person want to wait 24

         9     hours or so to get a product that he's

        10     standing right in front of to buy?

        11               GOVERNOR LOCKE:  Well, I can imagine --

        12     I can imagine that a lot of stores are going

        13     to become showcases or they don't have the

        14     product right there, because of limited

        15     storage space.  You go down to the store, you

        16     touch and feel the product, and you get a

        17     sense of it.  The color's not there, the very

        18     item is not there, and so you decide to --

        19     you know, they have Internet computers right

        20     there, and everything, and they decide, well,

        21     I'm going to order it over the Internet.

        22               MR. WYSOCKI:  Then you wouldn't be



         1     subject to a sales tax, but you'd still be

         2     subject to a shipping charge.  You'd still be

         3     subject to the 24-hour or so delay of

         4     personal gratification before you get the

         5     goods.

         6               GOVERNOR LOCKE:  Well, suppose they

         7     bring it to the store the next day and you go

         8     down and pick it up?  That's what happens now

         9     in stores if they're out -- temporarily out.

        10     You go back the next day or they deliver it

        11     to you.

        12               MR. WYSOCKI:  Or you can go to

        13     another store that has it.

        14               I mean, what I'm suggesting is that

        15     the economy as a whole -- I mean, I think the

        16     problem is that a lot of people in this

        17     debate are looking at the economy as a fixed

        18     piece of pie, and retail stores are still going

        19     to be around in the digital age.  People like

        20     to go and touch and feel and shop.  Whereas,

        21     people enjoy E-commerce as a new activity.

        22     There's a lot of excitement in buying things



         1     on-line.  I don't think that this is a

         2     zero-sum game.

         3               CHAIRMAN GILMORE:  Let me keep this moving here because weve had a number of people who have had their hands up who want to get in.  In fact almost everygody wants to get in the game.  Governor Leavitt,

         4     you're next.

         5               GOVERNOR LEAVITT:  Thank you.  I read an

         6     article recently.  It was actually a speech

         7     by Lou Gursner of IBM who was espousing and

         8     celebrating, as we all do, this remarkable

         9     opportunity we have with the Internet.  His

        10     point -- I think the phrase was, what we're

        11     seeing are the fireflies before the storm.

        12     The big players are now just barely starting

        13     to get into this.  Yes, we've seen tremendous

        14     potential, but wait until the WalMarts and

        15     the K-Marts and Sears and the JC Penny's and

        16     GAPs and the Radio Shacks and all of these

        17     big players become focused on this

        18     opportunity, as they are.

        19               I'm just wondering, as you have

        20     thought about this -- and I'm asking of both

        21     you -- have you considered what will happen

        22     when these big retailers who have nexus in



         1     all 50 states, when this collision between

         2     those who have nexus everywhere and those

         3     that have an unlimited status?  I mean, can

         4     we -- can we -- what's going happen when that

         5     collision happens?  Are we going to -- can we

         6     operate in that kind of environment?

         7               MR. THIERER:  It's going to be very

         8     difficult.  I think you raised the point

         9     earlier, Governor, about is the current sales

        10     and use tax system viable in the 21st

        11     Century?  That's a very good question.  There

        12     was an important submission to the Commission

        13     by Hal Varian, the Dean of the Berkeley

        14     School of Business Management where he said,

        15     the answer is no.  That we need to find a way

        16     to replace this system completely.  I don't

        17     think anybody's prepared to go that far right

        18     now, at least at the state and local level,

        19     because we rely so heavily upon sales taxes

        20     as a revenue source.

        21               However, there are other potential

        22     alternatives here.  I've mentioned a couple



         1     of them before about potentially getting rid

         2     of exemptions or changing the way you

         3     administer certain taxes or moving towards

         4     other systems, or taxing at the origin.  As a

         5     compromise position, it offers the potential

         6     for a state like Utah to assess -- or to

         7     levy, rather, a tax evenly on any vendor,

         8     Internet or main street merchant, at the same

         9     rate, within the state of Utah, not outside

        10     of it.  Fitting within into the

        11     constitutional confines that are currently in

        12     place and which are not likely to go away any

        13     time soon.

        14               So I think there are alternatives

        15     out there, but I think you're right.  There's

        16     no way we're going to stop this train from

        17     moving down the tracks.

        18               GOVERNOR LEAVITT:  What about you,

        19     Mr. Wysocki?  Is the sales tax going to

        20     become obsolete?  Is this a tool that we're

        21     just flat not going have in the 21st Century?

        22               MR. WYSOCKI:  I think in order to



         1     fund government programs in the future we

         2     have to take really hard look at the way we

         3     fund government programs.  I think there's no

         4     way to get around it.

         5               GOVERNOR LEAVITT:  Grover and I both

         6     agree that we really need to reduce

         7     government and keep it as flat as we possibly

         8     can and we'll go through that process.  But

         9     when we get there, how -- once we've done all

        10     of that, where -- what would you suggest we

        11     do as an alternative to this?  We've closed

        12     all the exemptions off.  You got some

        13     thoughts about the survival of small

        14     businesses when we've got to that point?

        15               MR. WYSOCKI:  Well, I think small

        16     businesses will survive in an environment

        17     that -- where taxes are simple and low.

        18     Whatever solution that can be reached, that

        19     guarantees the simplest and the lowest taxes

        20     possible, that's when small businesses will

        21     really take off.

        22               GOVERNOR LEAVITT:  I agree with that.



         1     One of the things that happens when

         2     businesses are profitable is that they have

         3     to deal with income tax.

         4               MR. WYSOCKI:  Absolutely.

         5               GOVERNOR LEAVITT:  I guess the point I

         6     would like to ask is what do you think would

         7     be the best way for us to deal with this once

         8     we've done all of those other things that the

         9     Internet -- if this truly is the fireflies

        10     before the storm and this is going grow as we

        11     all believe it will --

        12               MR. WYSOCKI:  I don't know I'm

        13     prepared to answer what's the best -- the

        14     best way to fix the problem today.  I really

        15     just don't feel prepared to answer that.

        16     What I will say about it, however, is that

        17     whatever tax is honest and low and simple is

        18     generally going to be the tax that does the

        19     best for small business.

        20               GOVERNOR LEAVITT:  Maybe fair?

        21               MR. WYSOCKI:  Fair.

        22               GOVERNOR LEAVITT:  One that everybody



         1     pays the same?

         2               MR. WYSOCKI:  Yeah.

         3               CHAIRMAN GILMORE:  Mr. Pincus?

         4               MR. PINCUS:  Thank you, Governor.

         5     I wanted to follow-up on Governor Locke's

         6     question about the kiosk in the store.

         7     Because as I read Congressman Kasich's bill,

         8     actually if you ordered the good over the

         9     kiosk in the store and it was given to you

        10     right there, you'd still use electronic

        11     commerce.  So I wonder why that also wouldn't

        12     be -- the bill just says it has to be via

        13     electronic commerce, so wouldn't that be tax

        14     exempt, also?

        15               MR. WYSOCKI:  My understanding is

        16     that it would.

        17               MR. PINCUS:  Yeah.  So any -- I

        18     think we have -- sort of right now we have

        19     Quill in effect.  So under that regime there

        20     is -- there are some taxes -- perhaps people

        21     quarrel about how much that are not being

        22     collected.  I guess it just seems to me that



         1     under the regime you're proposing it would be

         2     pretty easy for any store owner to integrate

         3     the Internet into how they do business.  So

         4     the impact on sales tax collection would

         5     probably be pretty dramatic.  I wonder if

         6     you've tried to scope that out at all?

         7               MR. WYSOCKI:  What impact?  What

         8     the impact would be, I think, is you would

         9     have a situation.  The situation where

        10     you're -- that you're proposing or suggesting

        11     is that people are going to be going into

        12     stores, ordering on-line, going home, coming

        13     back to the store the next day --

        14               MR. PINCUS:  No, I don't think

        15     they'd have to wait until the next day, I

        16     think they could get it right there.  As long

        17     as they order it over the kiosk, they just go

        18     to the check-out counter and it's delivered

        19     to them and they pay for it and they've used

        20     the Internet.  So wouldn't -- I mean I guess

        21     my question is just wouldn't it -- in a year

        22     or two, wouldn't every store owner of any



         1     size in America have integrated the Internet

         2     into their business in a way that there

         3     wouldn't be any sales tax?

         4               MR. WYSOCKI:  It would be a good

         5     idea.

         6               MR. THIERER:  Actually, if I

         7     could -- there might be a point there to

         8     clarify.  If existing nexus standards

         9     continue to remain in effect, that might not

        10     necessarily be the case.

        11               MR. PINCUS:  But I think the bill

        12     that the Congressman wrote overrules existing

        13     nexus standards.

        14               MR. THIERER:  I'm not sure if

        15     that's correct.  That's a good question.

        16               MR. PINCUS:  Yeah, I mean the bill

        17     was attached to his testimony and what the

        18     bill says is, if it's electronic commerce,

        19     it's per se exempt from tax.

        20               MR. WYSOCKI:  That's a good idea.

        21               CHAIRMAN GILMORE:  Next person, I think

        22     it was Mr. Lebrun and then Mr. Sokul.



         1               MR. LEBRUN:  A question again for

         2     Chris.  Chris, your Small Business Survival

         3     Committee which you told us had 50,000

         4     members, I assume some of those 50,000

         5     members are brick and mortar small businesses

         6     that don't have Internet?

         7               MR. WYSOCKI:  That's correct.

         8               MR. LEBRUN:  As I understand it,

         9     your committee is supporting this bill by

        10     Representative Tiosh.  Did the members who

        11     don't -- did the members who are brick and

        12     mortar of your committee support this

        13     position, and how did your committee arrive

        14     at this position to support this?

        15               MR. WYSOCKI:  Because it's the

        16     right thing to do.

        17               MR. LEBRUN:  No, you're not

        18     answering my question.

        19               MR. WYSOCKI:  No, I am answering --

        20               MR. LEBRUN:  How did the 50,000

        21     members that you represent arrive at this

        22     decision?  Or was it decided on by an



         1     executive committee?  How was it arrived at?

         2               MR. WYSOCKI:  The decision making

         3     process of the Small Business Survival

         4     Committee is very clear.  If it's right, we

         5     do it.  If it's wrong, we oppose it.  We

         6     don't --

         7               MR. LEBRUN:  Who decides if it's

         8     right or wrong?

         9               MR. WYSOCKI:  Basically, I do and

        10     our Board of Directors.

        11               MR. LEBRUN:  Thank you.

        12               CHAIRMAN GILMORE:  Mr. Sokul?

        13               MR. SOKUL:  Thank you.  I have a

        14     couple of questions.  But first, I just have

        15     a general comment the exchange that occurred

        16     with Mr. -- with Mayor Kirk who's not here

        17     now, and your response about the availability

        18     of data.  What is the data?

        19               It seems to me the basic debate

        20     occurring on the effect on state and local

        21     governments has to do whether you look at

        22     from a static point of view or a dynamic



         1     point of view.  Does the -- I think from a

         2     static point of view you can say when someone

         3     shops on-line and sales tax isn't collected

         4     on that one purchase, sales tax is being

         5     lost, or the use tax.

         6               Dean Andal's point to counter that

         7     is, well, yeah, but the dynamic effect, the

         8     ripple effect as outlined in the Commerce

         9     Report that we received in June is so strong

        10     that, for instance, California's revenue is

        11     growing at historic rates.

        12               So, you know, it depends on your

        13     perspective and your point of view, but I

        14     would, you know, just ask -- not for a

        15     specific response but just in general -- if

        16     we don't have the data, I mean what do we

        17     recommend to Congress?  I mean, should one of

        18     our recommendations be, you need to study

        19     this better.  We need more data before we can

        20     make recommendations?  But -- yeah, go ahead.

        21               I going to ask -- maybe you can --

        22     I'll have two questions, then.



         1               The other thing I wanted to ask you

         2     is, you noted that the zero burden plan of

         3     the streamlined sales tax system is

         4     unconstitutional.  I, as I understand it,

         5     it's a voluntary system on the part of

         6     business, and I wanted to ask you why do think

         7     it's unconstitutional?  Is it because there

         8     are others in the stream that have mandatory

         9     obligations imposed upon them, like credit

        10     card companies or --

        11               MR. THIERER:  Yeah, there's a

        12     number of reasons why that the NGA plan is

        13     problematic from a constitutional

        14     perspective.  I think, number one, it still

        15     doesn't get around this idea of whether or

        16     not use tax collection is constitutional.

        17     The question is, "By removing the burden on a

        18     remote seller and placing it on a,

        19     quote-unquote, trusted third party, removing

        20     any constitutional issues from the field of

        21     play?"  I don't necessarily think so.

        22     There's still an issue of extra-territorial



         1     tax reach at play here, and whether or not a

         2     state or local government can have the net

         3     effect of taxing a company outside of its

         4     state that does not have substantial physical

         5     presence.

         6               But there are other questions.  I

         7     don't necessarily think this plan is going to

         8     work if it's, quote- unquote, voluntary.  I

         9     don't see companies rushing to adopt it any

        10     time soon.  I don't see states that don't

        11     have sales taxes adopting it.  I don't know,

        12     maybe they will, but I don't how it could be

        13     voluntary and work in practice at all.  I

        14     think essentially they're going to have to

        15     find a way to coerce folks to join the

        16     system.

        17               Regarding your first point on data

        18     and what it should mean for this Commission,

        19     I think you're right, there is an absence of

        20     data and information.  It doesn't mean that

        21     there can't be steps taken by this

        22     Commission -- or later by Congress when it



         1     debates this issue -- to make the law clear

         2     on this point.  There remains an ambiguity

         3     regarding electronic commerce.  The laws that

         4     currently stand deals with the modern

         5     technology of the 1960's mail-order telephone

         6     sales and catalogue orders.  That needs to

         7     potentially be brought up to date with

         8     something along the lines of what

         9     Commissioner Andal is suggesting.

        10               MR. SOKUL:  Just one final question

        11     for Chris, and maybe I'll try to help you out

        12     rather than slam you here.

        13               The notions of fairness that

        14     something like Congressman Kasich proposes is

        15     just terribly unfair to local merchants.

        16     What is unfair is because of what states are

        17     doing to local merchants right now.  The

        18     existing tax system, I think everyone here

        19     would agree, is a mess.  The accumulative

        20     burdens that are posed on national merchants

        21     are incredible.  We'll hear about that more

        22     tomorrow.



         1               The costs of compliance are

         2     tremendous.  What is fair is based upon

         3     current reality which is terrible for local

         4     merchants.  It seems to me what Congressman

         5     Kasich is proposing, although certainly on

         6     the, you know, the hyper-technical level --

         7     maybe it's not so hyper-technical, but on

         8     certain levels can be attacked as, you know,

         9     that's unfair.

        10               What he's really saying is, we have

        11     Internet commerce and where should I prior --

        12     where should our priorities be?  You know, as

        13     we recommend to Congress, perhaps one thing

        14     we can do is to take a step back, rather than

        15     getting caught up in details and just saying,

        16     you know something?  Our priorities should be

        17     with the Internet and the future.  It should

        18     not be with a depression era tax system

        19     designed for the cash register economy.  It

        20     should not be preserving that, and our

        21     decisions should not be made on the basis

        22     of -- we should not accept the underlying



         1     assumption that that is what we have.

         2               You know, people around this table

         3     have changed the world -- these very

         4     people -- by what they've done in creating

         5     the Internet economy.  It's awe-inspiring to

         6     sit at this Commission with some of these

         7     folks.  They didn't accept the current world

         8     when they started their businesses.  They

         9     changed the world.  Why things are fair or

        10     unfair based upon a current government system

        11     is -- it just baffles me.

        12               Don't give government a pass.

        13     Isn't that what your saying?

        14               MR. WYSOCKI:  I think you said that

        15     very well.

        16               MR. SOKUL:  Governor, I wonder --

        17     Governor, I don't want to be accused being

        18     unfair to anyone, and I -- or

        19     hyper-technical -- and if I can just maybe

        20     clarify for one second --

        21               CHAIRMAN GILMORE:  Merely technical, but

        22     go ahead.



         1               MR. PINCUS:  Actually, I -- one

         2     sense, the Congressman's plan is the fairest

         3     to local merchants, because what it basically

         4     says is anyone who uses the Internet in any

         5     way will be free of tax.  I think the issue

         6     is -- the revenue implications are not

         7     the $20 billion that we've talked about with

         8     remote sales, I think they're probably all

         9     sales taxes in a few years.  I think that's

        10     really the issue with the Congressman's plan,

        11     is whether that revenue effect, which I think

        12     would pretty well follow, is sustainable.

        13               So I actually think the issue

        14     there, with that particular plan, isn't

        15     fairness, it's just overall impact.

        16               CHAIRMAN GILMORE:  Mr. Pincus, can you

        17     think of no way to alter the system in order

        18     to avoid the issue of the kiosk?  You can't

        19     think of any way to keep the Internet tax

        20     from bleeding over into all sales taxes.

        21               MR. PINCUS:  Well, this particular

        22     approach seems to me --



         1               CHAIRMAN GILMORE:  Mr. Pincus, perhaps

         2     not.

         3               MR. PINCUS:  I think we've got a

         4     lot -- we've got some approaches on the table

         5     here -- we're going to hear a lot tomorrow.

         6     I want to -- I've got questions for

         7     everybody, to see how they work.  I hope by

         8     the end of this process we will have

         9     something that works.

        10               CHAIRMAN GILMORE:  Mr. Norquist and then

        11     Mr. Guttentag and then Mr. Andal.  Mr. Grover

        12     Norquist?

        13               MR. NORQUIST:  Yes.  I appreciate

        14     the presentation on Mr. Kasich's proposal.

        15     I'd just point out that Mr. Senator McCain

        16     has introduced similar legislation in the

        17     Senate with a number of Senate co-sponsors,

        18     as well.

        19               I had a question for Adam.  I'm

        20     reading the list of coalition members of the

        21     E-Freedom Coalition that have endorsed your

        22     proposal, and I'm just struck.  It's



         1     everybody from the Heritage Foundation to the

         2     Rippon Society to all of the confident state

         3     think-tanks, and so on.  The Utah state

         4     think-tank, Sutherland Institute, and others.

         5     I'm just quite impressed with the number of

         6     state and national think- tanks that you put

         7     together, and I'm wondering whether they

         8     might be able to put forward some

         9     suggestions.  Some of the politic leaders

        10     have sort of said, gee, we have to raise more

        11     money somehow.  I know that you and some of

        12     these other groups have actually put out

        13     books on privatization and user fees and so

        14     on.  I was wondering whether you might make

        15     that available to political leaders who think

        16     the only alternative to not collecting a tax

        17     is to collect it somewhere else?

        18               MR. THIERER:  Well, sure, of

        19     course.  Everything I've written on the

        20     subject is available at our Web site

        21 or by personally contacting me.

        22     But every member that -- of the E-Freedom



         1     Coalition has issued a number of reports on

         2     tax policy, Internet and

         3     telecommunications-related issues, and ways

         4     to reform government to potentially bring

         5     government down to size and make it live

         6     within its means.

         7               So I think there are plenty of

         8     alternatives out there.  I think we,

         9     unfortunately, just sort of roll our eyes

        10     when we hear proposals that say, why not cut

        11     back expenditures and find ways to roll back

        12     certain -- the price of government programs?

        13     Then maybe it will be much easier to

        14     administer a tax system that works, if we're

        15     not spending as much money.  But, of course,

        16     again, a lot of people are not interested in

        17     having that debate, unfortunately.

        18               MR. NORQUIST:  We went through it

        19     in the '80s when we were told if we cut

        20     income tax rates we wouldn't have any money,

        21     and it turns out that they've got more money

        22     than they ever had before and that revenues



         1     have just poured in with lower rates.

         2               MR. THIERER:  Yeah, that's right.

         3     It's the seeming paradox of how is it that

         4     the Internet is currently un-taxed and is

         5     growing out of control, and yet state and

         6     local and even federal budget revenues are

         7     growing at record pace?  I think it has a lot

         8     to do with the supply side effects at play

         9     there and the fact that these businesses are

        10     creating new jobs, new economic opportunity,

        11     economic growth.  They are being taxed as

        12     corporations.  They are being taxed as

        13     holders of property.  The employees of these

        14     new companies are being taxed.  They're

        15     creating new opportunities and new taxpayers.

        16               MR. NORQUIST:  He's not necessarily

        17     on the panel, but Governor Gilmore provided

        18     leadership over the last year when some

        19     people said, we have to spend more money on

        20     roads.  You found it in existing budgets

        21     without tax increases, although I know you

        22     had a lot of helpful people explaining that



         1     the only way that Virginia could deal with

         2     its transportation problems was to raise

         3     taxes.

         4               We have a lot to learn from you,

         5     sir.

         6               CHAIRMAN GILMORE:  Thank you.  We prefer

         7     to cut all of our taxes and get all the

         8     business and let everybody else suffer.

         9     That's not exactly true.

        10               Joe Guttentag?

        11               MR. GUTTENTAG:  Thank you,

        12     Mr. Chairman.  Mr. Wysocki, I think you've

        13     created a new digital divide here that -- in

        14     a different way than we've been talking about

        15     it before.  That is, that people who buy on

        16     the Internet don't seem to be smart enough to

        17     realize they're not saving any money.  I hope

        18     you realize you've been on national

        19     television now announcing -- announcing this.

        20               MR. WYSOCKI:  That's not exactly

        21     what I said.

        22               MR. GUTTENTAG:  I appreciate your



         1     being here and presenting Mr. Kasich's

         2     proposal, because I think it does present

         3     something that is very useful for us to look

         4     at as we -- and a good beginning, as we look

         5     at the various proposals.

         6               I agree with my colleague,

         7     Mr. Pincus, that as I read the legislation --

         8     and I've gone over it and I used to be a tax

         9     lawyer -- that I think I could advise most

        10     merchants that they could avoid the sales

        11     taxes.  I think the result would be the

        12     destruction of the sales and use tax system

        13     as a revenue source, if that legislation were

        14     to be enacted.

        15               Based on that, now, others -- as

        16     the Governor has suggest -- Governor Gilmore

        17     has suggested, we could, of course, amend the

        18     bill to limit it, but that's not Mr.

        19     Kasich's bill and not the one that you're

        20     presenting.  I'm surprised we haven't heard

        21     from Mr. Andal, who is very proud of all of

        22     the sales taxes --



         1               CHAIRMAN GILMORE:  I just haven't called

         2     on him yet.  He's coming, he's next.

         3               MR. GUTTENTAG:  If that source of

         4     revenue disappears, but we can from him.  But

         5     we are talking about revenue which amounts to

         6     one-third of the total state revenues

         7     throughout the country.  In some

         8     jurisdictions, such as Governor Locke's, a

         9     greater percentage of state revenues.

        10               I think, respectfully, Mr. Wysocki,

        11     I think that you and Mr. Kasich should, in

        12     putting this mandate on the state and local

        13     tax jurisdictions -- you were asked by

        14     Governor Leavitt what are the alternatives.

        15     It seems to me that you were told -- and also

        16     Mayor Kirk asked, would the federal

        17     government pay for this?

        18               I think it's appropriate in this

        19     area for there to be for when such a proposal

        20     is made -- such a -- quite a drastic proposal

        21     and I think you would agree with that -- that

        22     there be a presentation and some ideas from



         1     you as to how that revenue ought to be

         2     replaced.  To indicate the fairness, the

         3     simplicity, all of the various factors which

         4     go into a tax system, as well as why -- the

         5     other question was asked, I think, by

         6     Ms. Jones, as to why the federal government

         7     is prohibiting states from enforcing laws

         8     which would -- which account for such a large

         9     proportion of their revenues.

        10               So I would suggest, Mr. Wysocki,

        11     that if you pursue this and Mr. Kasich

        12     pursues it, that such a recommendation be

        13     heard.

        14               CHAIRMAN GILMORE:  Mr. Andal?

        15               MR. ANDAL:  Oh, I have so much to

        16     say.  First of all, on the kiosk example, I

        17     feel like I'd have a real chance at the vice

        18     president's support, and I didn't want to

        19     miss this opportunity.  But under my

        20     proposal, the kiosk example that you

        21     mentioned would constitute physical presence

        22     and would be taxable.  No doubt about it,



         1     under my proposal that would be taxable.  I

         2     think -- I think part of the -- and by the

         3     way, I'm dying to answer the question as to

         4     what tax would I prefer to replace these

         5     taxes with.  I would volunteer a tax on

         6     lawyers and accountants.

         7               But I think we have the burden all

         8     wrong here.  I lost all the lawyers on this

         9     panel.  Here's the question for you.  Right

        10     now it is unconstitutional to make

        11     out-of-state sellers collect tax unless they

        12     have physical presence in your state.  That's

        13     the law of the land.  My proposal codifies

        14     that, expands it, makes the brighter lines,

        15     brighter.  But really does not change the

        16     underlying principles that we have today.

        17               I might be a single voice on this

        18     question, but I don't believe the sales tax

        19     is fatally flawed.  We collect about $27

        20     billion a year in California.  It's about

        21     somewhere between 35 or 40 percent of our

        22     general fund.  It finances our schools, helps



         1     us house prisoners, finances health and

         2     welfare to the poor.  It does -- other than

         3     the state income tax, it's is the most

         4     important state tax.  Most of the property

         5     tax goes to local needs.

         6               I don't think the state's sales tax

         7     is fatally flawed.  We do that, by the way,

         8     at a collection cost of less than 1 percent.

         9     It's not a fatally -- it has problems,

        10     though, and some of the problems that it's

        11     had for, say, 20 years, involved nexus and

        12     are exacerbated by the Internet.

        13               The solution to that is not blowing

        14     up our entire sales tax system.  The solution

        15     is not a software program that basically

        16     allows forcing out-of-state sellers to

        17     collect our sales tax for us.  We don't need

        18     any of that.  All we need is some bright

        19     lines that make some refinements to our

        20     existing sales tax system and prevent some of

        21     the abuses that could harm the Internet in

        22     the future.



         1               I think the burden of proof,

         2     instead, is on those who want to collect from

         3     out-of-state sellers.  They're the ones that

         4     want to change the existing system, either

         5     through software or through overturning

         6     Quill, and the question ought to be asked of

         7     them, how you solve all of the inevitable

         8     problems that you create?

         9               The answer to Mayor Kirk's

        10     question, when he was here, was -- he asked,

        11     who's going to pay for this?  Is the federal

        12     government going to pay for this?  Pay for

        13     what?  There is nothing being lost.  The

        14     question is are you going to allow state and

        15     local governmental entities to go after more?

        16     To collect more, to provide more sales tax

        17     collection responsibilities on out-of-state

        18     retailers.

        19               So the question is a little

        20     backwards.  That is, if you don't -- if you

        21     think the sales tax system is not bringing in

        22     enough money and you need to tax -- make



         1     out-of- state sales tax collectors pay more,

         2     then it's your burden to solve the problem.

         3     But there is no revenue loss of any

         4     significance occurring.  You have -- you have

         5     to have that burden of proof if you want to

         6     exchange our existing system with such a

         7     dramatically different system.

         8               CHAIRMAN GILMORE:  Delna Jones?

         9               MS. JONES:  Let me just -- Mayor

        10     Kirk needs no one to be in his corner, and I

        11     wouldn't want to try to do that.  However, I

        12     was going to say, I think that the question

        13     was related directly to Chris who was looking

        14     at really, in the end, almost eliminating all

        15     sales tax.  So I think that was the issue.

        16               Let me just add another piece from

        17     a state that doesn't have a sales tax.  One

        18     of the things that I'm very supportive of

        19     the -- of the comments that you've just made,

        20     and that is, because there is no -- just

        21     because there is not a sales tax does not

        22     mean that the tax system is fair or better.



         1     What I think it means is that you have a very

         2     high income, then, or you have other tax

         3     structures that are not necessarily as broad

         4     based, and are not related to choices and

         5     much as the sales tax.

         6               So when we look at the idea of

         7     eliminating all sales tax, I don't think that

         8     is necessarily a good step forward, from

         9     experience.

        10               Plus the fact that one of things I

        11     think our citizens have become very capable

        12     of doing, especially in states with an

        13     initiative petition process, is if one area

        14     of taxation has become more burdensome to

        15     them than they feel is realistic, they will

        16     find ways to reduce that tax structure, so

        17     that that does not feel -- so they do not

        18     feel the effect of that.

        19               I think the broader base tax you

        20     have, the better chance you have of being

        21     fair in that regard.

        22               CHAIRMAN GILMORE:  Grover Norquist?



         1               MR. ANDAL:  Do you want to give

         2     Mayor Kirk rebuttal?

         3               CHAIRMAN GILMORE:  Go ahead, Grover.

         4               MR. ANDAL:  That will teach you to

         5     leave the room.

         6               MR. NORQUIST:  Commissioner Andal?

         7     In your extension of the 4-R law to protect

         8     the telecommunications industry from being

         9     discriminated against or -- by state and

        10     local governments, compared to other

        11     industries, do I understand correctly that

        12     you just forbid state and local governments

        13     from having discriminatory property tax laws?

        14               MR. ANDAL:  Yes.

        15               MR. NORQUIST:  Why not include in

        16     that the excise taxes and other taxes that

        17     have gotten awfully high, as well?

        18               MR. ANDAL:  My proposal was only

        19     designed to deal with what I consider

        20     discriminatory ad valroem or property tax.

        21     There are -- that basically falls into three

        22     separate categories.  Some states tax



         1     intangible assets of telecommunications

         2     companies, while they don't tax the

         3     intangible assets of other companies in their

         4     state.  Some tax telecommunications companies

         5     at a higher rate of taxation.  Then others --

         6     and in the case of California, the

         7     discrimination that we engage in is we tax

         8     property of telecommunication carriers at

         9     market value, whereas all other businesses

        10     are taxed at a base year value set by

        11     Proposition 13 with an annual increase of 2

        12     percent.

        13               So my proposal only deals with the

        14     property tax piece, and the reason I didn't

        15     deal with the rest was others were.

        16               CHAIRMAN GILMORE:  Andy Pincus?

        17               MR. PINCUS:  Thank you, Governor.

        18     I wanted to put another issue on the table,

        19     although you alluded to it and so did Mayor

        20     Kirk, which is a question of fairness in

        21     discussing the food and drug exemptions.

        22     You've talked about how they were based on



         1     the public policy concern about who would

         2     bear those -- the cost of paying sales taxes

         3     if they were imposed on essentials of life,

         4     like food and medicine.  It seems to me in

         5     deciding whether and how to change the

         6     current system, because even Commissioner

         7     Andal's proposal is a change, one question

         8     that we have to consider is the fairness of

         9     the rules that we would adopt, if there are

        10     new rules, and the fairness of the current

        11     system.  At that, seems to me, to bring us to

        12     the issue of the digital divide.

        13               I think it's been mentioned here,

        14     but in the Commerce Department's study that

        15     came out last summer we found that households

        16     with incomes of 75,000 and higher are more

        17     than 20 times more likely to have access to

        18     the Internet than those at the lowest income

        19     levels, and more than nine times as likely to

        20     have a computer at home.

        21               All of us, I think, got a letter

        22     from nine Senators that raised this issue and



         1     expressed concern about the burden of sales

         2     and use taxes falling most heavily on low

         3     income consumers who are the least likely to

         4     have Internet access and the ability to buy

         5     goods on line.

         6               So it just seems to me that one

         7     issue that we all should keep in mind in

         8     accessing all these various proposals is what

         9     that will do to the -- where that adjustment

        10     will put the burden of the sales tax.

        11     Because I think some of the proposals will

        12     change where that burden falls.

        13               CHAIRMAN GILMORE:  Andy, I want to get

        14     on with this issue.  I absolutely believe

        15     that the digital divide is an important issue

        16     before the country, and I don't think we

        17     should assume, or have any right to assume,

        18     that people of modest means shouldn't have --

        19     won't have access to the Internet.  I imagine

        20     that this discussion was had at the time that

        21     the telephone was being introduced and people

        22     were talking about how, well, people of



         1     modest means, they can't make phone calls

         2     and, gee, they've got to run down to the

         3     local access or something.

         4               I think that we should be finding

         5     ways to get people onto the Internet.  I

         6     think we should find ways to do that.  My

         7     proposal, that I put in, which is included in

         8     the issues paper which will be discussed

         9     tomorrow afternoon, in fact says we ought to

        10     take TANF funds and take federal regulations

        11     and clarify it in order to give Governors a

        12     free hand to utilize excess surplus TANF

        13     funds in order to help cross the digital

        14     divide and give people more opportunities for

        15     access.

        16               Once you've done that, once you've

        17     extended the hand of the Internet down into a

        18     broad range of the people of this country,

        19     then a no-tax regime at that point really

        20     cuts generously to people who, otherwise, are

        21     having to make trips long distances, to go to

        22     malls, and can't, because they don't have



         1     cars.  Senior citizens, who are -- of whom I

         2     some personal knowledge of this, who have a

         3     hard time getting places in order buy things

         4     for themselves.  People who are concerned

         5     about what level of quality of life they're

         6     going to have, which could get four to -- in

         7     some states, more than 8 percent more,

         8     because they're not having to pay the tax,

         9     because they have an opportunity now to get

        10     on line.

        11               So I believe, absolutely, that the

        12     digital divide is a key issue, and the more

        13     generous proposals that I think are being

        14     offered, I think are more long-term prospects

        15     for people of modest means in this country.

        16               MR. PINCUS:  Governor, if I could

        17     for just a minute?  We -- I couldn't agree

        18     more that government should do everything it

        19     can to close the digital divide.  In fact, we

        20     had a conference on that subject in the

        21     Commerce Department last week with the

        22     business community, the public interest



         1     community -- a whole bunch of people -- to

         2     try and bring together to focus on that.  But

         3     in the short term, I think we can agree --

         4     although that's an important goal and one we

         5     should move forward with, I think one

         6     question is where we are in the short-term

         7     and what some these proposals will do in the

         8     short-term until that era happens.

         9               CHAIRMAN GILMORE:  I believe it makes no

        10     sense to argue that we should preserve taxes

        11     on commerce on the Internet, because today

        12     poor people can't get on the Internet.  I

        13     believe that's a very short-sighted point of

        14     view.  But this is also going to be discussed

        15     again tomorrow.

        16               Ron Kirk?

        17               MAYOR KIRK:  Governor, I did want to

        18     commend you, at least, for addressing that

        19     issue in your proposal, but I think it's a

        20     little more complex than that, because it's

        21     not just having a computer, it's the

        22     knowledge to use it.



         1               Also the reality -- the statistics

         2     Mr. Pincus gave us to instruct us, but more

         3     than that, 99 percent of the people that buy

         4     over the Internet pay with a credit card.

         5               So it's not going to help if you

         6     get someone at the lowest poverty level a

         7     computer.  They don't have the knowledge and

         8     they don't have credit, so they still have

         9     got a computer.  But if they can't use a

        10     credit card to pay for it, they won't.

        11               But, briefly Dean, I wanted to

        12     ask -- answer your question in terms of what

        13     cities and states would use with that money,

        14     and I want to elaborate, because to me the

        15     most exciting thing that's going to happen

        16     in 20-something days is not whether -- I

        17     mean, we will survive Y2K.  We'll survive the

        18     year of celebrations, but the next year is a

        19     decennial, and we're going to go into a

        20     census.

        21               States like California and Texas

        22     and border states, I would imagine, are



         1     seeing explosive growth, because people are

         2     moving to our part of the world to

         3     participate in this economy, and in some

         4     cases of migration, both legal and illegal.

         5     The biggest drain -- biggest drains challenge

         6     for high growth barriers, high growth states,

         7     is education.

         8               Paying for education, paying for

         9     roads, paying for streets, paying for

        10     increased demands for city services,

        11     out-strips the capacity of every government

        12     entity in this country.  Even though we've

        13     had tremendous surpluses the last several

        14     years, the few years before that we had

        15     tremendous losses.  Our city just now is back

        16     at the same tax levels that we were in 1984.

        17     We're proud of that.  But there was a lot

        18     times we didn't invest in infrastructure, and

        19     we would never propose to go in and tax

        20     people as much as we could so that we could

        21     fill every pothole, build every school.  So

        22     you have to spread that out.



         1               I think as someone involved in

         2     state government, you know that it does not

         3     equate to say, because you've got a surplus

         4     in one year that you don't have needs.  I

         5     would imagine even the most prosperous cities

         6     like Dallas and New York and others have

         7     billions of dollars of unfunded needs and

         8     projects that have to be met.  The federal

         9     government helps, because they want us to

        10     clean up our air, clean up our water, and do

        11     a number of other things that they give us no

        12     money to fund, and we should do that.

        13               But all of that takes money.  I

        14     assure you that our dollars are spent wisely.

        15     Unlike the federal government, we have to

        16     balance our budget at the end of every day.

        17     We don't get to do deficit spending.  So we

        18     live in a real world of service delivery that

        19     either we raise taxes or we cut services.

        20               CHAIRMAN GILMORE:  Richard Parsons?

        21               MR. PARSONS:  Thank you, Governor.

        22     One wrestles as you sit here and listen to



         1     this discussion with the question of how is

         2     this Commission ultimately going to come to

         3     some conclusions or endpoints, because

         4     essentially here the debate is between

         5     positions.  Just trying to think about it

         6     puts -- and particularly for tomorrow, what

         7     strikes me in listening to this conversation

         8     is that we need to be clear on what the issue

         9     is we're trying to solve for here.

        10               I mean, is the question before the

        11     House on this sales tax issue?  I mean,

        12     that's where the shoe is binding around the

        13     table.  Is the question what do we need to do

        14     to level up the playing field?  By that I

        15     mean, you know, how do we make sure that

        16     electronic commerce gets treated in the same

        17     fashion from a tax point of view as

        18     nonelectronic commerce?

        19               So, I mean, if that's the issue, I

        20     think our fellow Commissioner Dean Andal has

        21     fairly interesting proposition that's at

        22     least a good strawman to start from.  Because



         1     what he's trying to, as I understand it, is

         2     to draw the bright lines between where

         3     E-commerce really has a nexus with the state

         4     and should be taxed from a sales tax point of

         5     view and in the same way that other commerce

         6     with a nexus to a state does and where it

         7     doesn't.

         8               But there are at least two other

         9     issues.  One is -- is there something special

        10     about electronic commerce that suggests it

        11     should be exempted from sales tax altogether?

        12     That's the argument we're hearing from

        13     Mr. Wysocki and others that basically says,

        14     "Oh, if you tax it in any kind of way, we're

        15     going to put a burden on this goose that's

        16     laying the golden egg and potentially kill

        17     the goose."

        18               Now, while one hears the arguments,

        19     there doesn't seem to be any evidence at this

        20     point in time to actually support those

        21     arguments, but that's a different question

        22     than the question that Dean is trying answer.



         1               The other side of that coin is, you

         2     know, is there something about E-commerce

         3     that really reveals the need to reform the

         4     entire sales tax system?  That's kind of

         5     where, I think, Governor Leavitt and Mayor

         6     Kirk and others are coming from and they're

         7     saying, you know, we could tolerate remote

         8     sales as kind of a loophole or a hole in

         9     our -- in the bucket out of which a little

        10     bit of sales tax leaked in the past, because

        11     remote sales just never had the capacity to

        12     sort of overwhelm the entire market.

        13               This new thing called E-commerce

        14     does and so we now have to go back and kind

        15     of re-examine the entire sales tax structure.

        16     Now, again, that's an argument.  I haven't

        17     heard any evidence that suggests it's a

        18     reality staring us in the face at this point

        19     in time.  It could happen, could not.  But

        20     one of the things we might do as a Commission

        21     is try and figure out, you know, what are we

        22     trying to solve for here?  Because if



         1     everybody's got a different question in their

         2     mind or everybody's trying to resolve for a

         3     different issue, we're not going to make it

         4     as a Commission in terms of coming to some

         5     kinds of conclusions.

         6               I know we've all put in the time

         7     and listened to enough witnesses, that it

         8     would be useful to kind of come out of this

         9     thing with some recommendations that we could

        10     all get our arms around.

        11               CHAIRMAN GILMORE:  Paul Harris?

        12               MR. HARRIS:  Thank you, Governor.

        13     As I'm listening to the debates today, I find

        14     it all very interesting, and obviously, it's

        15     complex, and I think the presenters have

        16     facilitated our understanding of just how

        17     complex these issues are.  Certainly, there

        18     are no easy solutions to these problems.  But

        19     as I listen, I am increasingly am able sort

        20     of break out the Commission into several

        21     distinct camps which I think best

        22     characterize some of the deliberations that



         1     we're having.

         2               It is written that Oliver Wendell

         3     Holmes once said that taxes is the price we

         4     pay for living in a civilized society.  I

         5     think we have those here who represent that

         6     point of view.  John Marshall, our most

         7     famous Chief Justice, also said the power to

         8     tax is the power to destroy.  Certainly, we

         9     have individuals on the Commission who come

        10     from that perspective, as well.  Then the

        11     rest of us are either just confused or don't

        12     really care.

        13               But I think -- but also I wonder if

        14     we've really taken the time as a Commission

        15     to answer some more fundamental questions

        16     which I think are dispositive in the long

        17     run.  As I sit here and listen to these

        18     discussions, all of which are very, very,

        19     intellectual stimulating and interesting, I

        20     wonder if we're debating in the proper

        21     constitutional framework.

        22               I hear Delna Jones ask a question



         1     about whether the federal government is

         2     better at setting tax policy.  I'm not sure

         3     that's the right question.  I think a better

         4     question is whether E-commerce is inherently

         5     interstate commerce.  If E-commerce is

         6     inherently interstate commerce, then the

         7     question has already been disposed of in

         8     Article 4 of the Constitution, which provides

         9     that Congress has authority to regulate

        10     interstate commerce.

        11               Then if we go beyond that, there is

        12     a question of whether regulation of

        13     interstate commerce also empowers Congress

        14     with the authority to mandate tax policy

        15     within the various states and how that might

        16     conflict with the 10th Amendment.

        17               Then, finally, I wonder if states

        18     have a constitutional right to tax citizens

        19     in a different state that have little to no

        20     contact with the state that is doing the

        21     taxing?  I throw these questions out because

        22     I'm hopeful that they are constitutional



         1     lawyers or scholars who might be watching

         2     this via the Internet and might be willing to

         3     give us some guidance on this.  But, you

         4     know, we can talk about these issues ad

         5     nauseam, and it's all very interesting and

         6     exciting and we give the press a lot to write

         7     about -- and we've all had our various

         8     dealings with the press.  It's like having

         9     lunch with a tiger.  You can enjoy the lunch,

        10     but the tiger always eats last.

        11               But we need some guidance on these

        12     constitutional questions as to whether all of

        13     this discussion is being conducted and

        14     discussed with any proper constitutional

        15     framework, and I'm not sure that some of

        16     these basic questions have been answered.

        17               CHAIRMAN GILMORE:  The time is up.  We

        18     will have some more time to continue this

        19     even more sharply tomorrow, I suspect.  I

        20     would like to ask the members of the funding

        21     subcommittee to meet Delna Jones and me --

        22     that being Grover Norquist, and John



         1     Sidgmore.

         2               Let me mention one thing before we

         3     conclude, ladies and gentlemen who are

         4     getting up.  I would like to point out that

         5     in this hotel, according to a friend who's

         6     passed me a note, Mr. Tony Rocowski -- in

         7     this hotel in March of 1973, Bob Kahn

         8     convened the DARPA principle investigators,

         9     sketched the TCPIP protocol on a napkin, and

        10     the Internet was born in this hotel in 1973.

        11               We'll convene again tomorrow

        12     morning.  Thank you.

        13                    (Whereupon, at 6:00 p.m., the

        14                    PROCEEDINGS were continued.)

        15                        *  *  *  *  *








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