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Third Meeting: Transcript of December 15 1999

previous transcript (December 14)


              ADVISORY COMMISSION ON ELECTRONIC COMMERCE











                             THIRD MEETING











                       Westin St. Francis Hotel

                       San Francisco, California

                     Wednesday, December 15, 1999













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       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









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       1     PARTICIPANTS (CONT'D)

       2          ADAM THIERER

       3          STACEY L. SPRINKLE

       4          KEITH LANDRY

       5          JOHN MORABITO

       6                     *  *  *  *  *

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

       2               CHAIRMAN GILMORE:  Ladies and gentlemen,

       3     we had some of the television glitches which

       4     we have been waiting for, but I think that

       5     they're all straight now, so that we can get

       6     started once again.

       7               Welcome to the third meeting of the

       8     Advisory Commission on Electronic Commerce.

       9     I'm Governor Jim Gilmore, Governor of the

      10     Commonwealth of Virginia and chairman of the

      11     Commission.  And I would like to call the

      12     meeting to order.

      13               As yesterday, because we are on --

      14     either on television or being taped on

      15     television, I'm not sure which, it would be

      16     desirable, I think, for the viewing audience

      17     in the country to be acquainted with the

      18     members of the Commission.  So if you will

      19     bear with me, I am still trying to make sure

      20     I've got everybody's titles exactly right,

      21     but I think it is good to introduce the

      22     members of the Commission.









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       1               On my left, I begin with Delna

       2     Jones.  Delna Jones is the county

       3     commissioner from the Washington County in

       4     the State of Oregon.

       5               Others are going to be coming in.

       6     Mr. Pottruck is not yet here, so let me cross

       7     by his seat for just a moment.  In fact, I

       8     believe he's in a meeting this morning and

       9     will join us at a later time.  David

      10     Pottruck, who will be with us in a short

      11     while, is the president and co-chief

      12     executive officer of Charles Schwab

      13     Corporation.

      14               The third individual next over on

      15     my left is -- just one moment here; let me

      16     just make sure I know what I'm doing here --

      17     Gary Locke, of course, the Governor of the

      18     State of Washington.

      19               The next is Mr. Ted Waitt.  He is

      20     chairman and founder of Gateway,

      21     Incorporated.

      22               The next is Michael Leavitt.  He is









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       1     the Governor of the State of Utah.

       2               The next is John Sidgmore.  He is

       3     the vice chairman of MCI Worldcom, and

       4     chairman of UUNet.

       5               The next is Ron Kirk.  Ron is the

       6     mayor of the City of Dallas, Texas.

       7               The next is Joe Guitentag.  He is

       8     the senior advisor, the Office of Tax Policy

       9     of the United States Treasury Department.

      10               The next on this side of the room,

      11     beginning to work our way back towards the

      12     chair, at the end is Andre Pincus.

      13     Mr. Pincus is the General Counsel of the

      14     United States Department of Commerce.

      15               Oh, excuse me.  I passed by

      16     Mr. Novick.  At the very end is Mr. Robert

      17     Novick.  He is the General Counsel for the

      18     Office of the United States Trade

      19     Representative.  Robert, thank you.

      20               The next is Mr. Stan Sokul.  He is

      21     an independent consultant and represents the

      22     Association for Interactive Media.









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       1               The next is Mr. Gene Lebrun.  Mr.

       2     Lebrun is president, from '97 to '99, of the

       3     National Conference of Commissioners for

       4     Uniform State Laws.

       5               The next is Mr. Grover Norquist.

       6     He is the president of Americans for Tax

       7     Reform.

       8               The next is Mr. Paul Harris.  Is a

       9     member of the state legislature.  He is a

      10     member of the House of Delegates, the

      11     Commonwealth of Virginia, from

      12     Charlottesville, Virginia.

      13               Let's see.  Who do we have here?

      14     If I can find my list.  Why am I having

      15     trouble with this?  Here we are.  I just want

      16     to make sure I get the title right.  Yes,

      17     he's President.

      18               The next is Mr. Richard Parsons.

      19     He is the president of Time Warner,

      20     Incorporated.

      21               And then seated to my immediate

      22     right, the last individual to be named today









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       1     is Dean Andal.  He is chairman of the

       2     California Board of Equalization.

       3               Absent from this meeting, but who

       4     are members of the panel, as well, are

       5     C. Michael Armstrong; he is the chairman and

       6     chief executive officer of AT&T.  He has been

       7     in previous attendance, but is not able to be

       8     here today.

       9               And also, Robert Pittman, the

      10     president and chief operating officer of

      11     America Online.  And as I indicated,

      12     Mr. Pottruck, the chief of Charles Schwab,

      13     will be with is and join us shortly.  He has

      14     a business meeting in San Francisco here this

      15     morning.

      16               So thank you all very much for

      17     bearing with me as I get my titles right.

      18               I would like to remind everyone

      19     that this meeting is open to the public, and

      20     is being Webcast over the Internet and can be

      21     viewed on our Web site for the Commission.

      22               And that Web site is









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       1     www.ecommercecommission.org.  That's

       2     www.ecommercecommission, which is one long

       3     word, -.org.

       4               Today the agenda is to continue to

       5     hear presentations of proposals that have

       6     been submitted to the Commission.  And we

       7     have set aside a considerable amount of time

       8     to discuss those proposals and to review the

       9     Commission's issues and options paper, as

      10     called for by the Commission's work plan.

      11               We're going to take up several

      12     resolutions also today that have been offered

      13     by Commissioner Grover Norquist, and address

      14     some of the administrative issues at the very

      15     end of the day today as we conclude our

      16     meeting at about 5:30, somewhere in that

      17     area.

      18               Following the presentations, we'll

      19     entertain questions from the Commissioners.

      20     The pattern seems to be working fairly well

      21     to get the Commissioners' statements out and

      22     then go to Q&A to the entire panel at the









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       1     end.

       2               The first series of proposals,

       3     which are intended to be presented as a

       4     panel, include the following:

       5               The first presented will present

       6     "Streamlined Sales Tax System for the 21st

       7     Century."  This will be presented by Governor

       8     Bill Janklow of South Dakota and Tennessee

       9     State Representative Matthew Kisber and Chair

      10     of the Hennepin County, Minnesota Board,

      11     Mr. Randy Johnson, and on behalf of the

      12     National Governors' Association, National

      13     Conference of State Legislatures, the Council

      14     on State Governments, the National

      15     Association of Counties, the United States

      16     Conference of Mayors, and the International

      17     City-County Management Association.  Welcome,

      18     gentlemen.  Thank you for being here.

      19               Also a part of this panel for

      20     presentation is a second topic, a proposal

      21     that's been made.  The proposal on "Taxation

      22     of Electronic Commerce," by John Peha -- is









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       1     it Peha?  Mr. Peha of the Carnegie-Mellon

       2     University.

       3               The third is "Adapting Tax

       4     Technology to the Internet."  And this is

       5     "The E-Commerce Transaction Tax Server."  And

       6     the presenter is Mr. Daniel Sullivan of

       7     Taxware International, Incorporated.

       8               Now, gentlemen, I understand that

       9     your presentations are intended to be a panel

      10     presentation.

      11               Governor Janklow, we're pleased and

      12     honored to have you with us.  And the panel

      13     presentation would be about 30 minutes total,

      14     although I think we could add a little more

      15     time.  There's an understanding, of course,

      16     there will be time for Commissioners at the

      17     end, at the conclusion of all presentations.

      18               So I think that because of Governor

      19     Janklow's position, I think that we want to

      20     give him a little more time.

      21               Governor Janklow, we would extend

      22     to you 15 minutes for your opening remarks,









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       1     as well, of course, adding some time, the

       2     balance of the time to the members of the

       3     Commission.

       4               So with that I want to welcome

       5     Governor Janklow.  Governor, thank you for

       6     being here with us today, and the floor is

       7     yours.

       8               GOVERNOR JANKLOW:  Mr. Chairman and

       9     members of the Commission, thank you very

      10     much for the courtesy that's been extended to

      11     me this morning.  And I say that on behalf of

      12     the National Governors' Association,

      13     especially on behalf of the people in my

      14     state.

      15               I'd like to set out a couple

      16     parameters as I start, if I could.  One, in

      17     this person's mind, in my mind, there's no

      18     question that the federal government has the

      19     right to regulate interstate commerce.  And

      20     there's no question that the taxation of

      21     commerce is within the interstate commerce

      22     sphere.  So I don't dispute going all the way









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       1     back to the Articles of Confederation that

       2     Congress has this power.  As a matter of

       3     fact, as we all know from our history

       4     lessons, after the Revolutionary War, when

       5     the 13 original colonies entered into

       6     business, they were taxing each other's

       7     goods, they were sending ambassadors to

       8     foreign countries, they were raising armies,

       9     they even tried to run post offices.  And the

      10     net result was nothing worked.

      11               So they had to meet and form the

      12     United States of America.  And that's how we

      13     got the Constitution that we have.  And in

      14     that Constitution, they address the evils

      15     they had found under the Articles of

      16     Confederation.  And in the Bill of Rights,

      17     they address the evils they had found from

      18     British colonial rule.

      19               So between those two different

      20     documents put together, we got this marvelous

      21     Constitution.

      22               So I don't dispute in any way that









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       1     Congress has the power.  The issue is, how

       2     are we going to deal with the existing

       3     framework of an America that's over 200 years

       4     old, and certain things that have been left

       5     throughout history to the purview of the

       6     states?

       7               When they invented the telephone,

       8     it started commerce, electronic commerce.

       9     Nobody thought that there was something

      10     unique that ought to be prohibit -- prohibit

      11     the states from doing.  Over the decades,

      12     they invented fax machines.  Again, this

      13     expanded greatly electronic commerce.  Nobody

      14     felt there was any necessity to screw around

      15     with the state's ability to raise the funds

      16     to carry out state functions.

      17               Now we're into the multimedia

      18     world, and now we're into the Internet, and

      19     we're utilizing narrow-band, wide-band,

      20     broadband technology, and it's exploding onto

      21     the scene.  None of us dispute that the

      22     backbone of this, a significant portion of









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       1     the backbone of this, is going to be commerce

       2     into the future.

       3               Some people say the states are

       4     flush with cash.  One, they aren't.  But two,

       5     that isn't the issue.  This Commission wasn't

       6     established.  And the debate going on in

       7     America isn't whether or not state's have

       8     money.  As a matter of fact, it's the states

       9     of this union -- Mr.  Chairman, you're a

      10     classic example of that -- the states of this

      11     union and its governors and legislatures are

      12     the only people that have figured out how to

      13     cut taxes in America.  Congress and the

      14     President haven't done it.  They talk about

      15     it, but they can't get it done.  We on the

      16     state level have cut $25 billion worth of

      17     taxes over the course of the last decade.

      18     And you, Mr. Chairman, have been a leader in

      19     that in the short period of time that you've

      20     been a chairman.

      21               Let me say on my behalf, I've been

      22     Governor for four -- I'm in my fourth terms









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       1     as a governor.  A split series.  I was

       2     Governor in 1979, '80, and '81.  I lived

       3     through that period of time when we had

       4     18 percent interest rates and we had huge

       5     unemployment in America.  We had great

       6     problems.  And I was the first governor in

       7     the nation to cut the state's spending across

       8     the board.  I cut everything but K-12

       9     education.  I cut the blind and the deaf and

      10     the welfare crowd and the handicapped.  I cut

      11     the colleges and universities, the state

      12     employees, the works, because we had to do it

      13     to survive.  The federal government could go

      14     into debt to finance its problems.  We

      15     couldn't, because our state Constitution

      16     prohibited going into debt.

      17               But over the years, the last

      18     decade, we've cut $25 billion worth of taxes.

      19               As a matter of fact, in the last

      20     five years, I have cut 8 percent of the

      21     state's labor force.  We do today, by

      22     utilizing technology, and by working more









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       1     productive and smarter, all the state

       2     employees and I are able to do the work with

       3     8 percent less people that we had on the

       4     state's payroll five years ago.

       5               My state does not have a corporate

       6     income tax.  It doesn't have a personal

       7     income tax.  So I can't match some of my

       8     colleagues who are talking about cutting

       9     income taxes in their state, because our tax

      10     rate is zero for income tax.  So I can't cut

      11     it in South Dakota, like you can cut at other

      12     places and get political credit for it.

      13               In addition to that, in my state,

      14     we've cut personal property taxes, as of this

      15     next January, 30 percent across the board for

      16     every agriculture producer and every

      17     homeowner in the state of South Dakota.

      18     We've been able to do it within the framework

      19     of the existing structure we have, which is a

      20     backbone sales tax.  Yes, we have the other

      21     taxes:  Liquor tax, inheritance tax, the

      22     cigarette taxes and all of the vice taxes.









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       1     But by and large, the sales tax -- a broad

       2     based sales tax -- is where we get our money.

       3               I'd like to do one thing and draw a

       4     picture for you.  Just visualize with me for

       5     a moment all of you what my state looks like.

       6     It's a remote, rural state.  It's the 13th

       7     largest land mass in America.  It's 450 miles

       8     long, it's 250 miles wide, it's 88 million

       9     acres.  It has 730,000 people.  The

      10     population of Minneapolis-Saint Paul, is

      11     spread over 310 towns and cities in my state.

      12     The largest one we think is huge; it's got a

      13     110,000 people.  Our second-largest city has

      14     less than 60,000.  Our third-largest has less

      15     than 30,000.  And our fourth largest has less

      16     than 20,000.  And the remaining -- and let me

      17     put it this way.  The 14th largest has less

      18     than 5,000 people.  296 of our 310 towns and

      19     cities have less than 5,000 people.

      20               We become very small, very, very

      21     quickly.  Why is that important?  It's

      22     important because we have to maintain, to the









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       1     extent we can -- and I'm a governor who

       2     realizes that you can't stop change in the

       3     world.

       4               When I was a kid, my mom sent me to

       5     the store.  I went to the dairy and got the

       6     milk.  I went to the bakery and got the

       7     bread.  I went to the produce department and

       8     I got the vegetables.  And then somebody

       9     figured out, why have we got all these

      10     separate stores?  Let's put them under one

      11     roof.  So they called it a supermarket.  And

      12     people passed laws trying to save all the

      13     mom-and-pop grocery stores and dairies and

      14     bakeries.  We couldn't stop progress, because

      15     the housewives of America went where they

      16     could get convenience and products and price.

      17     We couldn't stop progress.  Nowadays, the

      18     only ones who want to stop progress are

      19     bankers.  They talk free enterprise, but they

      20     all come before the legislatures, trying to

      21     prevent competition from coming into play

      22     when you try to get a new bank in the









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       1     community.  Everybody else is for

       2     competition.

       3               But we can't have government policy

       4     that works to the detriment of a certain

       5     segment of our populations.

       6               You know, if you're -- Ted Waitt

       7     sits on this Commission.  He's the founder of

       8     Gateway.  He's the chairman of the board of

       9     Gateway.  Do you know where he pays taxes?

      10     Virginia and South Dakota, because he has

      11     nexus in Virginia and South Dakota.  And if I

      12     buy a computer from him for $2,000 -- and

      13     that's an expensive one from him -- but if I

      14     buy a computer from him for $2,000, I will

      15     pay him $120 tax in South Dakota at 6 percent

      16     rate in one of our municipalities.  But if I

      17     buy a Dell computer from Austan, Texas, the

      18     freight rate is going to be basically the

      19     same, but I'm going to pay $120 less for the

      20     identical Dell computer from Austan, Texas,

      21     because they don't have nexus in my state.

      22               Now, I'm not trying to change









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       1     nexus.  And I want you all to understand,

       2     this Governor does not think that we ought to

       3     change the nexus rules with anything we're

       4     discussing right now.  There is something

       5     more fundamentally important that I am

       6     talking about.  I am talking about that we

       7     are going to have to give a tax increase.  If

       8     we continue on the course that we're headed

       9     on on the national level, we're going to have

      10     to give a tax increase to citizens in my

      11     state who are the most vulnerable.

      12               A broad-based sales tax is the

      13     backbone tax in every state.  Who is going to

      14     pay it?  The people that deal with purchasing

      15     the necessities of life.  Because the reality

      16     of the situation is that most of the things

      17     that will be purchased over the Internet as

      18     we move into the out years will not be the

      19     convenience, day-to-day items.  They'll be

      20     the other things.  Because convenient stuff,

      21     you want to buy immediately and you want to

      22     take delivery immediately.









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       1               In my state where you've got

       2     small-town Main Streets -- and I'd like to

       3     emphasize this -- if I want to buy a suit, I

       4     can go find a suit that I like, but they have

       5     it in 44 and 46.  I'm a 48.  I can't get it.

       6     I can go on the Internet and get it, but I

       7     can't get it in a lot of the small-town Main

       8     Street merchants in my state.

       9               We cannot adopt a tax policy in

      10     America -- we can't adopt a tax policy in

      11     America that assists in wiping out these

      12     small-town Main Streets.  Now, the reality is

      13     they may get wiped out.  And the reality is

      14     they may be on the way to being wiped out.

      15     But the reality also is that we should not

      16     adopt a government policy -- at the same time

      17     our government is spending billions of

      18     dollars a year trying to shore up rural

      19     America, it shouldn't turn around on the

      20     other hand and do things to deliberately

      21     wreck rural America.

      22               You know, we used to have a program









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       1     called the wool subsidy program because we

       2     wanted to raise more sheep wool in America

       3     during the war.  We raised so much sheep wool

       4     with the subsidy, we turned around and

       5     started another program called the unshorn

       6     lamb program.  One time I had sheep and I got

       7     paid from both programs, because some of them

       8     I'd shorn and sold and the others, I didn't

       9     shear them and sell them.  Well, we found out

      10     the ludicrousness in this.

      11               The federal government doesn't have

      12     any problem taxing the Internet.  These

      13     people that sit in Congress and talk about

      14     changing the rules for the states have got to

      15     change the rule nationally.  Why, when I buy

      16     tires over the Internet, do I have to pay a

      17     federal excise tax?  Why?  For these folks

      18     that don't think it ought to be taxed.

      19               And I'll tell you, these folks that

      20     don't like taxes on the Internet, I'll tell

      21     you what they can do.  Instead of fooling

      22     around with the states and wrecking somebody









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       1     else, there's an easy solution.  Why don't

       2     they propose tax -- passing a national law

       3     that says we will not tax the income of

       4     anybody who makes their money over

       5     E-commerce?  They would get laughed out of

       6     America.  If anybody proposed that, they

       7     would get laughed out of America.

       8               But these folks that are so

       9     pernicious in pursuing these kinds of tax

      10     policies should understand what do states do

      11     with their money.  We educate our citizens.

      12     We take care of the blind and the deaf.  As a

      13     matter of fact, we pay for a hugely

      14     disproportionate share of special education.

      15               Congress passes law telling us we

      16     have to do certain things in special ed, they

      17     tell us they'll provide up to half the money,

      18     and they provide about 12 percent of the

      19     money, and we have to make up the difference.

      20     We take care of -- in my state of 750,000, we

      21     take care of 66,000 poor people for their

      22     medical care.  They're on Title 19.  That's a









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       1     huge expenditure for my state.  And we get

       2     that money, most of it to provide taking care

       3     of them, through our sales tax.

       4               So the point that I'm trying to

       5     raise is that we should not be changing the

       6     rules in the game.  Let commerce take care of

       7     itself.

       8               But the last point that I'd like to

       9     make, Mr. Chairman, because it's the most

      10     important one to me, never in the history of

      11     America have I been aware that the Congress

      12     or a national administration has passed a set

      13     of policies that deliberately set itself on a

      14     course to wreck certain aspects of state

      15     government.  The largest tax collections in

      16     the nation, even in the income tax states,

      17     are the sales tax base.

      18               And let's let the marketplace make

      19     the decision of what businesses succeed and

      20     what businesses fail.  Let's not decide that

      21     Gateway will win or lose based on the tax

      22     policies that we adopt on a national level.









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       1     That's unfair.  What it will force people to

       2     do is make their decisions based on the

       3     taxing scheme and not the free enterprise

       4     scheme.

       5               And to the extent we do that in

       6     America, we will be disproportionate in terms

       7     of how we deal with the allocation of

       8     development throughout America.

       9               So Mr. Chairman, the last point

      10     that I would like to make is what we are

      11     doing right now with the suggestions being

      12     made is creating a loophole, an unfair

      13     loophole for a certain segment of people who

      14     are late starters in the game of commerce.

      15     The folks that are established and have a

      16     capital base, it's at their expense for the

      17     late starters to come into the game and take

      18     advantage of a loophole.  Success in America

      19     cannot, should not, and should not allow to

      20     be based upon loopholes.

      21               So I want you to know I'm a person

      22     that believes in cutting taxes.  I'm a person









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       1     that believes in minimal government.  I think

       2     my actions in public life -- as the kids say,

       3     I've walked the walk and I've talked the

       4     talk.  But the bottom line is we cannot and

       5     we should not do anything that will disrupt

       6     the commerce in the states.

       7               The proposals to not allow taxation

       8     of interstate sales -- and let's all

       9     understand this.  Let's please understand

      10     this.  We are not taxing the -- we are not

      11     looking to tax the Internet in my state.  All

      12     I'm asking to be allowed to do is to collect

      13     the tax that the people of my state will owe

      14     under the laws of South Dakota that have been

      15     in place for more than 50 years, where they

      16     make purchases of goods or services like

      17     everybody else in South Dakota makes -- and

      18     to the extent that someone has nexus.  If

      19     they don't, we can't collect it.  But to the

      20     extent someone has nexus, we ought to be

      21     allowed, and we have to be allowed, to

      22     continue to get the revenues we need to carry









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       1     out the functions of government.

       2               Thank you so much for the courtesy

       3     you've given me, Mr. Chairman.

       4               CHAIRMAN GILMORE:  Governor, thank you

       5     very much for your presentation, the eloquent

       6     presentation.  We appreciate it very much.

       7     Would you like to floor manage the panel?

       8               GOVERNOR JANKLOW:  Oh, sure.  We all

       9     have our time limits and so we know what they

      10     are.

      11               CHAIRMAN GILMORE:  All right.  Then I

      12     believe that we are back to a 10-minute

      13     presentation.  You can see these aids that

      14     are before you here.  Yesterday I made

      15     reference to it, and it wasn't going on on

      16     the other side.  I was a little embarrassed.

      17     But you should see a green dot there.  And it

      18     can be an assistance to you just to kind of

      19     keep a feel for how much time that you're

      20     able to have.

      21               The next person on this panel is

      22     Tennessee State Representative, Matthew









                                                             29
       1     Kisber.

       2               Mr. Kisber, you're on.

       3               MR. KISBER:  Thank you, Governor

       4     Gilmore and members of the Commission.  It's

       5     an honor for me to be here this morning as

       6     one of the representatives of this proposal.

       7     It's been called the NGA proposal.  But in

       8     reality, we're here today as representatives

       9     of the major state and local government

      10     organizations coming forth and with this

      11     proposal.  And I'd like to spend a few

      12     minutes this morning sharing with you what we

      13     believe are the important components of the

      14     proposal.

      15               The zero burden proposal, first and

      16     foremost, provides an opportunity for all

      17     vendors to be playing on a level playing

      18     field.  We have heard extensively, not only

      19     yesterday but through the length of this

      20     discussion, how important it is that people

      21     who sell similar products be treated in a

      22     similar manner under similar circumstances.









                                                             30
       1               The distribution channel will not

       2     determine the tax policy that will be

       3     employed under the proposal that we bring

       4     forward.

       5               The zero burden proposal also

       6     accommodates the bricks and mortar business

       7     model.  As E-commerce and Internet sellers

       8     develop more fully, they'll want to add brick

       9     and mortar to their electronic operations and

      10     distribution warehouses.  And this could be

      11     done with an administrative ease and without

      12     new additional collection requirements.

      13               The zero burden proposal is

      14     voluntary.  It does not require Congress to

      15     change the current nexus standards, but

      16     rather it employs the current status quo on

      17     nexus.  We agree that there needs to be time

      18     for the Internet to develop, and that we need

      19     to work together to establish a system so

      20     that the collection of taxes that are owed

      21     and the development of new distribution

      22     models through electronic commerce can









                                                             31
       1     develop together and grow together.  And we

       2     believe that this proposal would do that.

       3               And very importantly, it removes

       4     costly administrative burdens from sellers

       5     and shifts that responsibility to state

       6     governments.  Governments pay for the system

       7     through a portion of the taxes which would be

       8     collected and remitted, not through

       9     additional levies that would be passed on to

      10     the remote sellers.  Just like the current

      11     vendors' compensation works in the sales tax

      12     scheme.

      13               For those of us who have worked to

      14     try to minimize the growth in government and

      15     actually reduce the size of government, this

      16     introduces an element of privatization into

      17     the collection of sales taxes.  It also --

      18     and I believe this is very important to those

      19     who are sellers -- this proposal eliminates

      20     the audit risk for those firms which are

      21     willing to participate.  As long as vendors

      22     use approved trusted third parties, or third









                                                             32
       1     party processors or whatever you'd like to

       2     call them, and the certified software that

       3     they provide, they would be held harmless.

       4     That, to us, is a very important

       5     consideration and a very attractive element

       6     of this proposal.

       7               The zero burden proposal also

       8     relies on a combination of technology and

       9     state simplification to make the system work.

      10     States will need to adopt uniformity in

      11     definitions, exemption process, filing and

      12     administration.  Again, it will be the state

      13     governments, not the sellers, responsible for

      14     the outcomes in this proposed system.  And as

      15     we all have great concerns about, it respects

      16     the privacy of buyers and sellers.  No buyer

      17     identification, except the taxing

      18     jurisdiction, goes to the trusted third

      19     party.

      20               In a state with local option taxes,

      21     the identifier would include the city, the

      22     county, and any other taxing jurisdictional









                                                             33
       1     information that's required to properly remit

       2     that tax which is collected.

       3               Let me tell you very quickly what

       4     the zero burden system does not do.  It does

       5     not change the current nexus standard for any

       6     tax.  It is a strictly voluntary system.

       7     States are faithfully following the court's

       8     decision on Quill.  We are not attempting to

       9     change Quill, but rather use the technology

      10     which has come forward with E-commerce, and

      11     the opportunity to develop new systems to

      12     collect, tax and to simplify our system in

      13     order to comply with Quill.

      14               The zero burden system does not

      15     impose a duty to collect on remote sellers.

      16     Instead, it provides a simple system that

      17     makes it easy and inexpensive for vendors to

      18     participate on a voluntary basis.  And very

      19     important to those of us who are proponents

      20     of this measure, it does not require federal

      21     legislation.

      22               Sales and use taxes are state









                                                             34
       1     taxes.  Governor Janklow covered that very

       2     well.  We do not need nor request federal

       3     interference in the establishment of our

       4     state tax policies.

       5               You've heard about the erosion of

       6     state sovereignty in an area that has been

       7     the province of state and local governments.

       8     We believe that the erosion of state

       9     sovereignty could lead, in many areas, to

      10     very dire, unintended consequences.

      11               What the zero burden system does

      12     not do as well is invade the privacy of

      13     buyers and sellers.  Again, only the taxing

      14     jurisdiction identifier is reported to the

      15     trusted third party.  And, again, it does not

      16     cost remote sellers.  The states will bear

      17     the cost of implementing and developing this

      18     system.

      19               So in summary, when you look at the

      20     proposal that is before you, I think it

      21     marries two very important concepts, two

      22     21st-century ideas:  The development of









                                                             35
       1     electronic commerce and the ability to

       2     utilize that technology to develop a system

       3     to collect the taxes that are owed under the

       4     laws of each of the states that impose a

       5     sales and use tax.

       6               If you see a benefit, if you see

       7     it's going to be good for your state, you can

       8     adopt it.  If you see that it's not going to

       9     benefit your state, you can pass on it.

      10               We believe that it's

      11     technologically feasible, and we'll hear more

      12     about that in a few minutes.  We believe it

      13     responds to the legitimate concerns of

      14     multistate sellers about undue burdens.  We

      15     take the burden of compliance off the remote

      16     seller and place it onto the trusted third

      17     party and the states to work out their

      18     simplification.  And the proposal meets the

      19     12-point criteria that you established in

      20     your meeting in New York, the benchmarks by

      21     which you're going to judge the proposals

      22     which have been presented to you today.









                                                             36
       1               So it is my pleasure to be with you

       2     this morning and to tell you that on behalf

       3     of the organizations which represent state

       4     and local governments, we wholeheartedly

       5     endorse and propose the zero burden proposal

       6     to you.

       7               Thank you.

       8               CHAIRMAN GILMORE:  Thank you,

       9     Mr. Kisber.

      10               The next presenter on this panel is

      11     Mr. Randy Johnson on behalf of the National

      12     Governors' Association.  Oh, excuse me,

      13     Mr. Randy -- let me be sure.  Yes, Mr. Randy

      14     Johnson.  He's chair of the Hennepin County

      15     Minnesota Board, I believe.

      16               MR. KISBER:  He's not Governor yet.

      17               CHAIRMAN GILMORE:  No, that's right.

      18     And this group, once again, the entire panel

      19     is speaking on behalf of the entire number of

      20     associations involved.

      21               Mr. Johnson?

      22               MR. JOHNSON:  Thank you very much.









                                                             37
       1     I'm not sure I can run for Governor in my

       2     state.  I've never wrestled and I'm not a

       3     Navy Seal.

       4               CHAIRMAN JANKLOW:  Apparently he isn't,

       5     either.

       6               MR. JOHNSON:  I don't think I'm

       7     going there.  Mr. Chairman and members of the

       8     Commission, again, thank you of this

       9     opportunity to discuss this very important

      10     issue.  And I want to stress that, although

      11     this has frequently been called the

      12     Governors' proposal, this is the proposal

      13     that has the support of city council members,

      14     local officials, county commissioners

      15     throughout the country, and specifically not

      16     only the National Governors' Association, but

      17     also the National Conference of State

      18     Legislatures, the Council of State

      19     Governments, the U.S. Conference of Mayors,

      20     the International City-County Managers'

      21     Association, and the organization which I

      22     chaired two years ago, the National









                                                             38
       1     Association of Counties, unanimously adopted

       2     this support for this proposal at our board

       3     of directors meeting last week.

       4               This is a complex issue, and I

       5     thought a lot about this issue since I put up

       6     my Web page, which I think might be the first

       7     Web page of any local official in the

       8     country, about four years ago.  And this

       9     issue is a lot like unpeeling an onion.

      10     Every time you think you understand the

      11     complexities of the issues, there's another

      12     layer of that onion to unpeel.  But as we

      13     look at this issue and as it develops and as

      14     technology develops rapidly, there are

      15     certain principles that we keep coming back

      16     to.

      17               The first principle is the

      18     principle of fairness.  Fairness for Main

      19     Street merchants and fairness for E-commerce

      20     merchants.  Main Street merchants don't need

      21     special protection.  E-commerce merchants

      22     don't need special protection from the









                                                             39
       1     government.

       2               Now, a few years ago there was a

       3     wave of national fervor by some advocates for

       4     a new industrial policy, that the federal

       5     government should pick and choose winners.

       6     Which industries ought to receive government

       7     concessions.  Which industries ought to

       8     receive special subsidies.  And that that was

       9     the only way that industries could compete

      10     with the Japanese, with the Asian economies,

      11     with the emerging Euro economies.  That was

      12     bad policy then and it's bad policy now.  The

      13     federal government should not be in the

      14     business of picking winners and subsidizing

      15     them and giving special concessions.

      16               Next, what keeps coming back is

      17     that contrary to the bumper sticker slogan

      18     of, "Keep the Internet Tax-Free," I have yet

      19     to meet a state or local official who has

      20     talked about taxing the Internet in any way

      21     different than anything else.

      22               As Governor Janklow has pointed out









                                                             40
       1     and Senator Kisber, this is a matter of

       2     taxing transactions.  It's not a matter of

       3     taxing the Internet.  And it may be cool for

       4     a lot of elected officials to say, "Keep the

       5     Internet tax-free," because I run for office,

       6     lowering taxes is very popular.  Saying you

       7     want something tax-free is.  And if you throw

       8     in the Internet besides, that shows you

       9     understand technology.  That's not the issue.

      10               Next is an issue of basic public

      11     policy.  At the state and local level in most

      12     states there are really only three

      13     significant sources of revenue:  Income tax,

      14     property tax and sales tax.  And as I told

      15     you, I'm a pretty conservative political

      16     person.  I believe in the work ethic.  I

      17     think people ought to be able to keep just

      18     about all the fruits of their labor, so I'm

      19     not a big fan of increasing income taxes.

      20               Next source of revenue is the

      21     property tax.  And I believe in private

      22     ownership of property.  I think we ought to









                                                             41
       1     encourage that.  I think private property is

       2     taxed at exorbitant rates in most states

       3     right now, certainly far beyond the services

       4     that are provided to that property.  And it's

       5     a regressive tax, besides.

       6               So we come to the third tax, the

       7     sales tax, a tax on consumption.  Now, I'm

       8     not a fan of any of these taxes.  But as a

       9     matter of public policy, if we try to tax

      10     activities we want to discourage and minimize

      11     taxes on activities we want to encourage,

      12     well, we want to encourage work, we want to

      13     encourage property ownership.  And I have yet

      14     to read an article saying the American people

      15     save and invest too much and consume too

      16     little.

      17               If we're looking at public policy

      18     on taxes, the sales tax is the tax to look

      19     at.  If you say no to the sales tax, then you

      20     are saying yes to higher income taxes and

      21     higher property taxes.  Government can't run

      22     on an empty tank.









                                                             42
       1               Finally, there's a principle of

       2     simplification.  I like to keep things

       3     simple.  I think our tax laws, income tax

       4     laws, property tax laws, and sales tax laws

       5     are absurdly complicated right now, and I say

       6     that as somebody who used to be a tax lawyer.

       7     There is virtue in simplification, and the

       8     streamlined sales tax proposal simplifies --

       9     radically simplifies sales taxes.  There is

      10     virtue in simplification.

      11               Even if the Internet had never been

      12     invented, the streamlined sales tax proposal

      13     is good public policy for a variety of

      14     reasons.  It meets all of the criteria that

      15     you set forth at New York City in August:  No

      16     new taxes, privacy.  It's voluntary.

      17               This would be good public policy

      18     even if there was no Internet.  I like it

      19     because it requires little or no action by

      20     the federal government.  As a local official,

      21     I like almost anything that requires little

      22     or no action by the federal government.









                                                             43
       1               Finally, as Senator Kisber and

       2     Governor Janklow and I agree, let the free

       3     markets work.  That's what made this country

       4     great.

       5               CHAIRMAN GILMORE:  Thank you very much,

       6     Mr. Johnson.  That, I think, concludes that

       7     panel presentation on behalf of the NGA and

       8     other of the national associations.

       9               The next speaker's presentation is

      10     on the proposal on taxation of electronic

      11     commerce by Mr. John -- it's Peha, is that

      12     correct?  Mr. Peha of Carnegie-Mellon.

      13               Mr. Peha, the floor is yours.

      14               MR. PEHA:  Thank you.  My name is

      15     John Peha.  I'm a professor at

      16     Carnegie-Mellon University and an independent

      17     consultant.  But today I am representing no

      18     one's views but my own.  In fact, I want to

      19     commend the Commission for hearing a few

      20     neutral parties here today.  I think we can

      21     add something.

      22               I want to emphasize the importance









                                                             44
       1     of a non-discriminatory tax policy, if we can

       2     find one that's practical.  By that, I mean,

       3     I should pay the same tax rate if I buy a

       4     piece of software at my local computer store

       5     in a disk that I would pay if I download it

       6     over the Internet from an out-of-state

       7     vendor.

       8               To make this work, tax rate has to

       9     depend on the location of the buyer.  Now, if

      10     we tax E-commerce at a larger rate, then

      11     we're impeding the growth of this new

      12     marketplace.  If we tax it at a smaller rate,

      13     or we do not collect taxes, yes, we put

      14     traditional vendors at a disadvantage, even

      15     when they are the lowest-cost alternative, as

      16     you've already heard.  Also, we put a higher

      17     tax burden on consumers who cannot afford

      18     Internet access.  It would be hard to find a

      19     more regressive tax policy.

      20               I want to emphasize, though, that I

      21     am suggesting tax rates depends on the

      22     buyer's location.  I'm not necessarily









                                                             45
       1     suggesting that that tax go to the buyer's

       2     state.  That's what most of the proposals

       3     before this Commission have assumed, but in

       4     fact the taxes could go to the buyer's state,

       5     they could go to the seller's state, or they

       6     could go to the federal government and still

       7     be non-discriminatory.  In fact, I'm not

       8     going to take a position on that here today,

       9     but I think it's worth your consideration.

      10               What I do want to do today is

      11     propose -- is to discuss what a practical

      12     policy would look like.  In particular, I

      13     want to suggest three litmus tests that be

      14     applied to all tax policy proposals.  And the

      15     slides are now up.

      16               The first one is enforceability.

      17     An unenforceable tax policy is worse than a

      18     useless policy.  It punishes honest vendors

      19     who voluntarily choose to comply with the --

      20     with the tax.  And to have an enforceable

      21     policy we have to have transaction records

      22     that cannot be deleted or altered without









                                                             46
       1     risk of detection from an auditor.  That's

       2     the first litmus test.

       3               The second litmus test I would

       4     propose is privacy.  A lot of consumers are

       5     already reluctant to engage in E-commerce

       6     because of privacy concerns, and we do not

       7     want a tax policy that makes matters worse.

       8               The third is efficiency.  We want

       9     minimal cost and minimal delay.

      10               Now, today we do not have a policy

      11     that meets all three of these tests.  And I

      12     think in the proposals you're going to hear a

      13     lot of suggestions on how to address the

      14     third concern, how to simplify tax policies

      15     to improve efficiency.  Now, I wholeheartedly

      16     support that effort, but I want to emphasize

      17     that we need to worry about the first two

      18     criteria as well, and I do not think that

      19     they're getting the attention that they

      20     desperately deserve.  That is, enforceability

      21     and privacy.

      22               The heart of the problem is that a









                                                             47
       1     vendor's electronic records can be altered

       2     undetectably.  Paper records are a lot harder

       3     to manipulate, but a lot of electronic

       4     commerce vendors are not going to have paper

       5     records to corroborate their electronic

       6     records.  So if we want enforceability, we

       7     need -- we need something that will produce

       8     reliable records.  The way to do that is to

       9     involve trusted third parties.  We must do

      10     that in a way that meets our three litmus

      11     tests.

      12               First, enforceability.  Auditors

      13     should be able to retrieve all of the

      14     transaction details from somewhere.  From the

      15     vendors, from the third parties or a

      16     combination thereof.

      17               Second, third parties cannot be

      18     able to alter their records undetectably,

      19     either.  For privacy, we want to make sure

      20     that the trusted third parties cannot examine

      21     the contents of these records.  And for

      22     efficiency, among other things, we'd like to









                                                             48
       1     have either a single agency that can audit,

       2     with jurisdiction to audit, or they're

       3     multiple agencies.  That's okay as long as

       4     they communicate, they share information, and

       5     they have identical record keeping standards.

       6               Now, we do have third parties today

       7     in many transactions.  We have credit card

       8     companies.  And this clearly does not meet

       9     the enforceability test and this clearly does

      10     not meet the privacy test.  We need something

      11     else.

      12               We also have a number of proposals

      13     to the Commission, including one we just

      14     heard, suggesting the creation of new kinds

      15     of trusted third parties.  And I think some

      16     of these ideas have great merit.  I'd want to

      17     suggest that just creating the trusted third

      18     party, though, doesn't mean that you get out

      19     of audits and trustworthy records if you want

      20     to enforce that policy.  And I would

      21     encourage proponents of these policies to

      22     think through these three issues, because I









                                                             49
       1     think there are still some concerns to

       2     address.

       3               So how can we do this?  Well, first

       4     of all, I'd suggest that wherever possible,

       5     competing commercial third parties are going

       6     to be more effective than government or

       7     government contractors.  The private sector

       8     will do it better and cheaper, if they can.

       9     I think this can work with two kinds of new

      10     commercial third parties.  One of them is an

      11     electronic notary.  This would -- this is a

      12     service that would create time-stamped and

      13     tamper-proof records without looking at those

      14     records.  And they would also have to be able

      15     to retrieve all notarized records that have

      16     been submitted by a given vendor if that vendor

      17     happens to get audited.  And this is now --

      18     this is technically possible.

      19               Also we need verifiers.  Verifiers

      20     would present verifiable credentials on

      21     either buyer or seller, such as, you know,

      22     "This consumer is in Pennsylvania."  They









                                                             50
       1     present the information that is needed for

       2     the transaction, and nothing more.

       3               Now, how do we know that these new

       4     commercial players are going to be operating

       5     properly?  Well, we need a government program

       6     of voluntary accreditation.  That is,

       7     E-commerce records would be handled by

       8     accredited third parties, and any commercial

       9     firm that wants to can request accreditation.

      10     Those that meet the requirements will be

      11     accredited.

      12               So to summarize, a

      13     nondiscriminatory tax policy is desirable,

      14     and it is possible, but three litmus tests

      15     should be applied in all proposals for a tax

      16     policy.  It should be enforceable, which

      17     means we have to have trustworthy records

      18     that an auditor can access.  It should not

      19     compromise the privacy of the buyer or the

      20     seller.  And it should be efficient.  To make

      21     this work, we need trusted third parties,

      22     such as commercial verifiers and notaries.









                                                             51
       1     But merely having trusted third parties is

       2     not enough.

       3               Also, some of the key policy steps

       4     to get us there:  We need voluntary

       5     accreditation of trusted third parties, and

       6     we need to make sure that there is one set of

       7     record keeping standards nationwide.  Thank

       8     you for your attention.

       9               CHAIRMAN GILMORE:  Okay.  Thank you very

      10     much, Mr. Peha.  I appreciate your

      11     presentation.

      12               The third is, "Adopting Tax

      13     Technology to the Internet from the

      14     E-commerce Transaction Tax Server."  This is

      15     Mr. Daniel Sullivan of Taxware International,

      16     Incorporated.

      17               Mr. Sullivan, you're on.

      18               MR. SULLIVAN:  Thank you, Governor.

      19     Thank you, members of the Commission, for

      20     inviting me.

      21               My job here is to show you what

      22     technology exists.  I'll give you a brief









                                                             52
       1     overview of how it works and how it might be

       2     applied to almost any of the solutions we've

       3     talked about over the last couple of days,

       4     but in particular the no-fault concept.

       5               The system as it works today,

       6     most -- we have, I should mention this,

       7     thousands of users that use this system from

       8     large companies, Fortune 100-type companies,

       9     on down to small Internet merchants.  In

      10     fact, on the Commission there are seven

      11     members who represent commercial interest,

      12     and out of those seven members, five

      13     represent companies who are currently using,

      14     in one form or another, the Taxware system.

      15     The only two that aren't are Andal and

      16     Charles Schwab, and they don't have much of a

      17     tax requirement, sales tax requirement.

      18     Everybody else, in one form or another, is

      19     using the system.

      20               In the course of a transaction a

      21     merchant, in processing a transaction, first

      22     accesses our Verizip system, which is a









                                                             53
       1     system of all the ZIP codes and addresses in

       2     the United States to validate the address and

       3     determine the tax jurisdiction.

       4               Next, through a universal tax link,

       5     the information is passed to the tax

       6     calculation program.  That could include

       7     sales tax.  We have a world tax system that's

       8     being used on the Internet.  The tax

       9     calculation system then determines if the

      10     merchant has nexus and any other relevant

      11     information about the merchant, to make a

      12     determination, using sales tax exemption

      13     processing to determine if it's an exempt

      14     sale because of the nature of the customer:

      15     Purchase for resale, government, charity.

      16               Next, we can make a determination

      17     by product.  Is it a product that's exempt in

      18     that particular identified tax authority?  It

      19     might be clothing, which is exempt in one tax

      20     authority, but not in another.  We have

      21     thousands of products and commodities that

      22     we've researched over the years, and we can









                                                             54
       1     automatically exempt or charge special rates

       2     for these products.

       3               And then finally, the standard tax

       4     rates may be applied if none of these other

       5     steps rule otherwise.

       6               The tax is calculated, we pass the

       7     results back to the merchant, and create an

       8     audit record of the transaction, and then

       9     finally, when tax returns are due, we have a

      10     tax compliance system that actually produces

      11     the tax reports.  This is our remit system.

      12               The platform independent supports

      13     all our Taxware systems.  It's Internet-ready

      14     for E-commerce reporting.  And it produces

      15     the actual tax forms to be remitted to the

      16     state, filled in with the data from the audit

      17     files.

      18               We've recently announced a

      19     transaction tax server.  In the past, the

      20     software had to reside at the point of sale

      21     or in-house for invoicing systems or

      22     purchasing systems.  Now we've developed a









                                                             55
       1     transaction tax server concept so that it can

       2     be a remote system.  It means that there is

       3     no longer any need for in-house systems,

       4     in-house updates, maintenance, changing of

       5     the software when tax laws change.  It's all

       6     remote and can be done by a central location

       7     on the transaction tax server.

       8               The same process occurs.  The buyer

       9     and the merchant complete a transaction.  The

      10     transaction data is transmitted to the

      11     server.  And the server does its thing, as

      12     we've discussed, and passes the tax

      13     information back to the merchant to complete

      14     the transaction.

      15               The server concept allows

      16     processing from a variety of sources, using

      17     either batch or real time processing.  It can

      18     be done with large scale computer systems.

      19     You can use laptops, handhelds, desktops --

      20     anything that can access the transaction

      21     server through the Internet can be used as an

      22     input device.









                                                             56
       1               The transaction tax server can also

       2     be used in conjunction with this proposal,

       3     this no-fault trusted third party proposal.

       4     In this case, the transaction data would be

       5     passed to the transaction tax server.  The

       6     transaction tax server could pass back the

       7     tax data and the merchandise amount to the

       8     merchant, and forward the tax amount directly

       9     to the tax parties.  So it would relieve the

      10     merchant of the necessity to collect and

      11     remit taxes.

      12               We would hope the tax authorities

      13     would also cooperate and put together an

      14     exempt certificate warehouse, so that we

      15     could automatically exempt sales based on the

      16     nature of the customer.

      17               And, finally, we -- I'm going to

      18     show you -- we're calling it the data

      19     highway.  This represents the transaction tax

      20     server passing information to the tax remit

      21     system which creates summary files, rather

      22     than a tax form.  The summary files could be









                                                             57
       1     transmitted to the tax authorities.

       2               We would provide the tax

       3     authorities at no cost a copy of our

       4     software, and the tax authorities could then

       5     either load the transaction data into their

       6     existing databases, or if they wanted to,

       7     they could produce the actual tax reports.

       8     This means that the tax authorities don't

       9     have to make a big investment in changing

      10     their systems.  They're getting the same data

      11     that they're getting now in pretty much the

      12     same format.

      13               Other tax systems could be used to

      14     input to the data highway, whether it's an

      15     in-house system or another tax system.  We

      16     could take their audit records, map them to

      17     the correct format, and again pass them

      18     through the data highway to the tax

      19     authorities.

      20               That's a quick overview.  If there

      21     are questions later on, we could flesh it out

      22     a little bit.  Thank you very much.









                                                             58
       1               CHAIRMAN GILMORE:  Thank you very much,

       2     Mr. Sullivan.  The -- I think that, according

       3     to my notes, that is the conclusion of the

       4     NGA et al. group that is offering their

       5     alternative proposal.  We do certainly want

       6     to get into the questions and answers on

       7     this, but under the agenda, frankly, if we

       8     open it up now we'll never get to the other

       9     people.

      10               So let's do the other people, as

      11     the agenda calls for, and then we can

      12     question the entire panel as a group and have

      13     the time to do that.

      14               The next series of presenters are

      15     "Radical Simplification of Sales Taxes and

      16     Use Taxes:  The Prerequisite For and Expanded

      17     Duty to Collect Use Sales on Remote Sales."

      18     This is by Mr. Charles McLure of the Hoover

      19     Institute.

      20               Mr. McLure, the time is yours.

      21     Thank you.

      22               MR. MCLURE:  Thank you,









                                                             59
       1     Mr. Chairman, Commissioners.

       2               I have accepted the challenge for

       3     radical simplification, so simplified you may

       4     say it's totally unrealistic.  But before you

       5     dismiss it, I'd encourage you to think about

       6     it because it is the conceptually correct

       7     approach.  It's also the simplest approach

       8     that is conceptually sound.

       9               Before I turn to the simplification

      10     proposals, let me address the most important

      11     issue facing the Commission, which is whether

      12     or not there should be an exemption for

      13     electronic commerce.

      14               I believe there is absolutely no

      15     principled reason for permanent exemption for

      16     electronic commerce.  And I would justify

      17     that with two sources.  I would quote Ronald

      18     Reagan, who said, "The taxing power of

      19     government must be used to provide revenues

      20     for legitimate government purposes.  It must

      21     not be used to regulate the economy or bring

      22     about social change."









                                                             60
       1               And then second, I'd refer you to a

       2     statement that I have asked the staff to

       3     distribute.  It's a statement signed by 55 --

       4     actually, at this point, 55 academic tax

       5     specialists.  And I would just read you the

       6     four points that are made there.

       7               First, there is no principled

       8     reason for a permanent exemption for

       9     electronic commerce.  Electronic commerce

      10     should be taxed neither more nor less heavily

      11     than other commerce.

      12               Second, remote sales, including

      13     electronic commerce, should to the extent

      14     possible be taxed by the state of destination

      15     of sales.  That is where consumption occurs.

      16               Third, there must be enough

      17     simplification for sales and use taxes to

      18     make a destination-based taxation of sales

      19     feasible.

      20               And, four, a means must be found to

      21     eliminate burdens of compliance on sellers

      22     making only small amounts of sales in a









                                                             61
       1     state.

       2               Now, in retrospect, I would have

       3     added a fifth principle, which is that to the

       4     extent the tax base is increased, there

       5     should be a reduction in rates, because there

       6     is no intent whatsoever to increase taxes.

       7               The implication of this view, of

       8     course, is that all commerce should be taxed

       9     alike, whether it occurs on Main Street, via

      10     electronic commerce, or via other forms of

      11     remote commerce.

      12               I think it's long been recognized

      13     that if there's to be an expanded duty to

      14     collect use tax, there has to be substantial

      15     simplification.  In my view, the key problem

      16     is the lack of uniformity of the state sales

      17     tax base.  Among other things, there are

      18     different coverages with tax base, different

      19     definitions, different exemptions for

      20     business purchases from state to state, and

      21     of course different administrative procedures

      22     and practice.









                                                             62
       1               My view is that the key to

       2     simplicity, so far as the tax base is

       3     concerned, is to have the same tax base in

       4     all states.  Now, yes, that's extremely

       5     radical, but it's not crazy.  I might point

       6     out that the European Union has been moving

       7     in this direction and has largely achieved

       8     it, beginning in 1973 with the sixth

       9     directive.  If separate nations can do that,

      10     it seems to me that perhaps the states could.

      11               The first issue in unifying the tax

      12     base is to tax all sales to households,

      13     including services and intangibles, and of

      14     course cut the rates to maintain revenue

      15     neutrality.  If there are to be exemptions --

      16     for example, fulfill your medicine -- those

      17     should be uniform from state to state.  The

      18     purpose, of course, is that no matter where a

      19     vendor is located, the vendor would be able

      20     to know what the tax base is, because there's

      21     only one to keep track of.

      22               I think that the uniform menu of









                                                             63
       1     what might or might not be taxable, which the

       2     National Tax Association considered, simply

       3     doesn't go far enough.  The best guess we

       4     have is that there might be a menu of 10,000

       5     items.  Yes, you can handle that with look-up

       6     tables on the computer, but why would you

       7     want to?  There's nothing good to be said for

       8     that solution, so why do it?  Why not have a

       9     uniform base.

      10               Now, notice -- I won't go into

      11     these -- but I believe that uniform base also

      12     addresses many privacy issues.  You don't

      13     need to know what people are buying, just

      14     that they bought something that's taxable.

      15     And you need to know the state and perhaps

      16     the locality where they make the purchases.

      17               Also, of course, uniformity

      18     alleviates compliance problems for firms

      19     located in the states with no sales tax.

      20     Somebody in those 5 states needs to know only

      21     1 state sales tax base, not 46.

      22               The second aspect of unifying the









                                                             64
       1     tax base is perhaps even more radical, and

       2     that is that you would exempt all sales to

       3     business.  That is since this is a

       4     consumption based tax, you would tax only

       5     consumption.  That is, sales to households.

       6     Again, this is what is being done in a

       7     different way in the European Union, because

       8     they allow a business a credit for any tax

       9     that's been paid on their purchases.

      10               With this system, the exemptions

      11     certification would be uniform and very

      12     simple.  It would consist essentially of one

      13     question.  Is this or is this not something

      14     that is allowable as a deduction or perhaps

      15     depreciation allowance, various other

      16     expenses of business, on your federal tax

      17     return?  If it is, you don't pay tax.  If it

      18     isn't, you pay tax.  Yes, people can lie, but

      19     they have to lie to the federal government,

      20     too.

      21               Let me say that besides simplicity,

      22     this approach has other additional









                                                             65
       1     advantages.  First, it avoids hidden taxes.

       2     Yes, we have 6 percent tax, perhaps, in some

       3     state.  But in fact, it may be more like nine

       4     by the time you add in the tax on business

       5     purchases.  Good government requires that

       6     people see the taxes they pay.

       7               Second, it's an economic -- this is

       8     an economically neutral tax; that is, it

       9     applies to all consumption in the extreme

      10     case, doesn't apply to business purchases.

      11     It doesn't distort decisions of what to

      12     produce, how to produce it, how to distribute

      13     it.

      14               I'd argue that for those governors

      15     who are curious about this, it's obviously

      16     more attractive to state economic development

      17     to exempt business purchases than to tax

      18     them.  We heard yesterday about an exemption

      19     for purchases of those wanting to set up Web

      20     servers.  Well, this would allow exemptions

      21     for everything.

      22               And of course, finally, something









                                                             66
       1     that's done in Europe and is not done here is

       2     that this proposal avoids all tax owned

       3     exports.  In the European Union, as we heard

       4     yesterday, if you export, you don't pay tax

       5     and you get any tax you've paid back.  In

       6     this case there would not be any tax that you

       7     would need to get back.  Exports would enter

       8     commerce tax free.  Currently, they don't.

       9     They pay whatever tax is hidden in the price.

      10               The second aspect is the question

      11     of sourcing and situs of sales in the local

      12     tax rates.  In the ideal situation, sales

      13     would be sourced to the local level.  This

      14     would allow states and local governments to

      15     continue to determine the tax rates applied

      16     to sales.  It should be possible to use

      17     software to determine the situs and the tax

      18     rates, and we've heard something about that.

      19     If it turns out that that's not possible, not

      20     feasible, I would propose an alternative,

      21     which is one rate per state for remote sales.

      22     In other words, states and localities would









                                                             67
       1     continue to choose the rate for local sales,

       2     but for remote sales they would all have just

       3     one rate.  I think that's acceptable.

       4               There may be some unallocable

       5     sales.  That is, it may not be possible to

       6     know the location of someone making purchases

       7     of digital content.  And, of course, you

       8     should also have a de minimis rule, which

       9     exempts those making very small sales.  I

      10     would argue that there what you could do is

      11     to have what we might call a national tax,

      12     not administered by the federal government.

      13     They have no business in this.  But

      14     administered jointly by the states.

      15               In other words, this is kind of a

      16     back-up tax that says, "Okay.  We don't know

      17     where that -- the digital content -- we don't

      18     know where the digital content is going, we

      19     don't know where people are making de minimis

      20     sales.  We will levy a uniform national tax,

      21     again with our uniform rate, uniform base,

      22     and divvy up the money on the basis of









                                                             68
       1     estimates of consumption."

       2               Notice I would not -- this would

       3     not be an origin-based tax.  I think an

       4     origin-based tax is an invitation for a race

       5     to the bottom in which states just cut rates

       6     in order to attract electronic commerce

       7     vendors.

       8               Yes, it would be noted that -- that

       9     there's a sacrifice of state sovereignty over

      10     the tax base.  To my view, that is a

      11     reasonable compromise in order to retain

      12     state control over the rates and perhaps even

      13     local control.

      14               Since my time is near -- is

      15     ending -- I will not talk about the

      16     administrative simplifications of the kind

      17     we've heard, such as whether the base state

      18     approach, trusted third parties software is

      19     the best approach.  I would say, though, that

      20     something like zero cost compliance is

      21     important.

      22               That is, states should provide









                                                             69
       1     software to vendors.  There should be

       2     realistic vendor discounts.  And there should

       3     be a de minimis rule.

       4               In short, the proposal is to

       5     eliminate distinctions that don't make any

       6     sense and are indistinct, between, for

       7     example, goods and services between local and

       8     remote commerce.  And also to limit --

       9     emphasize and clarify the appropriate

      10     distinctions; that is, between business and

      11     consumers.

      12               Ideally, this proposal would be

      13     implemented by joint state action.  As a

      14     matter of fact, because of Quill, it probably

      15     takes federal legislation.  That legislation

      16     should be bare bones, which says something

      17     like this, it passes Constitutional muster.

      18               Thank you.

      19               CHAIRMAN GILMORE:  Thank you very much,

      20     Mr. McLure.  The next presenter is a

      21     "Proposal Related to Electronic Commerce

      22     Taxes," by James Goldberg, who is General









                                                             70
       1     Counsel of the National Retail Dealers

       2     Association.

       3               Mr. Goldberg?

       4               MR. GOLDBERG:  Good morning,

       5     Governor Gilmore.  I'm here this morning on

       6     behalf of the North American Retail Dealers

       7     Association, which represent more than 3,000

       8     member companies that sell and service

       9     consumer electronics, home compliances,

      10     furniture, computers and other durable goods.

      11               NARDA's members, for the most part,

      12     they're traditional brick-and-mortar, small

      13     businesses who must compete on a daily basis

      14     with the so-called big box discount

      15     retailers, and increasingly with out-of-state

      16     sellers who transact business via toll-free

      17     telephone numbers, catalogues, and Internet

      18     Web sites.

      19               Now, competition is the essence of

      20     the retail business.  It affords consumers a

      21     wide choice of products and services.  But

      22     the basis of this competition must be, from









                                                             71
       1     our perspective, a level playing field.  That

       2     is, a situation where all sellers start from

       3     the same base and gain or loose market share

       4     based on their ability at such things as

       5     managing costs, providing unique products and

       6     services, and offering consumer service.

       7               The concept of a level playing

       8     field has been reflected in the sales and use

       9     tax regimen in place in the 45 states that

      10     have decided to use the sales tax as a means

      11     of raising revenue.  The basic concept behind

      12     this regimen is that once a state has

      13     declared a transaction to be taxable,

      14     consumers in that state must either pay a

      15     sales tax which is collected by the vendor,

      16     or the purchaser must pay a use tax directly

      17     to the state in the same amount.

      18               The unfortunate reality, as all of

      19     you know, is that despite this concept, a

      20     series of decisions by the Supreme Court,

      21     beginning more than 30 years ago, and ending

      22     with the Quill case less than 10 years ago,









                                                             72
       1     have left state and local governments with an

       2     ineffective means to collect sales and use

       3     taxes that are lawfully owed today.

       4               These decisions have also resulted

       5     in the severely hampered ability of NARDA

       6     members and other small businesses that

       7     operate bricks-and-mortar outlets to compete

       8     with those who are located in another state

       9     who are not lawfully required to collect

      10     state and local sales taxes and so choose not

      11     to do so.

      12               I would also add that this

      13     situation has hampered the ability of those

      14     retailers who want to get into the

      15     clicks-and-mortar business -- that is, have

      16     Web sites and stores.  It has hampered their

      17     ability to compete because they are being

      18     forced, because of this competitive

      19     situation, in many cases, to adopt two

      20     corporate entities, two companies, two sets

      21     of operations, one that collects sales tax,

      22     one that doesn't, and, therefore, they're not









                                                             73
       1     able to seamlessly integrate the selling

       2     system that I think many of them would like

       3     to be able to do.

       4               In the highly competitive world of

       5     consumer electronics retailing, for example,

       6     where profit margins on individual products

       7     are far below the norm for most retailers, a

       8     difference of 5 to 8 percent, that is the

       9     amount of the sales tax, is all to often the

      10     difference between a sale consummated over

      11     the counter and one concluded either online

      12     or via a toll free telephone number.

      13               As I've said, this problem is not a

      14     new one.  It's been around for over 30 years.

      15     It began with the emergence of the catalogue

      16     retailer in the '80s, but it's virtually

      17     exploded in magnitude in the last few years

      18     with the popularity of the Internet.

      19               The magnitude of this problem was

      20     evidenced several years ago when the Advisory

      21     Commission on Intergovernmental Relations, as

      22     part of an analysis of then-pending federal









                                                             74
       1     legislation, concluded that state and local

       2     governments were, at that time, losing more

       3     than $3.3 billion each year in use tax

       4     revenue that was lawfully owed, but which

       5     went uncollected because of the current

       6     system.

       7               With the exponential growth of

       8     Internet commerce since that time, I have no

       9     doubt that that amount of uncollected revenue

      10     has mushroomed accordingly.

      11               Now, as I said, the inability of

      12     state and local governments to collect sales

      13     and use tax revenue has stifled the ability

      14     of NARDA members and other small businesses

      15     to compete.  It's caused state and local

      16     governments to turn to new ways of raising

      17     funds, to think about imposing new taxes on

      18     products and activities that have heretofore

      19     remained untaxed, or increasing existing

      20     taxes on in-state businesses that have no

      21     choice but to pay them.

      22               NARDA's position on these new and









                                                             75
       1     increased taxes is simple, and I think it

       2     reflects the position of most business

       3     people.  Government shouldn't be raising

       4     additional revenue unless and until they've

       5     been satisfied that all existing taxes are

       6     efficiently and effectively collected, thus

       7     assuring that all taxpayers who are similarly

       8     situated are treated equally, and no one gets

       9     a competitive or other advantage.

      10               In the area of sales and use tax

      11     collection, the Supreme Court has made it

      12     abundantly clear that only Congress can

      13     authorize the states to require out-of-state

      14     retailers to collect applicable sales taxes

      15     on goods or services sold into the state.

      16               So it's for that reason that the

      17     proposal that we have put forward to the

      18     Commission is for the adoption of federal

      19     legislation that would authorize states to

      20     require remote sellers with no physical

      21     presence -- as that term has been defined by

      22     the Supreme Court -- to collect sales taxes









                                                             76
       1     as follows:

       2               The quid pro quo for the tax

       3     collection requirement would be

       4     simplification.  States would be required to

       5     establish uniform definitions for taxable

       6     transactions, so that, for example, food is

       7     food is food, clothing is clothing is

       8     clothing, and the only distinction is whether

       9     a state chooses to tax food or not tax food,

      10     tax clothing or not tax clothing.

      11               Remote sellers would only have to

      12     collect sales taxes based on a single rate

      13     per state.  That simplifies the 7,500

      14     jurisdictional rate issue down to 45.  States

      15     with varying rates would be required, if they

      16     wanted to require out-of-state sellers to

      17     collect taxes, to establish a mechanism by

      18     which local governments would share in the

      19     tax collected or would forgo their share of

      20     taxes collected by remote sellers.

      21               Remote sellers would remit taxes to

      22     a single office within the state where the









                                                             77
       1     tax payment is due.

       2               States would be required to

       3     maintain and establish toll-free telephone

       4     numbers or interactive Internet sites so that

       5     remote sellers could get answers to their

       6     questions.

       7               Audits would be conducted by the

       8     state in which the seller is physically

       9     located, so that these sellers would not be

      10     subject to audits by 45 states.

      11               And the requirement for collection

      12     of sales taxes would not trigger nexus for

      13     other tax purposes, such as income taxes, or

      14     create nexus for such things as qualification

      15     to do business and so on and so forth.  It

      16     would be a sales tax collection requirement

      17     only.

      18               Now, federal legislation, we

      19     understand, is going to take time.  I think

      20     there are a number of things that can be done

      21     in the interim, and we would urge state and

      22     local governments to begin some of these









                                                             78
       1     steps as soon as possible.

       2               Number one, begin a program to

       3     educate the citizens of states to understand

       4     that there is a use tax obligation and that

       5     sales made over the Internet or by catalogue

       6     or by 800-number are not really tax-free

       7     sales.

       8               In that connection, I would note

       9     that the State of Michigan, a few weeks ago,

      10     announced a new program to add, I believe,

      11     information to their existing income tax

      12     return, notifying people that use tax

      13     obligation is out there and providing a

      14     mechanism by which it can be computed and

      15     paid.

      16               Second of all, I would urge the

      17     states and local governments to begin to get

      18     together now to start the process of

      19     simplification, leading to common

      20     definitions, leading perhaps to one rate per

      21     state, so that this problem can be worked

      22     out.









                                                             79
       1               And third, we would urge the states

       2     and local governments to resume their

       3     negotiations and discussions with some of the

       4     remote sellers in an effort to prod, if you

       5     will, more voluntary compliance with the

       6     current system.

       7               I think there's a number of things

       8     that need to be done, but in the interest of

       9     fairness and equity, we think that

      10     simplification is the quid pro quo for an

      11     enhanced sales tax collection requirement.

      12     Thank you.

      13               CHAIRMAN GILMORE:  Thank you very much,

      14     Mr. Goldberg.

      15               Before we go on, I might just

      16     mention for everyone and for the record, if

      17     you have to ask why so many presenters?

      18     Because we asked of it.  We in New York asked

      19     for proposals from thoughtful people from

      20     outside of the community and received quite a

      21     large body of them.

      22               My own proposal for no Internet tax









                                                             80
       1     is included in this afternoon's policy and

       2     issues paper, as opposed to being a separate

       3     presentation.  But we asked for a lot of

       4     thoughtful people to come forward.

       5               We got a lot of people and then

       6     selected a representative group that the

       7     panel wished to hear from, by committee.

       8     It's a lot of information.  But this is the

       9     art of public policy making, to hear from

      10     people and then to shape it up later with

      11     questions and answers.

      12               There are three more.  The next one

      13     is labeled, "A Modest Principle:  No Net

      14     Tax" -- "No Net Net Tax."  Maybe that's

      15     important, actually.  "No Net Net Tax,"

      16     submitted by Mr. William McArthur and

      17     Mr. Peter Merrill of Price Waterhouse

      18     Coopers.

      19               Gentlemen, the two of you are here.

      20     You have one proposal.  I would ask you to

      21     divide five minutes and five minutes, if you

      22     please.  Who shall begin?









                                                             81
       1               MR. MERRILL:  I will begin,

       2     Mr. Chairman.

       3               CHAIRMAN GILMORE:  Mr. Merrill?

       4               MR. MERRILL:  Mr. Chairman,

       5     distinguished members of the Commission, my

       6     name is Peter Merrill.  I direct the National

       7     Economic Consulting Group in the Washington

       8     office of Price Waterhouse Coopers.  I

       9     appreciate the opportunity to be here to

      10     testify a second time before the Commission.

      11               At the Williamsburg meeting, I

      12     focused my remarks on the international

      13     aspects of electronic commerce.  Today we

      14     will be discussing a paper that we submitted

      15     to the Commission regarding state and local

      16     tax issues.

      17               I'm accompanied by my co-author,

      18     William McArthur.  He is partner in charge of

      19     the Knowledge Management Group for the State

      20     Tax Consulting Practice.  We are appearing

      21     today before the Commission in our own

      22     capacities.  We've brought together a mix of









                                                             82
       1     law and economic perspectives on this.

       2               And although we're sitting at the

       3     left end of the table, our goal is to come

       4     right down the middle and try to give you a

       5     proposal that really brings both sides of the

       6     debate together.

       7               MR. MCARTHUR:  Mr. Chairman,

       8     members of the Commission.  On October 15th,

       9     this Commission issued an invitation to the

      10     public to submit proposals related to state

      11     and local taxation of Internet transactions

      12     and electronic commerce.

      13               The Commission set forth 18

      14     criteria by which it would consider each of

      15     these proposals that are brought forward.

      16     Those criteria present both admirable and

      17     also certain prerequisite principles.  Among

      18     those set forth by this Commission is the

      19     following query:  Does this proposal leave

      20     the net tax burden on consumers unchanged?

      21               This criterion referred to as

      22     revenue neutrality is the key that we would









                                                             83
       1     like to talk about today in advancing the

       2     debate over the appropriate sales tax

       3     treatment across border E-commerce

       4     transactions.  We endorse imposition of the

       5     discipline of revenue neutrality in the

       6     Commission's consideration of the new tax

       7     proposals.  This will allow the Commission to

       8     focus on the fundamental technical and policy

       9     issues regarding the taxation of cross-border

      10     sales, without getting bogged down in the

      11     political charged allegations of tax increase

      12     by some, tax erosion by others.

      13               In addition, we discuss a mechanism

      14     for enforcing revenue neutrality that should

      15     Congress enact legislation in this area.

      16               The effect of E-commerce on states'

      17     current and future revenues is a very

      18     contentious issue, as we well know.  Some

      19     state officials allege that the current sales

      20     tax system is antiquated and that the

      21     exponential growth in untaxed remote sales

      22     will cripple the sales tax system.









                                                             84
       1               In our view, proposals to ban

       2     Internet sales taxation remain -- in their

       3     view, proposals to ban Internet taxation

       4     would mean fewer teachers and less law

       5     enforcement.  By contrast, remote sellers and

       6     fiscal conservatives would view the state's

       7     desired imposed use tax collection

       8     responsibilities on remote sellers as a

       9     thinly veiled attempt to increase revenues.

      10               Meanwhile, the majority of American

      11     taxpayers view proposals to collect sales

      12     taxes on remote sales as new taxes, even

      13     though consumers are legally obliged to pay

      14     the virtually unenforced use tax on the

      15     remote purchases.

      16               Echoing this view, House Majority

      17     Leader Dick Armey and 34 other members of

      18     Congress recently sent a letter to this

      19     Commission stating that any suggestion to

      20     collect sales tax on Internet transactions

      21     would not be viewed favorably by members of

      22     the U.S. Congress.









                                                             85
       1               We do not offer a legislative

       2     proposal this morning regarding imposition of

       3     use tax collection responsibilities on remote

       4     sellers.  Rather, our point is that an

       5     agreement to hold sales tax revenue constant

       6     would allow the debate to focus on more

       7     fundamental questions, such as the high cost

       8     of collection and remitting in thousands of

       9     tax jurisdictions around the country, and the

      10     legitimate privacy concerns of taxpayers and

      11     consumers.

      12               MR. MERRILL:  As a practical

      13     matter, revenue neutrality means that any

      14     effective expansion of the tax base -- in

      15     other words, more sales tax revenues

      16     collected by state and local governments,

      17     should be accompanied by a reduction in the

      18     sales tax rate.  This is precisely the

      19     principle that President Reagan insisted upon

      20     in drafting the tax reform proposals he sent

      21     to Congress in 1985.  Professor McLure, on

      22     this panel, was instrumental, actually, in









                                                             86
       1     drafting those proposals.

       2               This was the precursor for the

       3     landmark Tax Reform Act of '86 that broadened

       4     the tax base of both the individual and

       5     corporate income taxes, and at the same time

       6     lowered the tax rate dramatically.  The

       7     principle of revenue neutrality was embraced

       8     by the leadership in the House of

       9     Representatives, and was key to a bipartisan

      10     enactment of the legislation.

      11               The '86 act was drafted under an

      12     agreement that the bill should not shift the

      13     tax burden to low-income taxpayers as well.

      14     We believe that the principle of revenue

      15     neutrality actually achieves this result, as

      16     well.  The reason is that any expansion of

      17     duty to collect tax on remote sales would

      18     have relatively little impact on low-income

      19     households.  The accompanying sales tax rate

      20     reduction to keep the thing revenue-neutral

      21     would benefit all consumers.  Thus, the net

      22     effect of a revenue neutrality principle









                                                             87
       1     would also be to make certain that the tax

       2     burden is not shifted to low-income

       3     consumers.

       4               Well, if Congress were to enact

       5     such legislation -- again, we don't advocate

       6     this, but if Congress were to get into the

       7     fray here, how would the legislators ensure

       8     themselves that this power that they would

       9     potentially grant to states to impose tax on

      10     remote sellers would not be used to increase

      11     tax on their constituents?  A satisfactory

      12     answer to that question would be critical to

      13     obtaining really any support in the U.S.

      14     Congress.

      15               While further economic and legal

      16     research really would need to be done, we

      17     believe that there is an enforcement

      18     mechanism that could be drafted that would

      19     provide an adequate comfort level to members

      20     of Congress regarding revenue neutrality.

      21               One approach for ensuring revenue

      22     neutrality would be for Congress to condition









                                                             88
       1     a state's authority to impose and expand a

       2     duty to collect an agreement by the state to

       3     limit the growth in sales tax revenues to the

       4     growth in personal income.  A similar

       5     approach actually was adopted in Missouri

       6     where, since 1980, the Hancock Amendment has

       7     limited the growth in tax revenues to the

       8     growth in personal income.  There are a

       9     variety of exceptions, including for an

      10     emergency, and when the voters actually

      11     improved such a tax increase.

      12               Under this approach to revenue

      13     neutrality, any increase in sales use tax

      14     revenues attributed to an expanded duty to

      15     collect, would be recycled back to consumers

      16     in the form of lower rates.  This sort of

      17     sales tax cap mechanism should probably apply

      18     for a reasonably long period of time, say 10

      19     years, to allow consumers to fully benefit

      20     from the sales and use tax rate reductions

      21     that would occur from this dramatic

      22     broadening, potentially, of the sales and use









                                                             89
       1     tax base.

       2               After this period of time the

       3     voters could discipline politicians who, in

       4     fact, increased sales tax rates after the

       5     base was broadened.  States that failed to

       6     comply with this revenue neutrality principle

       7     could be sanctioned by the federal government

       8     by reducing various payments under federal

       9     grant programs, so that there would be no

      10     incentive for a state to raise its sales tax

      11     revenues beyond this revenue neutrality

      12     constraint, because they would lose the

      13     corresponding amount of federal grant monies.

      14               Even if there is no federal

      15     legislation in the area, we suggest that the

      16     states who are thinking about voluntary

      17     mechanisms might also advocate the principle

      18     of revenue neutrality in their own proposals.

      19               MR. MCARTHUR:  But what about

      20     possible objections to this?  Government

      21     officials may object to these enforcement

      22     mechanisms.  And these are merely our









                                                             90
       1     suggestions.  There are a myriad of

       2     alternatives that could be available to them

       3     for ensuring Congress that an expanded duty

       4     to collect use tax would not become a money

       5     machine.

       6               Another possible criticism is that

       7     state governments might lose sales tax rates

       8     at the end of the enforcement period.  This

       9     is indeed a risk.  But at the end of the day,

      10     state legislators who vote for tax increases

      11     are ultimately accountable to their voters.

      12               In conclusion, we believe the

      13     discipline of revenue neutrality would lead

      14     to more productive dialogue about improving

      15     sales tax system to increase neutrality, low

      16     compliance cost, and protection of privacy.

      17     President Reagan's endorsement of revenue

      18     neutrality principle was critical in

      19     obtaining bipartisan support for tax reform,

      20     and for convincing a skeptical American

      21     public that tax reform was not a code word

      22     for tax increase.









                                                             91
       1               Linking base broadening to tax rate

       2     reduction is good economics, as well as good

       3     politics.  Low tax rates encourage economic

       4     growth and reduce possible incentives for tax

       5     evasion and avoidance.  While Congress can

       6     certainly enforce revenue neutrality in the

       7     federal system, a new approach is required

       8     for state taxes.  Our suggested mechanism

       9     that Congress could use to reduce the risk

      10     that providing state authority to impose use

      11     tax collection on remote sellers would lead

      12     to a net tax increase on consumers.

      13               Thus we have subtitled our paper

      14     "No Net Net Tax."  While it is difficult for

      15     the commission to find a consensus for a

      16     legislative proposal, we hope that revenue

      17     neutrality is one of the principles that the

      18     Commission can broadly support and recommend

      19     to Congress.

      20               Thank you very much.

      21               CHAIRMAN GILMORE:  Gentlemen, thank you

      22     very much.  The next is the "Proposal from









                                                             92
       1     the Committee on State Taxation to Increase

       2     Voluntary Remittance of Sales and Use Tax."

       3     This is by Ms. Diann Smith, the General

       4     Counsel of the Committee on State Taxation.

       5               Ms. Smith?

       6               MS. SMITH:  Good morning.  Thank you very much.  I'd like to first of

       7     all tell you who is the Committee on State

       8     Taxation and what gives us the moral

       9     authority to talk about this issue and to try

      10     and advise this Commission.

      11               Secondly, I will discuss the

      12     process that we went through in coming to

      13     this proposal.

      14               And, finally, I will discuss the

      15     proposal itself.  The Committee on State

      16     Taxation is a trade organization that has

      17     been around for 30 years.  We have over 500

      18     members that make up the Fortune 1000-size

      19     companies.  Our members are credit card

      20     companies, they're telecom companies, they're

      21     Main Street retailers, they're catalogue

      22     companies, and they're banks.  These are the









                                                             93
       1     exact companies that right now are building

       2     the infrastructure of the Internet and

       3     creating the items that we're discussing

       4     today.

       5               They're buying business-to-business

       6     transactions over the Internet.  They're

       7     selling to consumers over the Internet.

       8     They're the telecom companies that are

       9     providing the infrastructure for the

      10     Internet.  And they're the financial

      11     institutions that are providing the

      12     mechanisms so that purchases can be made over

      13     the Internet.

      14               It's these companies that were able

      15     to come together and create what we see as a

      16     truly practical proposal for this Commission

      17     to consider.

      18               In thinking about my testimony

      19     today I tried to come up with come type of

      20     catchy phrase, some type of elegant

      21     description for the proposal.  And finally I

      22     decided that there really isn't one.  It's









                                                             94
       1     just a practical, straightforward and

       2     realistic idea of what we can expect for the

       3     sales and use tax system to handle at this

       4     point in time.

       5               In thinking about what COST could

       6     propose, we looked at who the stakeholders

       7     are and what the current state of the law is.

       8     You've heard it time and time again, but it's

       9     worth repeating.  Currently the state of the

      10     law is that if there is the requisite amount

      11     of physical presence within a state, a vendor

      12     must collect and remit sales and use tax on a

      13     transaction.  If the physical presence does

      14     not exist, then the remote vendor does not

      15     constitutionally have to collect and remit.

      16               Finally, the consumer in the state

      17     has the obligation on any transaction in

      18     which sales tax has not been collected to

      19     independently file and remit use tax to its

      20     state.  That's the state of the law.

      21               This state of the law, however, has

      22     created some significant concerns among the









                                                             95
       1     stateholders in the process.

       2               First of all, local vendors see

       3     this as a competitive disadvantage.  If they

       4     have to go up against a remote vendor that

       5     does not have collect sales tax, they see

       6     this as a marketing issue.  If the remote

       7     vendor can say, look, we can put on our Web

       8     page, "No sales tax collected," the local

       9     vendor, they believe that this gives them a

      10     competitive disadvantage in the marketplace.

      11               Secondly, the remote vendors say,

      12     we cannot be forced to be submitted to this

      13     collection system.  It's way too expensive.

      14     It's way too cumbersome.  It's way too

      15     burdensome.  And it puts us at risk of all

      16     sorts of other taxes.  If we're required to

      17     collect and remit sales and use tax, what

      18     does that mean for other types of taxes?

      19     Does that mean that we have to be subject to

      20     the income tax, to other types of business

      21     activity tax?

      22               So the remote vendors have a









                                                             96
       1     significant concern about any type of

       2     expansion in the sales and use tax system.

       3               Finally, the states and the other

       4     taxing jurisdictions have significant

       5     concerns about their tax base, about the

       6     erosion of the tax base, and about the loss

       7     of their local retailers.

       8               So this is the triangle that COST

       9     was subjected to in trying to come up with a

      10     practical solution.  As a result of this

      11     triangle, we came up with three ideas that we

      12     think are the only practical solution to this

      13     system.

      14               First of all, any solution has to

      15     be voluntary.  It has to be voluntary because

      16     this keeps the parties from being polarized

      17     into extreme positions.  As long as it is

      18     voluntary, then all of the stakeholders, they

      19     can decide just how much needs to be done to

      20     make the system work.

      21               Secondly, there has to be

      22     significant incentives to get remote vendors









                                                             97
       1     to voluntarily collect and remit.  These

       2     incentives include a whole myriad of

       3     possibilities.

       4               First of all, there has to be

       5     simplification.  And I'm talking about

       6     radical simplification.  The simplification

       7     itself will drastically reduce the financial

       8     burden and the risk on remote vendors and

       9     local vendors on collecting in the current

      10     sales and use tax system.

      11               Secondly, there has to be some type

      12     of vendor allowance.  This is some type of

      13     payment that the vendor gets because of the

      14     cost of administrating this system.  Right

      15     now, I don't know exactly what that payment

      16     would be.  It would depend on how far the

      17     simplification went.  But it would be

      18     basically a way to lower the cost on both the

      19     remote vendors and the local vendors of

      20     collecting the sales and use tax for the

      21     state.

      22               There would also be some type of









                                                             98
       1     protections under this incentive system so

       2     that there would not be increased risk of

       3     other types of taxes, increased risk of

       4     income taxes or other business activity

       5     taxes.

       6               Finally the system says we should

       7     have some type of test period.  This is a

       8     voluntary program, and if we let it continue

       9     forever, people can get caught up in the

      10     minutiae.  If there is a specific test period

      11     in which the states and the vendors can come

      12     together and say this is a system that we

      13     think will work, and then give the system

      14     three years to see how many vendors really

      15     will participate, maybe 80 percent of the

      16     vendors will participate, and maybe the

      17     taxing jurisdictions will say, "You know,

      18     that's good enough.  We don't need that extra

      19     20 percent."  Maybe 60 percent will

      20     participate and the states will say, "You

      21     know, that's not enough.  We have to increase

      22     our incentives.  We have to do something to









                                                             99
       1     get more of the vendors to participate."

       2               That's the best way to level the

       3     playing field, to bring as many members

       4     voluntarily into the system as possible until

       5     some type of equilibrium is reached.

       6               Now, there's been a lot of talk on

       7     this panel about the technological solution.

       8     We think technology is an important part of

       9     this simplification and incentive concept.

      10     However, we don't think that it can be a

      11     significant part at this point in time.  We

      12     don't think it's a panacea, that it can in

      13     any way be substituted for the simplification

      14     and the other incentives.

      15               The business community believes

      16     that the technology itself could be very

      17     expensive to implement by the vendors.  Much

      18     of this technology is itself some type of

      19     bolt-on, so that it has to coexist with an

      20     existing computer system, with existing

      21     coding systems.  We see that as an important

      22     part, but not the entire system.









                                                             100
       1               And finally, we have to have some

       2     type of education and perhaps incentives for

       3     the consumers.  In this voluntary system,

       4     it's possible that not all vendors are going

       5     to voluntarily remit.  There will be some

       6     vendors who it's too expensive or they're

       7     just not sophisticated enough or it's too

       8     difficult to voluntarily remit.  And in those

       9     situations, consumers should be encouraged to

      10     file their own use tax returns.  It was

      11     mentioned earlier about Michigan; Michigan is

      12     going forward on this.

      13               Education can do wonders for the

      14     individual consumer.  We have a whole history

      15     in this country of voluntary compliance with

      16     our tax systems.  Other items can be created

      17     to encourage consumers to comply, some type

      18     of federal credit that consumers who

      19     voluntarily remit.  That would be the same as

      20     a vendor allowance to compensate the consumer

      21     for their filing costs.

      22               And with that, I will end my









                                                             101
       1     presentation.  Thank you very much for

       2     allowing COST to speak.

       3               CHAIRMAN GILMORE:  Thank you, Ms. Smith.

       4     The last presentation is "Simplification of

       5     the State and" -- last for this group.

       6     There's still another panel left for this

       7     morning's session after a break and after a

       8     Q&A.  But last on this group is,

       9     "Simplification of the State and Local Sales

      10     and Use Tax System," by Mr. Joseph Crosby of

      11     Ernst & Young, the National Director of State

      12     Tax Legislative Services on behalf of the

      13     E-commerce Coalition."

      14               Mr. Crosby?

      15               MR. CROSBY:  Chairman Gilmore,

      16     Commissioners, thank you very much for the

      17     opportunity to speak to you today.  I'm going

      18     to keep my remarks short, in small part

      19     because you've heard a lot already and are

      20     probably getting fairly tired of us speaking,

      21     but in large part, because I'm afraid of

      22     piquing Mayor Kirk's interest too much if I









                                                             102
       1     continue on for long.

       2               The E-commerce Coalition is

       3     comprised of businesses in the financial,

       4     technology and retail sectors of the economy,

       5     and the E-commerce Coalition is dedicated to

       6     providing a sound tax policy on E-commerce

       7     taxation issues.

       8               As you're well aware, there's a

       9     critical difference between taxation of the

      10     Internet and taxation of transactions that

      11     occur over the Internet.  Of course, the

      12     Internet itself is already taxed through a

      13     variety of mechanisms, most notably taxes on

      14     telecommunications, and in some locales,

      15     taxes on Internet access.

      16               The E-commerce Coalition is opposed

      17     to taxes that are unique to or specifically

      18     directed at the Internet, such as Internet

      19     access taxes.

      20               Transactions that occur over the

      21     Internet, of course, are also taxed.  All

      22     transactions that are currently taxable in









                                                             103
       1     the real world are also taxable on the

       2     Internet.

       3               Of course, we're aware that remote

       4     sellers, including some Internet vendors,

       5     currently aren't required to collect those

       6     taxes, and that individual consumers rarely

       7     remit use taxes to their states, and states

       8     rarely seek to enforce the use tax against

       9     these consumers.  So, for states and local

      10     governments, it's clearly an issue of the

      11     uncollected tax on remote and Internet sales.

      12               The question is, is this

      13     uncollected tax the fundamental problem?  Is

      14     that the issue that you've been asked to

      15     address here?  How to seek to get the monies

      16     that go uncollected.  Or is it, rather, that

      17     this is the result of a more fundamental

      18     problem, which is that the current sales and

      19     use tax system, when taken collectively,

      20     poses and objectionable burden upon

      21     interstate commerce.

      22               I would submit that, indeed, it is









                                                             104
       1     this that is the fundamental problem, that is

       2     an objectionable burden on interstate

       3     commerce, and that uncollected tax is merely

       4     one result of this underlying problem.

       5               There are numerous other results

       6     from this, including when viewed from the

       7     perspective of taxation strictly, a

       8     competitive advantage provided to some

       9     vendors vis-a-vis competitors.

      10               This fundamental issue, that the

      11     sales and use tax system is overburdensome is

      12     not new to you.  We've discussed it all

      13     morning long.  The fact bears repeating,

      14     however, because you will hear and have

      15     already heard from other presenters that will

      16     suggest cures for this that are actually

      17     worse than disease, that treating the

      18     symptoms is not an appropriate approach, and

      19     that it is simplification that is the key and

      20     the only solution to this issue.

      21               Simplification is the only solution

      22     that removes this objectionable burden upon









                                                             105
       1     interstate commerce.  It's the only solution

       2     that can lead to a level playing field, which

       3     I define as an equitable, consistent, easily

       4     administered and technologically-neutral

       5     sales and use tax system.

       6               In our proposal, which you have

       7     before you, we've identified a number of

       8     simplifications, such as uniform definitions

       9     or classifications for the tax base as

      10     Charles McLure mentioned earlier today in his

      11     presentation.

      12               Some of these simplifications can

      13     only occur though policy changes.  Others can

      14     be accomplished through technology, such as

      15     calculation of tax rates.  I heard the

      16     discussion earlier from Taxware and Taxware,

      17     indeed, is a vendor of tax software that

      18     provides great benefit to many companies in

      19     assisting them with sales and use tax

      20     determinations, collections, remissions and

      21     the like.  Many other companies, including

      22     Ernst & Young, do similar things for clients.









                                                             106
       1               I was interested, though, in the

       2     last slide that we saw.  There was what I

       3     thought as a huge leap and, I think, an

       4     important issue when discussing technology

       5     generally, in that right now Taxware is

       6     proposing and sells software to clients that

       7     help them determine tax.

       8               The merchant still collects all the

       9     money.  The merchant still remits the tax.

      10     The last slide that was presented showed a

      11     new line, and that new line is, all of a

      12     sudden, Taxware is going to handle all of the

      13     transactions, hundreds of millions of which

      14     occur in a given week, and more importantly,

      15     all the money is going to flow through

      16     Taxware.  I think that's an important thing

      17     that needs to be considered before one tries

      18     to bolt on a software solution to a trusted

      19     third party.

      20               Regardless, though, of the final

      21     mix of statutory changes and software that is

      22     adopted, efforts to simplify the system must









                                                             107
       1     be state led, as we've heard earlier today.

       2     We commend members of the state and local

       3     government community, which have started to

       4     think constructively about this issue, and

       5     indeed, many which have been thinking

       6     constructively about this issue for some

       7     time.

       8               It may be desirable, however, for

       9     the federal government to get involved, for

      10     Congress for both the states and the business

      11     community, for Congress to assist in the

      12     effort by defining what true simplification

      13     really is.  That may not be the case, but we

      14     think at this point in time that it might be

      15     worthwhile for Congress to get involved in a

      16     bare-bones level, again, as Dr. McLure

      17     mentioned earlier today.

      18               Having just commended those in

      19     state and local government, however, I cannot

      20     help but take this opportunity to provide a

      21     criticism of the proposal that's been

      22     developed by the National Governors'









                                                             108
       1     Association and other members of the state

       2     and local government community.

       3               The basic premise of the NGA

       4     proposal is that vendors should be removed

       5     from the system altogether.  Although this is

       6     an admirable goal in and of itself, I think

       7     it's fundamentally flawed.  The vendor is

       8     currently the only party to the transaction

       9     that has the information that's necessary to

      10     determine whether a transaction is taxable,

      11     what the tax is that should be appropriately

      12     determined, et cetera.

      13               Removing the vendor from the

      14     process requires that a brand new party, a

      15     trusted third party, be inserted in the

      16     middle of market-determined, rather than

      17     government mandated processes.  This new

      18     entity adds not only complexity to the

      19     system, but is, worse, distorting currently

      20     efficient marketplaces solely for the purpose

      21     of collecting, calculating, and remitting

      22     tax.









                                                             109
       1               A far better approach would be

       2     first to admit that the vendor has to play a

       3     role in any tax collection scheme.  Second,

       4     to reduce the burden on the vendor to the

       5     greatest extent possible by simplifying the

       6     current burdensome system.  Then, third,

       7     compensating vendors with a meaningful vendor

       8     compensation for whatever costs are left

       9     over, whatever costs are incurred by the

      10     vendor, in adopting such a system.

      11               So long as the NGA proposal clings

      12     to the premise that vendors need not play a

      13     meaningful role in the system, it will

      14     inevitably have an intrusive and, I believe,

      15     detrimental effect on the existing market

      16     processes and the parties involved in those

      17     processes.  Simplification, not market

      18     distortion, is the solution to this issue.

      19               I realize that some of you are not

      20     satisfied with the discussion of simplifying

      21     the current system.  For some, this is a

      22     broader debate concerning issues of state









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       1     power and federalism.  For others, it's a

       2     more fundamental question of whether or not

       3     the Internet should be taxed.

       4               Although the E-commerce Coalition

       5     recognizes the saliency of these issues,

       6     we've decided to focus on the present laws,

       7     the laws which together constitute an

       8     objectionable burden on interstate commerce.

       9               Simplification is the key to

      10     reducing that burden.  It's the key to

      11     providing a level playing field for all forms

      12     of commerce and to ensuring the stability of

      13     the state and local revenue structure.  If

      14     the laws were not as complex as they are, we

      15     may never have had a decision in Bellas Hess;

      16     we may never have had a decision in Quill.

      17     We might no even have an advisory commission

      18     on electronic commerce, and we probably

      19     wouldn't be having this debate here today.

      20               Simplification is the key to

      21     solving the problem.  Thank you very much.

      22               CHAIRMAN GILMORE:  Thank you,









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       1     Mr. Crosby.  Time now for questions and

       2     answers and open discussion.  Mr. Andal, you

       3     begin.

       4               MR. ANDAL:  Yes, I'm going to

       5     address, just for the sake of clarity, I'll

       6     address my questions for the NGA to Governor

       7     Janklow.

       8               First thing I need to say is that I

       9     love your state.  I visited the first time

      10     this year with my little boy.  It was a

      11     journey into the past.  My great-grandfather

      12     immigrated to Elm Springs, South Dakota,

      13     years ago.

      14               After listening to your remarks, I

      15     wondered if we were in disagreement.  My

      16     proposal, which is different from some of the

      17     others offered, deals almost exclusively with

      18     the nexus question.  You made the comment

      19     that you only wanted to tax sales when you

      20     had nexus, when you had nexus under current

      21     standard.

      22               I don't disagree that you ought to









                                                             112
       1     be able.  At least, my proposal doesn't

       2     disagree with the idea that if a sale occurs

       3     in your state on the Internet, you can tax

       4     it.  My proposal doesn't exclude you from

       5     doing that.  My proposal only deals with the

       6     nexus question.

       7               I'm wondering if you agree with

       8     Quill and my proposal pretty much just

       9     codifies Quill.  Do you agree with my

      10     proposal?

      11               GOVERNOR JANKLOW:  One, I'm not familiar

      12     with your proposal.  Two, I'm willing to live

      13     under Quill, but I don't agree with Quill.

      14               MR. ANDAL:  I see.

      15               GOVERNOR JANKLOW:  I don't agree with

      16     it.  I don't agree with Quill, but I'm

      17     willing to live under that decision.  I don't

      18     think anything this Commission does or has

      19     been charged with by Congress was to change

      20     the substantive law that deals with Quill.

      21               MR. ANDAL:  Right.

      22               GOVERNOR JANKLOW:  I thought we were









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       1     going to look at electronic commerce.  Please

       2     understand, sir and this is a slight

       3     editorial but let me give you four

       4     categories:  K-12 education, higher

       5     education, Title 19 for the people who can't

       6     afford medical care, and the prison system,

       7     take up 75 percent of my state's entire

       8     budget.  The general fund takes up 75

       9     percent.

      10               These aren't things that we can

      11     fool around with.

      12               MR. ANDAL:  No, I'm very familiar

      13     with those needs.  I was a state legislator

      14     in California, and so I've dealt with all

      15     those questions before.

      16               Interestingly enough, our tax

      17     system is very different than yours.  The

      18     sales tax is our third tax.  Property and

      19     income taxes, in California, anyway, bring in

      20     more than the sales tax.

      21               GOVERNOR JANKLOW:  The average farm

      22     ground in my state for the whole state is









                                                             114
       1     worth $300 an acre.  In this state, it's

       2     probably $3,000 an acre.

       3               MR. ANDAL:  That's right.  Let me

       4     ask you:  I think one of the fundamental

       5     problems with your technological approach is

       6     and maybe it's not.  Maybe it's a matter of

       7     timing.  Maybe it's a lack of detail.

       8               The real problem we face right now

       9     with compliance is a uniform tax base.  Do

      10     you think your technological solution works

      11     without having that uniform tax base?  In

      12     other words, every state agreeing on what's

      13     taxable and not taxable?  Or do you think

      14     that your technological solution depends on

      15     that uniform tax base being accomplished?

      16               GOVERNOR JANKLOW:  Sir, I believe it

      17     could go either way.  I'm a human being that

      18     does not underestimate the ability of human

      19     beings to sit down, utilizing technology to

      20     solve problems.  I really believe we don't

      21     have an answer today, and some of these

      22     software approaches that people talk about I









                                                             115
       1     don't think really fit.

       2               They'd like it to fit because

       3     they'd like to sell a product, but it doesn't

       4     really fit.  But technology has never been

       5     asked to solve this problem yet because of

       6     the way we do business in America.  If we

       7     were to ever say, here's the problem,

       8     software community.  Go out and see if you

       9     can bring a solution, I really believe they

      10     could bring it very quickly, one.  Two, I

      11     think people like Sears have come a long ways

      12     towards doing this.

      13               In my state, Sears gets taxed on

      14     sales three different ways.  When I say

      15     taxed, imposing the tax on citizens.  We have

      16     a 4 percent sales tax at the state level, and

      17     communities can put up to two at their

      18     option.  Some communities have adopted one

      19     cent, others have adopted the two.

      20               So, three different Sears stores in

      21     my state can have three different rates, and

      22     they do it by zip code and they do it very









                                                             116
       1     well.  I don't know how Sears does it, but I

       2     can tell you, sir, that the technology, we've

       3     never asked the technological community to

       4     solve this, and they've been able to solve

       5     every problem we've ever had addressed to us.

       6     I've got to believe that they could do this.

       7               MR. ANDAL:  Sears, of course, has

       8     physical presence and nexus, and thus knows

       9     where the sale takes place.

      10               GOVERNOR JANKLOW:  Sir, that honestly

      11     isn't what's taking place any more.  Let me

      12     give you a classic example:  Cabella's.  Some

      13     of you may be familiar.  They mail out 66

      14     million catalogues a year.  Cabella's has two

      15     operations.

      16               They have a store operation, a

      17     bricks and mortar operation, and they have a

      18     catalogue operation, an Internet operation.

      19     They are two separate corporations.  You can

      20     go into a Cabella's store and order off the

      21     catalogue.  If you buy something from the

      22     catalogue, you can go into the Cabella's









                                                             117
       1     store and return the merchandise and get a

       2     credit for it or exchange it.

       3               But they maintain two completely

       4     separate legal entities.  One has nexus, the

       5     other doesn't.  The names are slightly

       6     different, but they have two different

       7     nexuses when it comes to dealing with this

       8     type of situation.

       9               Michigan and Wisconsin, by the way,

      10     and now Minnesota and Wisconsin tax one of

      11     their deals, but not the other one.

      12               MR. ANDAL:  Again, I'd refer you to

      13     my proposal, because under my proposal

      14     returns would create physical presence and

      15     nexus, and thus allow you to tax it.

      16               But my fundamental question is,

      17     what if you don't know where the customer is?

      18     The Internet is significantly different from

      19     other types of sales.  In other words, you

      20     don't require the Main Street merchant to

      21     know where his customer is.  They come in,

      22     they buy it, they take it out.  No obligation









                                                             118
       1     is there.  If you want an even playing field,

       2     for instance, we don't ask Main Street

       3     merchants to collect information on their

       4     customers and where they live.

       5               GOVERNOR JANKLOW:  Look, sir.  Even

       6     though we have rules and referees, some

       7     players still cheat.  But when you have

       8     referees and you have a good set of rules,

       9     you eliminate a lot of cheating, one, and

      10     two, you still have to deliver the goods.  If

      11     it's a physical sale, you still have to

      12     deliver the goods.

      13               Now, you may not get them all.  But

      14     the fact of the matter is we're not getting

      15     any now.  Under the proposal of some people,

      16     we never would get any.  All I'm suggesting

      17     is we shouldn't wreck what's going on.  Why

      18     should somebody want to force my state into

      19     an income tax?  Isn't that our business in

      20     South Dakota?  I'm not saying you do.

      21               MR. ANDAL:  No, absolutely.

      22               GOVERNOR JANKLOW:  But I'm saying by









                                                             119
       1     doing what some people are doing, you're

       2     going to force us "you" plural, not singular,

       3     are going to force us to do things my state,

       4     as a matter of policy, doesn't want to do.

       5     This is a state made up of 50 separate

       6     laboratories, as Justice Brandeis said 80

       7     years ago.  We have 50 laboratories that

       8     really, really bring about a lot of good

       9     things.  The states compete with each other.

      10               MR. ANDAL:  Yes, I have no

      11     objection to South Dakota taxing South Dakota

      12     residents.

      13               GOVERNOR JANKLOW:  That's all I want to

      14     do, sir.

      15               MR. ANDAL:  Where I disagree is you

      16     forcing California companies to collect your

      17     sales tax for you.  That's where our

      18     disagreement lies.

      19               Are you familiar with what a dock

      20     sale is?

      21               GOVERNOR JANKLOW:  Spell the word.  I

      22     don't?









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       1               MR. ANDAL:  Yes.

       2               GOVERNOR JANKLOW:  D-o-c-k or d-o-t?

       3               MR. ANDAL:  D-o-c-k.

       4               GOVERNOR JANKLOW:  Yes, sir.

       5               MR. ANDAL:  A dock sale is pretty

       6     much where you buy a product and it's not

       7     delivered to your home or your business, but

       8     it's delivered to a warehouse or somewhere

       9     else, and you go pick it up.

      10               It's the sale of tangible personal

      11     property, but you do not have to give your

      12     address.  All you have to do is pay for it

      13     and pick it up at the dock.  That is a

      14     tangible personal property sale where having

      15     the address of the customer is not necessary.

      16               These are the types of problems I

      17     think you have in your technological

      18     approach.  It sounds to me like you're a

      19     pretty straightforward fellow.  It sounds to

      20     me like you're saying that you believe a

      21     technological solution will be possible in

      22     the future, but it's not ready now.









                                                             121
       1               GOVERNOR JANKLOW:  I don't think

       2     technology can can solve everything.  I don't

       3     think we've been asked to do it.  We never

       4     approached the AIDS situation until it was a

       5     panic.  Look what has been discovered in

       6     medical technology.

       7               Look what has been discovered in

       8     gene tapping and the human body, just in

       9     doing that type of research on a crash basis.

      10     Look at the spin-off that came from America's

      11     spaceship program when we became afraid of

      12     the Russians because they put up Sputnik.

      13     Huge responses.  I don't think this is all

      14     that complex a problem.  People haven't been

      15     asked to solve it.  Look, if they get asked

      16     to solve it and can't, then we can always

      17     say, don't do it. But let's give somebody a

      18     chance before we say no.

      19               MR. ANDAL:  I'll cede my time, but

      20     in your view, have you solved the problem?

      21               GOVERNOR JANKLOW:  Have we solved the

      22     problem?  No, because everybody says we can't









                                                             122
       1     deal with it.  I'm willing to live with

       2     Quill, because there's another way,

       3     ultimately, there's a way states can deal

       4     with this, because frankly these proposals

       5     that say no tax aren't going to get through

       6     Congress, either.  There's going to be a

       7     stalemate.  The bottom line is we're going to

       8     start stopping little brown trucks, and we're

       9     going to start examining the packages.

      10               People can talk privacy all they

      11     want, but there's nothing that stops, there's

      12     nothing that stops our Highway Patrol from

      13     stopping those white and brown trucks in my

      14     state and going through the packages and then

      15     just following them back.  I'll tell you, we can

      16     disrupt enough commerce so that there is an

      17     interstate commerce problem, and you can

      18     still prevent Congress from passing it,

      19     because all it takes is one more than is

      20     necessary to cut off cloture to stop

      21     something in the Senate.

      22               The Senate is the great equalizer









                                                             123
       1     because, frankly, my state doesn't have much

       2     horsepower, but we've got two Senators, just

       3     like California.  We've got one Congressman,

       4     and you've got 45.

       5               CHAIRMAN GILMORE:  Mr. Parsons?

       6               MR. PARSONS:  Just to be clear,

       7     Governor Janklow, because I'm listening and

       8     with so many presenters, one gets confused.

       9     What are you proposing, other than a simple

      10     lifting of the ban?

      11               GOVERNOR JANKLOW:  I'm here to prevent

      12     what some people are talking about doing to

      13     us with suggestions that may come out of this

      14     Commission and go forward to Congress.  There

      15     are some people, frankly, in my party in the

      16     Congress that are working very, very hard to

      17     becoming a minority leadership.  I want to

      18     help.  I want to help prevent that from

      19     happening to them.  I'm here to save them

      20     from themselves.

      21               MR. PARSONS:  I'm sure they're

      22     pleased to know that.  But from the point of









                                                             124
       1     view of this Commission.

       2               GOVERNOR JANKLOW:  They don't know?

       3     They don't know they're terminal yet.

       4               MR. PARSONS:  From the point of

       5     view of the Commission, there right now is

       6     sort of a temporary freeze on states, you

       7     know, sort of taxing commerce on the

       8     Internet.

       9               As I listened to your proposal and

      10     the colloquy we've had, I'm trying to figure

      11     out what you're advocating beyond simply

      12     letting that lapse and letting the states,

      13     you know, under Quill do what they want to

      14     do.  Is that your proposal?

      15               GOVERNOR JANKLOW:  That's a fair

      16     question, sir.  I've got two objectives being

      17     here.  One, I'm concerned about what some

      18     suggestions are for proposed legislation.  I

      19     want to stop some things bad from happening.

      20     I may not like my current environment, but

      21     it's better than what some people are

      22     proposing to do in addition to it.  That's









                                                             125
       1     the first thing.

       2               The second thing, sir, that I'm

       3     really concerned about, also, is that I think

       4     that this is a developing area.  The Quill

       5     decision in nexus.  I mean, the Supreme Court

       6     did not say in Quill that you can't visit

       7     this area again.

       8               They invited the states to do

       9     something.  They invited the states to do

      10     something in the Quill decision.  In the

      11     Bellas Hess decision they didn't say, no,

      12     never, not ever.  They left openings.  So the

      13     only point that I'm making is, as this

      14     technology explosion continues, and it will,

      15     and as it brings magnificent benefits to

      16     everybody, and it frankly drives productivity

      17     in America that continues in spite of a lot

      18     of bad things we have going on to drive us

      19     economically up, as all these things happen,

      20     let's let the dust settle a little more

      21     before we make dramatic changes.

      22               I'm willing to live with the









                                                             126
       1     existing Quill rules as things develop,

       2     because I think over time a lot of this will

       3     flesh out, and we should not rush into doing

       4     something my way or somebody else's way.

       5               MR. PARSONS:  So, in effect, if the

       6     net net result of all this was to simply let the

       7     moratorium terminate with no additional

       8     recommendations of legislation.

       9               GOVERNOR JANKLOW:  I'd be out of your

      10     hair, sir.  I'd be out let us do things our

      11     own way in South Dakota.

      12               CHAIRMAN GILMORE:  Both Governor Locke

      13     and Governor Leavit have questions, but I

      14     have one, too.

      15               Let me ask you, Governor Janklow.

      16     With the idea here of stopping little brown

      17     trucks and so on like that, surely that is

      18     exactly why the Constitution was created,

      19     wasn't it?  So that we could avoid the

      20     Articles of Confederation and get away from

      21     the idea that each individual state would try

      22     to impose its own system on interstate









                                                             127
       1     commerce, isn't that right?

       2               GOVERNOR JANKLOW:  No, no.

       3               CHAIRMAN GILMORE:  It's not right?

       4               GOVERNOR JANKLOW:  With respect to the

       5     interstate commerce was one of many problems

       6     that there were with the Articles of

       7     Confederation.  States running post offices.

       8     Sending ambassadors to France.  Putting

       9     duties on each other's goods.  Raising

      10     armies.  There were a whole host of things.

      11     Commerce, obviously, was one of them.

      12     There's no question about that, one.

      13               Two, we have always had the

      14     authority to stop the little brown trucks.

      15     What I may do in that regard is not new.  All

      16     I'm trying to do is to make sure that our

      17     state has the ability to collect the taxes

      18     from our citizens that are buying goods to be

      19     delivered in South Dakota.  That is not

      20     interfering with interstate commerce at all.

      21               Now, there are merchants out of my

      22     state that don't like it.  There are









                                                             128
       1     merchants that don't like it.  But that's not

       2     interfering with interstate commerce.

       3               CHAIRMAN GILMORE:  We agree that the

       4     Congress, if they think that the individual

       5     action of the state is a burden on interstate

       6     commerce, would have the ability to legislate

       7     that.

       8               GOVERNOR JANKLOW:  Absolutely, sir.

       9               CHAIRMAN GILMORE:  Absolutely.

      10               GOVERNOR JANKLOW:  Absolutely.  If they

      11     can get 51 U.S. Senators, they can do it.

      12     But they won't.

      13               CHAIRMAN GILMORE:  I think they would be

      14     very interested in the idea that each

      15     individual state has the ability to set up

      16     barriers between states.  I doubt seriously

      17     that that's the law, and I doubt seriously

      18     there's a need for a legislation, but if so,

      19     I would imagine the Congress would act

      20     decisively.

      21               GOVERNOR JANKLOW:  I agree.  This isn't

      22     a barrier in commerce between states, sir.









                                                             129
       1     All it's doing is allow states to do what

       2     they have to do to educate their kids, to

       3     take care of the handicapped, to maintain the

       4     public prisons, to maintain the public mental

       5     health hospitals, deal with adjustment

       6     training centers, and carry on state

       7     functions without giving the shaft to a

       8     portion of the citizens in the state at the

       9     expense of others who choose to buy a

      10     different way.

      11               CHAIRMAN GILMORE:  How are sales taxes

      12     doing?  How are sales taxes doing in South

      13     Dakota?  Are they up, down, level?

      14               GOVERNOR JANKLOW:  They're like every

      15     place else in America, they're up, sir.

      16               CHAIRMAN GILMORE:  They're up.

      17     E-commerce is going on and has been going on

      18     and is rising.  Do you have any empirical

      19     evidence that says that the sales tax

      20     collections in South Dakota or anywhere else

      21     in America is going down as a result of

      22     E-commerce.









                                                             130
       1               GOVERNOR JANKLOW:  That isn't the issue,

       2     sir.  That's not the issue.

       3               CHAIRMAN GILMORE:  I think it is the

       4     issue, but go ahead.

       5               GOVERNOR JANKLOW:  I believe, sir, the

       6     issue is not is it going down because of

       7     E-commerce.  Is it being stifled in its

       8     collections and is it less than it should be

       9     in going up because of E-commerce, and is

      10     E-commerce giving an unfair advantage to

      11     those people who are utilizing E-commerce at

      12     the expense of other commerce?  So the real

      13     issue isn't are tax collections up 6 percent

      14     in my state.

      15               The question is would they have

      16     gone up 9 percent if we had been getting the

      17     money from E-commerce, which would have given

      18     governors like you and I, because you're a

      19     tax cutter and so am I, would it had given

      20     you and I the ability to lower the overall

      21     taxes for all our people?

      22               CHAIRMAN GILMORE:  The -- the discussion









                                                             131
       1     that's gone on for the last two days has been

       2     an assertion that if E-commerce is not taxed

       3     and collected in an effective way, that it is

       4     going to destroy the sales tax system.  I

       5     think you're alluding to that here today, as

       6     well.  Is there any evidence that that's

       7     going on?  Any empirical evidence at all?

       8               GOVERNOR JANKLOW:  Sir, I think the

       9     answer to that is yes.  Do you know what the

      10     biggest example of it is?  All these people

      11     that are insisting that we shouldn't be able

      12     to do it.  They know where this freight train

      13     is headed, and that's why they want to insist

      14     that they not have to play by the rules

      15     everybody else has to play by and they want a

      16     special exemption carved out for themselves.

      17     That's my empirical evidence.

      18               It's not that I have a dollar

      19     number, because, frankly, I can't get it.  If

      20     I want to go to Lands End and find out how

      21     much they're not collecting and sending to my

      22     state, they won't tell me.  Under the Quill









                                                             132
       1     decision, I can't make them tell me.  So,

       2     nobody can gather the empirical evidence for

       3     those types of things under the current

       4     circumstances.  I accept that.  But the fact

       5     that all these people are insisting that they

       6     don't want to collect the taxes from my

       7     citizens and the other state citizens is

       8     proof that they know where this is all

       9     headed.

      10               CHAIRMAN GILMORE:  Let's go to Governor

      11     Locke.

      12               GOVERNOR LOCKE:  I think Mr. Parsons

      13     yesterday kind of asked a really good

      14     question in terms of where is the Commission

      15     headed and what are some of the choices that

      16     we have before us.  The moratorium prohibits

      17     any new taxes on the Internet.  The

      18     moratorium will expire.

      19               When the moratorium expires, unless

      20     Congress does something, it appears that the

      21     states' local jurisdictions could impose or

      22     reimpose bit taxes or taxes just to get onto









                                                             133
       1     the Internet.  It appears now that states

       2     will not be able to, or local governments,

       3     given the Quill and Bellas Hess decision,

       4     ever try to collect taxes on transactions

       5     from remote sales, whether by catalogue or by

       6     the Internet.

       7               So, you know, I think we should

       8     make it clear that if the moratorium expires

       9     there will not and there cannot be a mad rush

      10     to impose sales tax on transactions that are

      11     from another state that are conducted by

      12     E-commerce.  There may be, however, attempts

      13     by local jurisdictions, cities, counties,

      14     utility districts or states, to impose

      15     Internet access charges or taxes just to use

      16     the Internet.  I think many of the people on

      17     this Commission are opposed to that type of

      18     taxation.

      19               The governor here, Governor Janklow

      20     and others, are arguing that they want to

      21     maintain the status quo with respect to

      22     Internet commerce within their own states,









                                                             134
       1     and that if someone is using Internet

       2     commerce within their state from a company

       3     within the state, or where there is strong

       4     physical nexus, that the state should be able

       5     to continue taxing, which is right now the

       6     law.

       7               It seems that there are some

       8     proposals to overturn Quill, and basically,

       9     from some of the presentations, say that even

      10     if it's a remote sales, and it's done by

      11     electronic commerce, that that's

      12     discriminatory against Main Street, and that

      13     the states and local governments should have

      14     the ability to extend sales tax to those

      15     transactions.

      16               Then there are others who have made

      17     presentations who say that even if it's

      18     within the state and even if it's truly nexus

      19     within the state, a company is located in the

      20     state, the consumer is within that same state

      21     and that consumer wants to buy something

      22     using electronic commerce, that there should









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       1     be no tax on that.

       2               But I've heard a lot of people here

       3     saying, even with the governor's and the

       4     local government's and the county's proposal,

       5     that they're not seeking to overturn Quill,

       6     but really seek the status quo and don't want

       7     any changes from the status quo, other than,

       8     for instance, prohibiting taxes on access to

       9     the Internet.

      10               I guess I have a question, then,

      11     with respect to the notion of Quill, and I

      12     think it deals with Mr. Andal's proposal to

      13     codify Quill.  If Quill is the law of the

      14     land, and Bellas Hess is the law of the land,

      15     which says that a remote seller, whether by

      16     catalogue or by E-commerce, has no duty to

      17     collect a tax on behalf of South Dakota,

      18     selling into the state of South Dakota, do we

      19     really need, number one, to codify Quill if

      20     it's already the law of the land?  Number

      21     two, if we try to codify Quill, will not

      22     there be some more litigation, more









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       1     complexity, because you put on a different

       2     word, you try to codify Quill, because the

       3     states now know how to deal with Quill.  We

       4     know what we can or cannot tax.  We know what

       5     to try not to tax or what to try to tax and

       6     what not to try to tax.  If we put it in, try

       7     to codify it, does that create even more

       8     uncertainty, a whole new round of litigation,

       9     and create more complexity within the

      10     business community among those who are

      11     arguing just for tax simplification?

      12               So, I guess maybe I would ask the

      13     question perhaps to Mr. McLure, others, or

      14     Mr. Merrill and Mr. McArthur, who have been

      15     working on these issues of just simply tax

      16     simplification and whether or not trying to

      17     codify Quill would open up a hornet's nest,

      18     and whether or not Mr. Andal's proposal is

      19     truly a codification of Quill or goes beyond,

      20     and might interject a new round of

      21     litigation, complexity and uncertainty?

      22               CHAIRMAN GILMORE:  Does anyone have a









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       1     comment on that question?  Mr. McLure.

       2               MR. MCLURE:  From an economic point

       3     of view, the Quill decision makes no sense.

       4     It is perhaps necessary and appropriate,

       5     given the complexity of this existing state

       6     sales and use tax.  If this Commission or

       7     this nation doesn't have the will to address

       8     the complexity and simplify the system to the

       9     point that a destination-based tax is

      10     feasible, that is, the placing of use taxes

      11     by remote vendors, then yes, perhaps

      12     codification of Quill would be appropriate.

      13               But the bottom line is that's not

      14     the right answer, because that still leaves

      15     local merchants at a competitive

      16     disadvantage, and also creates opportunities

      17     for reducing sales taxes, collections.  For

      18     example, through the use of

      19     separately-chartered out-of-state

      20     subsidiaries that managed to walk the tight

      21     rope and not establish nexus.

      22               So, the short answer is if you're









                                                             138
       1     going to keep the mess we have, yeah, codify

       2     it so that it becomes tax avoidance instead

       3     of tax evasion.

       4               On the other hand, what somebody

       5     should do is to fix the system so that

       6     everybody is treated the same, that the

       7     system is simple enough to be enforced.

       8               CHAIRMAN GILMORE:  We have seven more

       9     people who are on the list to ask questions

      10     of the panel, so if the questions could be

      11     expeditious, I think we'll be able to do this

      12     a lot better and a lot more thoroughly.

      13               Governor Leavitt is next.

      14               GOVERNOR LEAVITT:  Governor, with your

      15     permission I'd like to ask two.  One is I'd

      16     like to hear, if I could, Dan Bucksí and/or

      17     Harley Duncan's opinion on Governor Locke's

      18     question.  I think that this is a critical

      19     question.

      20               Then I have a question I'd like to

      21     ask Gene Lebrun about the -- the length of

      22     time in which this kind of a system would









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       1     take to undertake.  They are, I think,

       2     qualified as experts on this point.

       3               GOVERNOR JANKLOW:  Mr. Chairman, may I

       4     respond to one thing, please?  I'll be very

       5     brief.  Governor Locke.  Two things.

       6               One:  Nexus is different things for

       7     different issues dealing with the Internet.

       8     States are struggling to pass pornography

       9     laws to deal with protecting citizens from

      10     what's sent to them remotely from other

      11     states.  The criminal law is developing that

      12     states that can get nexus very quickly and

      13     very easily, or far more easily than they can

      14     in a commercial sense.

      15               The second thing is that Web pages

      16     that go up and things that are transmitted

      17     over the Internet, even from someone

      18     remotely, are being subjected to libel laws

      19     within states, even in changing international

      20     shoe type decisions and their progeny, as

      21     this stuff starts to expand.  So, really it

      22     depends on the issue as to how it's expanding









                                                             140
       1     for nexus.

       2               Quill is slightly different than

       3     Bellas Hess.  I mean, these things are

       4     evolving.  So, my only comment is that all

       5     this electronic stuff, nexus is different

       6     things for different issues, and it continues

       7     to evolve, and that's healthy.  We in

       8     American can live with that.

       9               GOVERNOR LEAVITT:  Maybe I could

      10     redirect my question.  Maybe just one -- Dan,

      11     maybe you could address it.  I would like to

      12     hear Wally Hellerstein's opinion on that, as

      13     well.

      14               Why don't we go ahead?  Is he here?

      15               GOVERNOR GILMORE:  Governor, who is

      16     Wally Hellerstein?

      17               GOVERNOR LEAVITT:  He's one of our

      18     experts.

      19               MR. HELLERSTEIN:  Governor Leavitt,

      20     you'd like the answer to the question as to

      21     whether or not the proposal --

      22               GOVERNOR LEAVITT:  The question is would









                                                             141
       1     it help to codify Quill?

       2               MR. HELLERSTEIN:  I don't think it

       3     would be of any help to codify Quill if you

       4     simply said Quill is the law of the land

       5     because Quill still raises as many questions

       6     as a statutory proposition as it does as a

       7     constitutional proposition.

       8               GOVERNOR LEAVITT:  If we opened up a

       9     whole new round of litigation it would not

      10     help us with this?

      11               MR. HELLERSTEIN:  If you codified

      12     the law as established by the Supreme Court

      13     you would simply be making a statute out of

      14     something that is not a rule of

      15     constitutional law.  I think you could

      16     clarify the rules regarding nexus, and you

      17     could do it perhaps the way Dean Andal has

      18     suggested.  You could do it in a way that

      19     would level the playing field.

      20               Instead of having a physical

      21     presence test, you could have a test that

      22     said a minimum amount of sales.  I thing you









                                                             142
       1     could come up with a better rule than Quill,

       2     a more sensible rule.  But certainly just

       3     codifying Quill itself makes no sense at all

       4     to me.

       5               GOVERNOR LEAVITT:  Dan?

       6               MR. BUCKS:  Yes, Governor Leavitt

       7     and members of the Commission, just one

       8     simple point.  The proposal, with all due

       9     respect, the proposal before you to codify

      10     Quill illustrates the problems of any

      11     legislative effort of doing so, because it

      12     does not codify Quill.

      13               Nowhere did the U.S. Supreme Court

      14     in that decision say that the standard was

      15     substantial physical presence.  They said

      16     that a company had to have substantial nexus,

      17     and an indicator was physical presence.

      18     There's a very great difference, because what

      19     the concept of putting the words into federal

      20     law of "substantial physical presence" means

      21     is you begin to weigh whether or not there is

      22     enough physical presence, in terms of the









                                                             143
       1     weight or the quantity or what have you.

       2               That opens the door to extensive

       3     litigation.  That's just one example of the

       4     difficulty of trying to put into statute

       5     words that theoretically or

       6     hypothetically codify Supreme Court

       7     standards.

       8               GOVERNOR LEAVITT:  Can I just ask the

       9     second part of my question?

      10               CHAIRMAN GILMORE:  Governor, I'm okay

      11     with this, except that it's taking a long

      12     time.  I certainly will call on Mr. Lebrun in

      13     order, but go ahead, Gene, if you could.

      14               MR. LEBRUN:  Very briefly.  The

      15     Uniform Laws Conferences, made up of

      16     Commissioners from all 50 states, Puerto

      17     Rico, the U.S. Virgin Islands and the

      18     District of Columbia, has been in the

      19     business of drafting uniform laws for

      20     over 100 years.  It has no power of

      21     enactment, all we can do is make

      22     recommendations to the states.









                                                             144
       1               However, or track record, I think,

       2     is pretty good.  I think all of you are

       3     familiar with the Uniform Commercial Code.

       4               The process is not real quick, but

       5     I think it's good.  But we can act quite

       6     quickly.  An example would be the recently

       7     drafted and enacted Uniform Interstate Family

       8     Support Act.  From the time it came before

       9     the conference to do a drafting prior to the

      10     time that it's been enacted, I think now in

      11     all 50 states, is probably only three to four

      12     years.

      13               I think in terms of getting the

      14     backing of such organizations as NCSL and the

      15     governors and the mayors and the counties and

      16     the business community, a project could be

      17     undertaken to draft the type of

      18     simplification we're talking about, and it

      19     could be done quickly, and it could be

      20     prepared for states to start enacting in a

      21     year or two.  I think that's the time that

      22     we're looking at.









                                                             145
       1               CHAIRMAN GILMORE:  Mr. Lebrun, do you

       2     have you any reason to believe that the

       3     states, at this point, are prepared to

       4     cooperate on an NGA-type of proposal like the

       5     one that's being talked about this morning?

       6               MR. LEBRUN:  I think the proposal

       7     was supported by not just the NGA but also

       8     the NCSL, the counties and the cities, it's a

       9     strong indication that we could get that type

      10     of broad support, yes.

      11               CHAIRMAN GILMORE:  Voluntary system.

      12     For a voluntary system?

      13               MR. LEBRUN:  Yes.

      14               CHAIRMAN GILMORE:  The next one in line

      15     is Mr. Norquist.

      16               MR. NORQUIST:  Governor, I was very

      17     pleased to hear you talking about savings and

      18     reducing spending in South Dakota, because

      19     sometimes political leaders focused on this

      20     see every dollar not collected in taxes as

      21     something that can't go towards increasing

      22     efficiency, but rather is going to have to be









                                                             146
       1     raised somewhere else, as if there was some

       2     fixed level of taxes and spending that has to

       3     continue forever.

       4               The savings that you've been able

       5     to make in South Dakota show the way for

       6     other politicians to perhaps look at their

       7     own spending levels rather than at the

       8     pockets of their citizens.

       9               I was concerned that in this

      10     discussion we didn't hear about the present

      11     high level of taxes already levied on the

      12     parts of the Internet, on telecommunications,

      13     on the local and state governments putting

      14     taxes on cable, and so on.  I think we need

      15     to keep in mind that the Internet is one of

      16     the most heavily taxed institutions already,

      17     never mind the question of whether we're

      18     going to overturn the commerce clause and

      19     start taxing distance commerce on the

      20     Internet.

      21               The chart that we saw in New York,

      22     that some people have forgotten about, is









                                                             147
       1     that 14.1 percent is the average state tax.

       2     South Dakota is below that, about 9 percent,

       3     for state and local taxes on

       4     telecommunications.  So, if we're worried

       5     about the digital divide, one of the things

       6     that we have to do is reduce the taxes now on

       7     people's access to the Internet, both taxes

       8     on cable, but also on telecommunications

       9     industry.

      10               I am hoping your comment about

      11     sending out the police and going after FedEx

      12     efforts was in jest, but I am interested when

      13     brown trucks, okay.  That's UPS?  You

      14     mentioned the growing support?

      15               GOVERNOR JANKLOW:  I either have to buy

      16     stock in them or stop them.

      17               MR. NORQUIST:  I really hope that's

      18     a joke.  I don't want to live in a country

      19     where political leaders take that approach

      20     seriously, and I realize you're jesting.

      21               You are right that there is a

      22     growing sense in the Senate and in Congress









                                                             148
       1     against taxing.  Senator Hatch in Iowa just

       2     signed the E-Freedom Declaration, committing

       3     himself to supporting the current ban on

       4     Internet access and sales and use taxes, and

       5     will work to reduce and ultimately eliminate

       6     discriminatory taxation of telecommunication

       7     services.

       8               So, I want to commend Senator Hatch

       9     of Utah for his leadership on this, along

      10     with Senator McCain's, and the growing

      11     support in Congress.

      12               When you say the National

      13     Governors' Association has put forward this

      14     proposal that people talked about, does that

      15     mean all 50 governors endorsed it, and if

      16     not, which ones have?

      17               GOVERNOR JANKLOW:  Sir, I believe I've

      18     seen a letter that had 16 signatures.  I

      19     don't know what the total number of people is

      20     that have endorsed it.  But you've got to

      21     understand something, sir.  This isn't carved

      22     in concrete.  It's a proposal.  Proposals,









                                                             149
       1     once they're subjected to the democratic

       2     process, evolve into a lot of things.  We

       3     call them bells and whistles that get added.

       4     We call them Christmas tree ornaments.  A lot

       5     of changes take place.  It's a starting

       6     point, and that's all it is.

       7               Let me also explain, sir, you talk

       8     about discriminatory taxes.  I want to assure

       9     you of something.  Telecommunications in my

      10     state is taxed at exactly the same rate as

      11     everything else.  Exactly the same rate as

      12     everything else.  No more, no less.

      13               MR. NORQUIST:  One of the things

      14     that has been discussed here is extending

      15     the 4-R rule, which says you can't have

      16     discriminatory taxes on railroads, to

      17     telecommunications.  There are other states

      18     that aren't as prudent as South Dakota that

      19     have very heavy discriminatory taxes on

      20     telecommunications.  Would you support

      21     efforts to reduce those?  I want to get back

      22     to that question of if the NGA endorses









                                                             150
       1     something, but not all the governors are for

       2     it, how did the NGA endorse this, and which

       3     governors are for it and which ones are

       4     against it?

       5               GOVERNOR JANKLOW:  Sir, I don't know

       6     that.  I've got a list here of 16, I can pass

       7     it up to you, of the governors that have

       8     signed it, and I don't know if there's any

       9     more since, oh, it's December 14th, so I

      10     assume not.  I think that's the 16 that have

      11     signed it, one.

      12               Two:  Sir, I'm glad you analogized

      13     this to railroads, because railroads pay

      14     property taxes.  They pay income taxes in

      15     states and they pay sales taxes.  They pay

      16     all three taxes.  Those are the three legs of

      17     the taxes that states' governments live on.

      18     So it's a perfectly analogue, sir.  Just

      19     treat us in E-commerce like the railroads are

      20     treated and you'll have no objection from me.

      21               MR. NORQUIST:  Which would include

      22     federal prohibition of discriminatory taxes?









                                                             151
       1               GOVERNOR JANKLOW:  Absolutely.  I'm not

       2     in favor of federal prohibition of

       3     discriminatory taxes.  I'm in favor of state

       4     prohibition of discriminatory taxes.

       5               America can't survive commercially

       6     if we discriminate in our tax policy.  What's

       7     being discussed by some people for this

       8     Commission is a discriminatory policy that

       9     says, if you do business over the Internet,

      10     you don't have to collect and pay.  But if

      11     you do it another way, you do.  That's

      12     discriminatory, sir, and I don't believe in

      13     that.

      14               You and I are on the same level

      15     playing field with that.

      16               MR. NORQUIST:  If you could get us

      17     the list of governors.  I guess I'm still

      18     confused as to how 16 governors are for

      19     something, and the National Governors'

      20     Association, which is supposed to

      21     represent 50 governors, has endorsed a

      22     position.









                                                             152
       1               GOVERNOR LEAVITT:  Mr. Chair, I'm

       2     probably able to respond to that.

       3               GOVERNOR JANKLOW:  I don't know.  That

       4     may be a distinction without a difference,

       5     I'm not sure.  I can just speak for me.  In

       6     all fairness, I just talk for myself.  So I

       7     think you and I are in agreement, we want

       8     non-discriminatory taxes.

       9               CHAIRMAN GILMORE:  Governor Leavitt is

      10     chairman of the National Governor's

      11     Association and wishes to respond.

      12               GOVERNOR LEAVITT:  Yes, I'll probably be

      13     able to respond to that.  Each of the seven

      14     organizations that are represented on this

      15     panel have quite entailed and very

      16     disciplined methods of being able to make

      17     positions or take positions formally on

      18     behalf of their organizations.  Each of them

      19     have gone through that process.

      20               The National Governors' Association

      21     does have a means by which that's done on an

      22     interim basis in between our meetings.  The









                                                             153
       1     executive committee has passed this.  It's

       2     been passed by a bi-partisan group of nine

       3     governors.  Is it unanimous?  No.  We know of

       4     at least four or five governors, some of

       5     which are represented their own interest,

       6     that don't.  There have been policies

       7     established by the NGA that have passed, not

       8     with unanimous support, but with roughly 90

       9     percent of 85 percent of the governors.  So,

      10     they're not united.  This is not a policy

      11     that we represent to be the mind and will of

      12     every single governor.

      13               But I think it's pretty clear that

      14     this represents the attitude and direction of

      15     those who have been elected by the people of

      16     this country to represent state and local

      17     governments.

      18               CHAIRMAN GILMORE:  Delegate Harris?

      19               MR. HARRIS:  When we left off

      20     yesterday I expressed my concern that we were

      21     not necessarily always conducting these

      22     discussions within the proper constitutional









                                                             154
       1     framework.  As I listen to some of the

       2     discussion today, I was at first excited that

       3     some of the constitutional terms and

       4     principles that are important in this

       5     discussion were raised.  Governor, you raised

       6     a couple of those in your opening remarks.  I

       7     believe I heard you say that it is your

       8     understanding that Internet commerce is

       9     interstate commerce, is that correct?

      10               GOVERNOR JANKLOW:  I believe that, yes,

      11     sir.  I wouldn't want to argue against that.

      12               MR. HARRIS:  I also believe I heard

      13     you say that you could live with the Quill

      14     decision?

      15               GOVERNOR JANKLOW:  Yes, I don't like it,

      16     but I live with it now, and I'm willing to

      17     live with it.

      18               MR. HARRIS:  I also believe that

      19     you stated that the Quill decision left it to

      20     the states to resolve some of these issues

      21     that we're discussing now, is that right?

      22               GOVERNOR JANKLOW:  No, I didn't say









                                                             155
       1     that.  What I said was the Supreme Court, in

       2     Quill, has invited states to continue to

       3     evolve and work within the framework of that

       4     decision, advancing forward.  There's just a

       5     couple of sentences in there that deal with

       6     that.  But in that Quill decision they talk

       7     about how this is an evolving thing.

       8               Sir, one other thing I should have

       9     added.  In the U.S. Constitution, you can

      10     have a burden on interstate commerce.  What

      11     the constitution prevents is an unreasonable

      12     burden on interstate commerce.  I mean, I

      13     actually have argued a case in the U.S.

      14     Supreme Court, the Reeve v. Stake 

      15     (phonetic), a commerce case in the U.S.

      16     Supreme Court.

      17               MR. HARRIS:  I'm aware of that.

      18     I'm an attorney, as well.  I haven't argued

      19     before the Supreme Court, but the other

      20     problem is you can't discriminate against

      21     interstate commerce, which would clearly

      22     happen if you decided to stop UPS trucks.









                                                             156
       1               GOVERNOR JANKLOW:  No.

       2               MR. HARRIS:  My final question, if

       3     I could.

       4               GOVERNOR JANKLOW:  Sir, the UPS trucks

       5     would be subjected to the same type of thing

       6     that I'm subjecting everybody to in South

       7     Dakota.  You see, we can walk into a person's

       8     business and we can audit their books, we can

       9     go check their records, we can go to people's

      10     houses who make purchases and make them pay

      11     the use tax.  As a practical matter, we all

      12     agree we don't do it because you couldn't do

      13     it effectively.  Taxing somebody for a dress

      14     that comes in on a truck and going after the

      15     person that bought the dress would cost far

      16     more than the dress tax would gain.  It's not

      17     efficient, it's not effective, so no state

      18     does it.  But that doesn't mean we can't do

      19     it, sir.

      20               MR. HARRIS:  I understand.  There

      21     was discussion earlier about -- with regard

      22     to the Andal proposal about not passing









                                                             157
       1     something that would invite litigation.  I

       2     think that's a clear invitation for

       3     litigation should you, in all seriousness,

       4     decide to pursue such a policy.

       5               But the Quill decision, going back

       6     to that, clearly makes the Court's case that

       7     the Court defer to Congress to resolve some

       8     of the issues that we're debating here,

       9     notwithstanding your arguments about the

      10     states playing a role in the evolution of

      11     dealing with nexus and how we're going to tax

      12     E-commerce in this situation.

      13               Given the fact that you think

      14     E-commerce is interstate commerce, and given

      15     the fact that Congress has authority in the

      16     constitution to regulate interstate commerce,

      17     including taxation issues, and given the fact

      18     that the Quill decision makes clear that the

      19     Congress is institutionally more capable than

      20     the courts to decide some of these issues,

      21     where -- how does that stack up against some

      22     of the proposals that you've suggested here









                                                             158
       1     this morning?

       2               GOVERNOR JANKLOW:  Sir, I beg to differ

       3     with you.  That is not what the Supreme Court

       4     said in Quill, and you and I as attorneys

       5     know that.  What the Supreme Court said in

       6     Quill is we are not -- we see no reason now

       7     to change the Bellas Hess decision.  Because

       8     we made the Bellas Hess decision a long time

       9     ago and it stayed the law this period of

      10     time, we are not going to embark now, even

      11     though we are a different group of judges, in

      12     changing that decision.  But they didn't say

      13     that it's absolutely exclusively -- they said

      14     Congress can change it.  They weren't going

      15     to, but they recognized they had the power to

      16     do it and that the world had evolved

      17     commercially and electronically since the

      18     Bellas Hess decision, but to stick with stari decisis they would go ahead and

      19     not change their decision.  That's what they

      20     really, in effect, said in Quill, sir.

      21               MR. HARRIS:  I'm glad you brought

      22     that up because I have a copy of Quill with









                                                             159
       1     me.  It reads:

       2               "Congress may be better qualified

       3     to resolve, but also when the Congress has

       4     the ultimate power to resolve."

       5               GOVERNOR JANKLOW:  I agree with that.

       6               MR. HARRIS:  Okay.

       7               GOVERNOR JANKLOW:  That isn't what I

       8     just said, though.

       9               MR. HARRIS:  I know that, which is

      10     why I'm bringing this up.  It also reads:

      11               "Accordingly, Congress is now free

      12     to decide whether, when and to what extent

      13     the states may burden interstate mail order

      14     concerns with the duty to collect use taxes."

      15               GOVERNOR JANKLOW:  Absolutely.  I agree

      16     with that.  That's why I said I don't, as a

      17     matter of policy, like Quill, but I'm willing

      18     to live with it, sir.  I just don't think

      19     anything ought to be done.  What people are

      20     suggesting is legislation that changes Quill.

      21               Now, one may suggest that they're

      22     codifying Quill, but there's a lot of other









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       1     proposals that are being laid out that would

       2     drastically alter the Quill decision.

       3               CHAIRMAN GILMORE:  I have placed myself

       4     on the list last, but we will keep going down

       5     the list.

       6               Mr. Harris, are you completed for

       7     the moment?

       8               MR. HARRIS:  Yes, sir.

       9               CHAIRMAN GILMORE:  Next is Mr. Sokul.

      10               MR. SOKUL:  Thank you, Governor.  I

      11     wanted to just briefly react on behalf of the

      12     people I represent here, which are the, you

      13     know, not hardware manufacturers or people

      14     who link people up, but the online merchants,

      15     the people who are selling online.

      16               These people, their concern with

      17     this issue is the cumulative burdens that

      18     result from 50 states having tax authority.

      19     So, when you said that the evidence that you

      20     see of online companies wanting special

      21     treatment is what proves your point, I think

      22     what the evidence is that these people want









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       1     to stay in business.  They don't want to deal

       2     with 50, or they can't deal with 50 different

       3     tax systems, 7,600 different tax systems.  If

       4     national tax authority, if Quill was

       5     overturned, there's 30,000 potential tax

       6     jurisdictions.

       7               It's not just collection.  Taxware

       8     is good with collection, maybe, but under

       9     current -- if Quill were to fall, these

      10     businesses would confront enforcement

      11     burdens, audits.  There's a company, this is

      12     a mail order company that had facilities

      13     nexus in New York and Indiana.  They moved

      14     their collection operation from New York City

      15     to Indianapolis, and their audits went

      16     down 300 percent.  I mean, tax auditors

      17     didn't want to junket to Indianapolis, but

      18     they enjoyed their junkets to New York City.

      19               I mean, that's the real world that

      20     online businesses are working in.  I just

      21     wanted to make that point that there's a

      22     terrible system which Joel Crosby noted, and









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       1     I don't think I disagree with you.  I think I

       2     disagree with Mr. Goldberg, who just is

       3     advocating overturning Quill.

       4               Trying to turn this into a

       5     question, I'll go back to what Mr. Parsons

       6     brought up.  What would you advocate the

       7     deliverable of this Commission to be?  Would

       8     you advocate that zero burden needs our

       9     sanction, this is the way to go?  Or do you

      10     just want to say to Congress, let the states

      11     have the time to solve this?

      12               GOVERNOR JANKLOW:  Sir, I think it's one

      13     and two, and there's a three.  I think it's a

      14     combination.  This is an exploding area, as

      15     we all agree.  I think we also all agree that

      16     E-commerce today, as big as it is, is just a

      17     midget compared to what it's going to be

      18     three, four, five, 10 years from now.  It's

      19     hard for us to understand the PC was only

      20     invented nine years ago.  I have at my desk

      21     more computing power than sent Neal Armstrong

      22     to the moon.  I don't know how to use it, but









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       1     I've got more.  But I've got more computing

       2     power than sent Neil Armstrong to the moon.

       3     So I realize that this is an exploding,

       4     dynamic area.

       5               But let me give you an example.

       6     Congress may decide in its wisdom and look, I

       7     poke at them, but they're elected officials

       8     and they're responsible.

       9               MR. SOKUL:  I often wonder how

      10     different the debate would be in Congress if

      11     state legislators still appointed senators.

      12               GOVERNOR JANKLOW:  I'll tell you what

      13     the difference is.  When you want to go beat

      14     up on your state legislator, you walk across

      15     the street to do it.  You've got to go all

      16     the way to Washington to get them back there.

      17     Virginia gets to go across the street, but

      18     the rest of us have to travel a lot.  They're

      19     a long distance call, which we tax.

      20               But let me give one suggestion.  It

      21     would be very easy for Congress to say, we're

      22     not going to deal with 30,000 jurisdictions.









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       1     We are going to say that whatever the state's

       2     taxes.  In my state it happens to be four, in

       3     another state it may be seven, whatever it

       4     is.  We're going to allow you to tax at the

       5     state level.  That's as far as we're going to

       6     go.  Anything more than that, we are going to

       7     determine, as Congress, is an unreasonable

       8     burden on interstate commerce.

       9               Now, clearly it wouldn't be

      10     difficult to come up with a software package,

      11     even though not all states tax the same

      12     thing.  In my state we tax food and we tax

      13     clothing.  The neighboring state of Minnesota

      14     doesn't tax clothing.  I mean, they're all

      15     different, I understand that.  But we would

      16     eliminate tens of thousands of combinations

      17     if Congress were to say, we're going to allow

      18     you to tax, but we're going to make it very

      19     simple.  That's one thing they could do.

      20               The Uniform Commissioners could

      21     really go work this out.  The one thing about

      22     the Uniform Commissioners they're not all of









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       1     us.  They don't have a political agenda like

       2     all of us that are elected.  Whatever our

       3     party is, we've got a political agenda.  The

       4     Uniform Commissioners don't.  They've given

       5     us everything from Uniform Probate laws to

       6     Uniform Commercial Codes to Uniform Detainer

       7     Acts and extradition acts and all kinds of

       8     things.

       9               MR. SOKUL:  I also wanted just to

      10     make the point that these are there seems to

      11     be a framing of this debate as, you know,

      12     online merchants versus Main Street, the

      13     Internet economy versus Main Street economy.

      14     Online merchants don't live in cyberspace.

      15     They live in the real world.  They're real

      16     people.  They're businesses.  You can find

      17     thousands of stories where selling online,

      18     the access to the national market, is helping

      19     a Main Street business survive.

      20               GOVERNOR JANKLOW:  I agree, no argument.

      21               MR. SOKUL:  Particularly in rural

      22     areas, that is important.









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       1               I have just one other brief

       2     question for Diann Smith.

       3               CHAIRMAN GILMORE:  If you could be

       4     quick, Mr. Sokul.

       5               MR. SOKUL:  It will be really

       6     quick.  You submitted testimony.  You talked

       7     about unconstitutional taxes and the need for

       8     allowing a federal court to hear

       9     unconstitutional tax challenges.  The point I

      10     want to make is states are enacting

      11     unconstitutional taxes that discriminate

      12     against out-of-state commerce.  How big of a

      13     problem is that, and to what extent would

      14     federal court review help?

      15               MS. SMITH:  It's a significant

      16     problem.  It's obviously not the only problem

      17     in the electronic commerce area, but it is a

      18     significant problem.  Just over the last year

      19     we saw Alabama, their franchise tax was ruled

      20     unconstitutional by the U.S. Supreme Court.

      21               Currently there are two rules that

      22     are keeping taxpayers from getting into









                                                             167
       1     federal court.  One is state sovereign

       2     immunity.  For retroactive relief, refund of

       3     taxes, you can't get into federal court on

       4     that.

       5               Also, under the Tax Injunction Act,

       6     which is a federal statute, taxpayers can

       7     also not get into federal court looking for

       8     prospective relief.  So, under the current

       9     system, taxpayers cannot get into federal

      10     court until they have gone through the state

      11     court system, and then their only access is

      12     an appeal to the U.S. Supreme Court.

      13               The U.S. Supreme Court takes less

      14     than 2 percent of all cases.  So, the chances

      15     of getting the U.S. Supreme Court to review a

      16     case are very small.

      17               One of the reasons that the federal

      18     courts were set up was this concern that

      19     local courts weren't necessarily going to

      20     give full and adequate representation to

      21     out-of-state plaintiffs or citizens of other

      22     states.  The federal court system can help









                                                             168
       1     taxpayers from other states get the kind of

       2     relief that they're looking for.

       3               I know in the south there's a

       4     phrase that when you go into state court and

       5     an out-of-state company that feels it did not

       6     get an adequate decision, they call it home

       7     cooking.  That's what we're trying to avoid

       8     by allowing taxpayers to get into federal

       9     court on these national constitutional

      10     issues.

      11               I think the question was as

      12     electronic commerce explodes will the problem

      13     get worse?  To the extent that the nexus

      14     rules remain the same, that I think the

      15     problem can get worse.  If the states see

      16     their tax base being eroded, they may look at

      17     other alternatives for finding income.

      18               Also, under some of the voluntary

      19     systems that my organization and several of

      20     the other organizations have suggested, to

      21     encourage out-of-state tax payers -- I'm

      22     sorry, out-of-state-vendors -- to voluntarily









                                                             169
       1     remit, they have to know that if they are

       2     going to voluntarily remit, that the states

       3     are not going to aggressively go after them

       4     for other taxes, possibly unconstitutional

       5     taxes.  That's the reason that we would like

       6     to see the federal court jurisdiction.

       7               CHAIRMAN GILMORE:  Andrew Pincus?

       8               MR. PINCUS:  Thank you, Governor.

       9     A comment and a question.  Mr. Parsons asked

      10     a question of Governor Janklow earlier about

      11     relating to the moratorium, and I think it's

      12     an important point to clarify.  The

      13     moratorium does not apply to sales and use

      14     taxes.  So, right now the Internet is

      15     operating under the rule of Quill today as it

      16     applies to sale and use taxes.  The

      17     moratorium does apply to discriminatory

      18     taxes, multiple taxes, and to taxes on

      19     Internet access.

      20               So, although that moratorium with

      21     respect to those taxes is under a three-year

      22     time table and will expire, Quill, which is









                                                             170
       1     the rule today, as the Governor said, will

       2     remain in place, and isn't subject to that

       3     expiration date.  So, it may provide for more

       4     flexibility in addressing that issue, because

       5     there's no drop dead date for when the rules

       6     will otherwise change.

       7               My question goes back to the issue

       8     of simplification and uniformity, and it's to

       9     you, Governor, or to any of your colleagues.

      10     Ms. Smith and Mr. Crosby mentioned a number

      11     of specific items in terms of what they would

      12     suggest in terms of simplification.  Are

      13     those things that are on your list, or how do

      14     your proposal refers to simplification, but

      15     it doesn't exactly say which items you're

      16     looking to simplify.

      17               GOVERNOR JANKLOW:  Sir, I think if

      18     you're talking about the NGA proposal and all

      19     of the other organizations, it's the starting

      20     point.  That's all it is.  It's like

      21     legislation you throw into the hopper the

      22     first day of the legislative session.  It's









                                                             171
       1     got to go through the process, and the

       2     process really will flesh it out.  Frankly,

       3     personally, I don't care if you take that one

       4     or somebody else's as a starting point, I

       5     think if we avoid two things:  The argument

       6     that says there will be no taxation and I'm

       7     not trying to argue with the chairman right

       8     now.  I'm just saying that's one extreme

       9     position.  It's not unreasonable, but it's

      10     extreme.  The other side is that says, yes,

      11     we will tax absolutely everything, no matter

      12     what anybody's relationship is.

      13               Within the framework of the middle,

      14     I think reasonable people and I'm not saying

      15     that on the other ends are unreasonable, I'm

      16     just saying within the framework in the

      17     middle, that's how legislation is made and

      18     they'll come up with something, and your

      19     point is well taken, sir.

      20               I'm not here to suggest that I'm

      21     concerned about the legislation the stay in

      22     place legislation.  I'm concerned about all









                                                             172
       1     the other things I heard being discussed in

       2     the Commission, there may be a recommendation

       3     that goes to Congress and some leadership in

       4     Congress who have already signed things

       5     warning people 34 of us or 54 of us or

       6     presidential candidates have already said

       7     we're in favor of certain actions.

       8               That's what bothers me, sir.  This

       9     has got to flesh itself out.  I think what's

      10     happening in E-commerce is no different than

      11     would take place in the legislative process.

      12               I don't agree with everything my

      13     colleagues on this panel said, but I agree

      14     with some of what everybody said.  That's the

      15     process.

      16               MR. KISBER:  Okay.  If I may add,

      17     it's part of your question.  I think each of

      18     the organizations involved have recognized

      19     that simplification is a key component to

      20     making this work.  We've also passed policies

      21     or principles that guide our policies, and

      22     simplification is at the forefront of that.









                                                             173
       1               We all believe and I'm a business

       2     man as well as a legislator.  We all believe

       3     that incenting for good behavior is more

       4     worthwhile than trying to beat with a whip.

       5     If we can bring people together with the

       6     incentive, getting back to the question about

       7     undue burdens, that we can simplify, we can

       8     take that burden away and put it on this

       9     third party so that remote sellers do not

      10     have to worry about 50 or 750 or 7,5000 tax

      11     audits.

      12               We can have a system where we've

      13     already worked on some basic areas where

      14     simplification could take place.  I think

      15     that we could find a way in which everybody

      16     comes out a winner from the system.

      17               MR. PINCUS:  I think, as Mr. Sokul

      18     said, you know, in thinking about this

      19     Commission has to arrive at a report at some

      20     point.  If simplification is an element of

      21     it, I think that people probably would want

      22     to have, not just say simplification and









                                                             174
       1     let's see how it works out, we'd probably

       2     want to have some specific elements of what

       3     simplification means.  So maybe I don't know

       4     if you want to do it right now, but at least

       5     for me it would be useful to have your

       6     reaction to the specific kinds of

       7     simplification that Mr. Crosby and Ms. Smith

       8     mentioned.

       9               CHAIRMAN GILMORE:  John Sidgmore?

      10               MR. SIDGMORE:  I have a real quick

      11     question, I guess, for Governor Janklow.  You

      12     talked this morning, I think quite

      13     persuasively, about leveling the playing

      14     field and so forth, and yet your proposal is

      15     to preserve Quill, as you've mentioned many

      16     times.  I'm just curious, because it sounds

      17     to me like, you know, if you really were

      18     starting with a clean sheet of paper you'd

      19     rip it up and start over.

      20               Is it solely for practical reasons

      21     that you think it's impractical to overturn

      22     and start over?









                                                             175
       1               GOVERNOR JANKLOW:  I understand, sir,

       2     the political realities.  One, the U.S.

       3     Constitution, as we all know, was written

       4     more than 200 years ago.  A lot of water has

       5     gone under the bridge since then.

       6               They didn't have telephones and

       7     computers and all kinds of things, but they

       8     did a brilliant job of laying out those

       9     documents.  What they said was you can't put

      10     an unreasonable restraint on interstate

      11     commerce.  You can put a restraint, you can

      12     put a burden, it just can't be unreasonable.

      13     It can't be substantial.

      14               It's left to the courts to

      15     determine or Congress if they want to, by

      16     delineating factually, what does the word

      17     "substantial" mean.  Otherwise, it's left to

      18     the courts.  Remember, Bellas Hess is not --

      19     it's not Congressional action, it was a court

      20     action.

      21               Sir, I'm living to live with Quill

      22     because it's the supreme law of the land, and









                                                             176
       1     I didn't think it was the charge of the

       2     E-commerce Commission, when it was created,

       3     to change Quill.  What I'm concerned about is

       4     that we would take drastic action in America

       5     before this thing continues to flesh itself

       6     out.  The system works.  Honest to God, I

       7     believe, I may be wrong, but I'm sincerely

       8     wrong if I am.  I believe the system works.

       9     Let the states do their thing.

      10               Any state that screws up commerce

      11     does it at their peril for their citizens.

      12     That's what they do.  What do states do?  Why

      13     do states cut taxes?  Because we're competing

      14     for jobs.  We're trying to attract companies

      15     to come in from out-of-state.  Hey, we'll

      16     give you a tax break, and we'll give you this

      17     deal and we'll give you that deal.  We're

      18     competing with each other for jobs.  Let's

      19     let that competition continue to go forward

      20     in E-commerce.  It's going to be a winner for

      21     America.  It's going to be a winner for very

      22     state.









                                                             177
       1               MR. SIDGMORE:  Could I just

       2     follow-up for one second?  I think everybody

       3     agrees with that last comment.  But a number

       4     of the other proposals were different in that

       5     they would overturn Quill.  I think it's fair

       6     to say that most people believe that

       7     out-of-state sales are going to be

       8     accelerated dramatically and exacerbated by

       9     the Internet, and so you're going to have, I

      10     think, this issue come up time and time

      11     again.

      12               GOVERNOR JANKLOW:  I agree.

      13               MR. SIDGMORE:  So the question is

      14     why.  I'm just curious why you didn't address

      15     it.  It sounds like it was just solely for

      16     practical reasons.

      17               GOVERNOR JANKLOW:  I just think as a

      18     practical matter, proposing to get rid of

      19     Quill there's enough political clout to stop

      20     it.  I also think there -- frankly, and

      21     people disagree with me -- there's enough

      22     political clout to prevent something from









                                                             178
       1     going in the other direction.  Sometimes we

       2     pass legislation, even at the state level,

       3     I've done it before, where we have to repeal

       4     it a year or two later because we screwed

       5     something up.

       6               That's when we don't put enough

       7     thought into it.  We shouldn't rush in -- in

       8     areas that -- I know it's taking time, but

       9     let me tell you.  My state is the only state

      10     that ever legalized Laitril.  We legalized

      11     it.  I vetoed it.  It's the first time I was

      12     ever written in a veto.  Two-thirds of both

      13     houses overrode me.  Two years I proposed a

      14     Governor's bill.  Let's get rid of that

      15     Laitril, sucking that apricot pit stuff.

      16     Nobody fought it.  They asked me, well, how

      17     come Janklow and nobody is fighting it?  I

      18     said, everybody that was for it died of

      19     cancer, so.

      20               CHAIRMAN GILMORE:  Mayor Kirk?

      21               MAYOR KIRK:  I'm going to make sure I

      22     don't say anything to disagree with the









                                                             179
       1     Governor.  I don't even want to wish that.

       2               I just wanted to make an

       3     observation.  First, I wanted to thank all of

       4     the panelists for being here and the time

       5     they put into their proposals.  I think we

       6     did hear a lot of common denominators.  One

       7     is that the taxes should be

       8     nondiscriminatory.  In that case, I think

       9     Governor Janklow is very right and on point,

      10     that nondiscrimination would ultimately

      11     manifest itself by just arbitrarily saying

      12     you're going to treat E-commerce different

      13     than you treat everybody else.

      14               Second, that we ought to simplify

      15     and that Governor Leavitt and all of us that

      16     support his proposal would agree that this is

      17     a starting point.  We ought to put some meat

      18     on the bones.

      19               But, third, I wanted to especially

      20     just briefly, and it's more of an

      21     observation, and Dr. McLure, you may want to

      22     expand on that or not.  But yesterday we just









                                                             180
       1     heard a number of proposals that were telling

       2     us that taxes were everything from immoral to

       3     God awful and everything else, and they all

       4     referenced a study by Dr. Goolsbee (?) from

       5     the University of Chicago to purportedly show

       6     that taxes on E-commerce would be

       7     devastating.

       8               Charles, is that the same Austan

       9     Goolsbee that is a proponent of your proposal

      10     that we, in fact, treat E-commerce the same

      11     as everyone else?

      12               MR. MC LURE:  Yes, sir, it is.

      13               CHAIRMAN GILMORE:  Delna Jones?

      14               MAYOR KIRK:  I guess I did have

      15     another question.

      16               CHAIRMAN GILMORE:  If you're not done,

      17     proceed.

      18               MAYOR KIRK:  Well, one other question

      19     that I had for Mr. Crosby was in -- in your

      20     concern over -- I thought one of the -- well,

      21     in my mind, I thought one of the real

      22     attractive proponents of the governors --









                                                             181
       1     we'll say the local and state and local

       2     governments' position was removing all of the

       3     burden from the vendor.

       4               You seem to think differently, but

       5     having heard from everyone from Ms. Smith and

       6     almost every other vendor here that the one

       7     cry they were saying was, get us out of this

       8     mess.  That the vendor having been necessary.

       9     But it just seems, you know, to me as a

      10     non-vendor, it just seems incredibly easy

      11     that if right now -- I mean, vendors don't

      12     collect money.

      13               They don't go around and collect

      14     money from everyone.  They rely on Visa or

      15     Mastercharge.  They're relying on a trusted

      16     third party now to complete that transaction.

      17     Can you not envision that same third party

      18     adding a component that they collect the tax

      19     and remit it?  Because vendors surely don't

      20     go to all those people around the world and

      21     collect the money from them.

      22               MR. CROSBY:  I would say first,









                                                             182
       1     Mayor Kirk, that we do agree, you hear a lot

       2     of similarity on this panel in terms of

       3     simplification.  You don't hear a lot of

       4     people talking about keeping the Internet

       5     tax-free forever on the panel we have here

       6     today.

       7               My point about the governors'

       8     proposal and this, I think, goes to what

       9     Governor Janklow was talking about.  This is

      10     the appropriate place for the legislative

      11     process to hammer out the details on some of

      12     these proposals.

      13               I think it is a mistake to presume

      14     that by eliminating the vendor from the

      15     process you have eliminated the burden.  What

      16     you have done is effectively shifted the

      17     burden to other parties that are in the

      18     transaction, whether they be Internet service

      19     providers, payment processors, credit card

      20     companies, Visa or MasterCard.  I think there

      21     are a number of not only policy reasons not

      22     to do that, but significant technological









                                                             183
       1     burdens that are not addressed by solutions

       2     like Taxware.

       3               There is tax technology, which is a

       4     minor part of the payment processing system.

       5     Currently, payment processors don't get any

       6     information that would allow them to even

       7     determine tax, let alone collect and remit

       8     tax.  That is not the type of information

       9     they have available to them.  It's not the

      10     deals that they have with their vendors.

      11               If you insert a third party in the

      12     middle of this process, you're disrupting

      13     that marketplace and forcing those payment

      14     processors, credit cards and other

      15     intermediaries to enter into business

      16     relationships with a trusted third party who

      17     then may have control over where business

      18     goes.

      19               You're introducing a new?  Well, if

      20     you have, I'll explain that a little further.

      21               MAYOR KIRK:  I don't shop a lot on

      22     the net, but I mean every day Americans will









                                                             184
       1     give the most detailed information to

       2     somebody they've never seen, because they go

       3     through the little mouse thing and it says,

       4     is your shopping cart full?  Then it says,

       5     tell us how you're going to pay for it.  It

       6     says, tell us whether it's Visa, MasterCard,

       7     or whatever.  You give them all that stuff.

       8     You give them your address, because they're

       9     going to send it to you, and then all they

      10     want to know is how you're going to ship it.

      11               GOVERNOR JANKLOW:  You know a lot about

      12     it for a guy that doesn't use it.

      13               MAYOR KIRK:  My wife.  But I mean,

      14     this is not rocket science.  I mean, I'm

      15     trying to understand where the difficulty is.

      16               MR. CROSBY:  I would agree, and I'm

      17     happy to present to the Commission more

      18     detailed information on this.  The difference

      19     is that the information that you present to

      20     the vendor is not transmitted to the credit

      21     card company.

      22               They do not have all that









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       1     information.  It is not transmitted in the

       2     normal course of business.  By introducing a

       3     third party into the process to aggregate all

       4     that information and to control the flow of

       5     money, for example.

       6               MAYOR KIRK:  I'm just presuming that

       7     third party, and I'm not advocating that, is

       8     that same person, is the credit.  In my mind,

       9     the easiest third.

      10               MR. CROSBY:  Then you change from a

      11     voluntary system to a mandatory system.

      12               MAYOR KIRK:  No, you don't.

      13               MR. CROSBY:  If you're presuming

      14     that.

      15               MAYOR KIRK:  Visa, Mastercharge,

      16     Discover Card, whoever else is out there.  If

      17     I'm leaving you out and you're upset.  Credit

      18     cards in general are going to go to states

      19     and say, as Governor Leavitt said, we think

      20     we can do a better job at this than the tax

      21     collector for the State of Utah, South

      22     Dakota, and they're going to compete for









                                                             186
       1     that.  They've already got the information,

       2     because I'm their client and they know where

       3     to find me.  They bill me on a regular basis.

       4               MR. CROSBY:  Right.  I work with

       5     some of those companies and I think they

       6     would disagree that they necessarily view

       7     this as a tremendous business opportunity.  I

       8     only caution.

       9               MAYOR KIRK:  They're here.  Ask them.

      10     They came up here.  Are you kidding?  They're

      11     going to get a break for collecting this

      12     money and remitting it to the states.  They

      13     probably get to get a percentage.  This is a

      14     huge cash cow for them.

      15               CHAIRMAN GILMORE:  Whoa, whoa.  We're

      16     not going afield here.  What we're going to

      17     do is ask a question, get an answer and then

      18     move on and be fair to the other

      19     Commissioners.  Do you have a question?

      20               MR. CROSBY:  My point is that in

      21     the process that there is ample opportunity

      22     to work out these kinks.  The proposal, as it









                                                             187
       1     currently stands, is not perfect, and I don't

       2     think anybody would say that.  My point was

       3     just to raise one of the areas where there is

       4     difficulty, and possibly put forward a

       5     constructive criticism on ways that it could

       6     be improved.

       7               There are definitely members of the

       8     audience that would be happy to come up here,

       9     I'm sure, and address those points more

      10     specifically and would probably disagree with

      11     your contention that it's a wonderful

      12     business opportunity.

      13               CHAIRMAN GILMORE:  Let's go to Delna

      14     Jones and give her a chance.

      15               MS. JONES:  I'm one of those who

      16     come from a state without a sales tax, and

      17     I'm a little concerned about a couple of

      18     things that I've heard.  I'd certainly don't

      19     want to see our state have to collect for

      20     other people, where we don't benefit.

      21     However, let me give you a couple of

      22     thoughts.









                                                             188
       1               First of all, I think the issue of

       2     tax neutrality or reducing the burden on our

       3     citizens.  Let me just give you an example of

       4     something our state does, since everybody

       5     likes to brag about what we do when you're

       6     trying to keep the citizens from paying more.

       7     In our income tax system, if we collect more

       8     than 2 percent over projection, and we have a

       9     two-year budget, we actually send checks back

      10     to everybody that paid the income tax and

      11     those checks arrive the 1st of December.

      12     Isn't that a nice benefit?  Just thought I'd

      13     like to let you know that.

      14               Also, for Grover, I'd like to tell

      15     you that I have a separate letter from my

      16     Governor.  He didn't sign the other one, he

      17     happen to send a separate letter.  So I think

      18     that's kind of all over the map.

      19               MR. NORQUIST:  Endorsing the

      20     proposal?

      21               MS. JONES:  Yes.  The issue I keep

      22     hearing that to me is more key than anything









                                                             189
       1     else is even if we didn't have the Internet

       2     issue today, the big issue is simplification.

       3     Where I keep hearing over and over again, the

       4     system is broke, this is giving us an

       5     opportunity to try to find ways to fix a

       6     system and at the same time keep the states

       7     able to collect the tax that they legally

       8     have the right to do.

       9               Now my question, for anyone who

      10     wishes to comment on it and I'll let the

      11     Governor decide how many that is if in fact

      12     simplification takes place, is there not

      13     reason to believe that if challenged, Quill

      14     would be overturned as we know it today,

      15     because one of the burdens, and I'm not an

      16     attorney, but one of the issues is that was

      17     so difficult to comply that Quill became an

      18     issue because of that lack of simplification

      19     and collection process?

      20               GOVERNOR JANKLOW:  Ma'am, you hit the

      21     nail on the head, and you say it far better

      22     than Bill Janklow can.









                                                             190
       1               Quill says, and so does Belles

       2     Hess, right now there's an unreasonable

       3     burden on interstate commerce, a substantial

       4     burden.  I don't know, it's the lawyer's

       5     game, at what point does something not become

       6     a burden?

       7               But Quill would change if there was

       8     no burden on commerce, or it was a

       9     substantially less burden, or less than

      10     substantial, let me put it that way.  So that

      11     could happen, but that wouldn't be bad.  It

      12     wouldn't be necessarily bad, because the key

      13     is all Congress, all they did when they wrote

      14     that U.S. Constitution is exactly what you're

      15     saying.  They just wanted to make sure that

      16     there isn't a burden placed on commerce, so

      17     there is this free flow of things between the

      18     various states.  No matter, whether it was 13

      19     or now 50, or 500, whatever it is there would

      20     be a free flow of commerce, because that's

      21     what builds the dynamics of the economy.

      22               So you're right; you're dead right.









                                                             191
       1               MS. SMITH:  Commissioner Jones, the

       2     other side to that argument is that Quill, in

       3     addition to talking about the burden on

       4     interstate commerce, did discuss that it was

       5     really a decision on stari decisis, that they

       6     had addressed this issue before in Belles

       7     Hess case.

       8               So Quill also looked at the

       9     reliance by the industries, specifically in

      10     that case, the mail order industry.  Thus,

      11     there is an argument that even if the

      12     simplification, in and of itself, occurs,

      13     that it will not have an effect on the Quill

      14     decision, because the industry has relied on

      15     Quill and Belles Hess.

      16               MR. GOLDBERG:  Ms. Jones, I would

      17     agree with that.  I don't think Quill

      18     necessarily goes away just because you

      19     simplify a state sales tax computation issue.

      20     I think the issue of burden on interstate

      21     commerce is still there and the problem of

      22     states being able to require tax collection









                                                             192
       1     by out-of-state vendors remains.

       2               MS. JONES:  Let me just clarify.  I

       3     didn't say it went away.  I said it would

       4     reduce, I believe, reduce considerably the

       5     issue that brought it to the court and might,

       6     if challenged, change the outcome.

       7               CHAIRMAN GILMORE:  Let me ask one or two

       8     questions, because I think we're a little bit

       9     afield.

      10               The objective here, I think, was to

      11     determine whether the NGA proposal was

      12     feasible.  That's what we set up in New York

      13     and we said, is this something that can work

      14     today?  Is this something that, in fact, we

      15     can tell the Congress at the end that this is

      16     something we want to do?

      17               Governor Janklow, the NGA and any

      18     of the others that are here presenting,

      19     Mr. Kisber or any of the others, this

      20     proposal calls for a third-party collector, a

      21     trusted third-party.  A vendor, a person who

      22     is a seller, is going to have to make his









                                                             193
       1     business system interface with the

       2     third-party collector's interface system.

       3     They're going to have to change their

       4     software and their hardware to make that

       5     work.  Who's going to pay for that?  Is that

       6     going to be paid for by the third-party

       7     collector or by the vendor?

       8               GOVERNOR JANKLOW:  Look, I sound like

       9     I'm ducking you and I'm only half-ducking,

      10     okay?  It's a document that I'm willing to

      11     work from.  It's the beginning, it's the

      12     openers in the game of legislation, is all it

      13     is.  I don't think that frankly, if you're

      14     asking me personally, I don't think just

      15     dealing with a third-party vendor solves the

      16     problem, because I think it can get

      17     prohibitively expensive for somebody starting

      18     a new business on the net, and having to

      19     purchase those kinds of things and deal with

      20     people can be expensive.  I understand that.

      21               All I'm suggesting is everybody

      22     needs a document to work from.  This is a









                                                             194
       1     starting point for me and I support it,

       2     because it's a starting point that deals with

       3     resolving it without destroying the states'

       4     tax bases.  So, my guess is, there's 16

       5     Governors who signed it and 16 Governors

       6     would be slightly different in their opinion

       7     as to what they really support.

       8               But I support it as a working

       9     document.  So I'm saying I'm ducking your

      10     question a little.  I just need a document to

      11     work from and I'm willing to work on it with

      12     people.

      13               MR. KISBER:  Governor, I think it's

      14     important to recognize that as part of our

      15     proposal the cost of development and

      16     implementation is borne by the states.  That

      17     is a part of what we do to make this proposal

      18     work:  The simplification, the cost of

      19     getting it up and running, and the incentives

      20     to the remote sellers to participate in it.

      21     That's the way in which a voluntary system

      22     can bring sellers into it to make it









                                                             195
       1     successful.

       2               CHAIRMAN GILMORE:  So if there's a

       3     voluntary system where sellers are going to

       4     voluntarily join up and agree to make their

       5     software and hardware consistent with the

       6     third- party, trusted third-party, the states

       7     are going to pay for that expense?

       8               MR. KISBER:  The cost of

       9     development would be borne by the states.

      10               CHAIRMAN GILMORE:  Okay, under the

      11     program.  Now, every state and locality has

      12     different exemptions and different tax

      13     applications and rates depending upon who's

      14     buying and what the particular product is.

      15     Now, I believe that you suggested in your

      16     testimony today that has to be uniform across

      17     the country.  We have to begin to build a

      18     uniform list.  Is that right, Mr. Kisber?

      19               MR. KISBER:  It would have to be

      20     part of the simplification.  There would have

      21     to be a greater definition given, but it can

      22     be done, from the testimony we've heard in









                                                             196
       1     our task force, and that it is something that

       2     can be accomplished.

       3               CHAIRMAN GILMORE:  You believe that

       4     all 50 states and the localities are prepared

       5     to make their taxing authorities uniform

       6     everywhere in order to cooperate with this

       7     proposal?

       8               MR. KISBER:  I think when you talk

       9     about definitions, when you talk about

      10     whether clothing is going to be exempt or

      11     not, would still be under the responsibility

      12     of that particular state.  But what is

      13     clothing would then be part of the standard

      14     definitions that we would be working as part

      15     of the simplified system.

      16               CHAIRMAN GILMORE:  Then the uniform

      17     system, at that point, would begin to dictate

      18     the tax policy for every state and locality

      19     in the United States.  Is that right?

      20               MR. KISBER:  No, sir.

      21               CHAIRMAN GILMORE:  Why not?

      22               MR. KISBER:  No, because the states









                                                             197
       1     would still have the responsibility for

       2     deciding what they're going to exempt, what

       3     they're going to tax.  It is only in trying

       4     to have from state-to-state common

       5     definitions of what would be included.

       6               If in Tennessee we do not tax

       7     clothing, but in South Dakota they do, then

       8     we would know, as well as whatever other

       9     state does not tax clothing, what items of

      10     clothing would mean.  But it would still be

      11     up to us to decide whether we're going to tax

      12     that item or not under our sales and use tax.

      13               CHAIRMAN GILMORE:  Under the NGA

      14     proposal, the list that would be created

      15     defines closely that states and localities

      16     don't have the freedom then to change those

      17     exemptions or tax rates except in accord with

      18     the plan.  Is that right?

      19               MR. KISBER:  They would have the

      20     ability to change on a timetable basis.

      21     There would a certain number of times a year

      22     in which they could make adjustments, either









                                                             198
       1     in rates or what is exempt or what's not

       2     exempt.  There would be a period of time that

       3     notice would have to be given so the software

       4     companies could re-program the software and

       5     third- parties could get the trusted

       6     third-parties could get that into place.

       7               CHAIRMAN GILMORE:  But we would give up

       8     any freedom to be able to do that on our

       9     timetable under the legislatures of our

      10     states and, instead, turn this over to a

      11     national unified third-party organization,

      12     right?

      13               MR. KISBER:  I disagree.  I chair

      14     the finance committee in Tennessee --

      15               CHAIRMAN GILMORE:  I'm not arguing with

      16     you, I'm asking you.

      17               MR. KISBER:  No, what I would say

      18     is that when we make tax changes, we do it in

      19     most instances to begin at the start of the

      20     fiscal year.  We usually have, for the

      21     purpose of notifying retailers and notifying

      22     those who are impacted, a period of time by









                                                             199
       1     which they have to adjust their own processes

       2     to comply with the law.  This would be done

       3     in the same manner.  It would just specify

       4     that there would be once or twice a year,

       5     three times, however many times everybody

       6     would agree to and that there would be 90

       7     or 120 days, however much time it takes,

       8     notice in order to make it work.

       9               CHAIRMAN GILMORE:  What if the trusted

      10     third-party organization at the national

      11     level decides to set down a rule that is

      12     inconsistent with Tennessee's rule, or any

      13     other state?

      14               MR. KISBER:  It would be under the

      15     contracts which would be entered into, would

      16     define the way in which the trusted

      17     third-party would operated, and the language

      18     of the authorization that the states would

      19     have to enact would cover how the trusted

      20     third-party interacts with the states to

      21     standardize that process.

      22               CHAIRMAN GILMORE:  How about private









                                                             200
       1     communications between purchasers and

       2     sellers, for example, on something like

       3     digital goods?  We had lengthy discussion

       4     with the European community on this

       5     yesterday.  Under the NGA proposal, how are

       6     digital goods going to identified and taxed?

       7               MR. KISBER:  I would have to yield

       8     to Dan Bucks or Harley Duncan on that.

       9               CHAIRMAN GILMORE:  Okay.

      10               MR. BUCKS:  Mr. Chairman, the

      11     proposal would call for digital goods to be

      12     taxed, if that's taxed under the laws of any state,

      13     in terms of how you identify what state a

      14     transaction is to be sourced.  Two, there

      15     would be a uniform rule that would be

      16     developed.

      17               There has been discussion of what

      18     that rule would look like.  Probably at least

      19     one component of it would look to the billing

      20     address of the buyer.  But the key component

      21     or the sourcing rule would be, you'd look

      22     only to information that's normally available









                                                             201
       1     in the course of the transaction and not ask

       2     for extra-ordinary steps on the part those

       3     sellers of digital products.

       4               CHAIRMAN GILMORE:  So this assumes every

       5     digital seller is going to cooperate with the

       6     trusted third-party and pass that information

       7     from their purchases on to that group on a

       8     voluntary basis, right?

       9               MR. BUCKS:  The sellers that would

      10     volunteer to participate in the system would

      11     have the obligation to submit to the trusted

      12     third-party information to make a taxability

      13     determination.  That would be a code as to

      14     what's being bought, the cost of the item,

      15     and the jurisdiction to which it's to be

      16     sourced, so that the trusted third-party

      17     knows what rules are to applied.

      18               CHAIRMAN GILMORE:  I'm going to ask

      19     questions of the panel with respect to audit.

      20     I believe that the NGA proposal says that if

      21     you get engaged and you go with the software

      22     and you conform everything and those expenses









                                                             202
       1     are paid and the third -- trusted third-party

       2     is with you and you're all together on this,

       3     then there's no audit, right?  I mean there's

       4     not going to be any audits?

       5               MR. KISBER:  Audited by that home

       6     state under the existing requirements of that

       7     state.  There would be only one audit.

       8               CHAIRMAN GILMORE:  So there would be an

       9     audit, then.  That is always available under

      10     this proposal?

      11               MR. KISBER:  That home state would

      12     be responsible for audit.

      13               CHAIRMAN GILMORE:  Okay, I

      14     misunderstood.

      15               MR. KISBER:  As it is now.

      16               MR. BUCK:  There would be no audit

      17     under the proposal.  If they accepted the

      18     software, then compliance would be assumed

      19     and the risk of any miscalculation would be

      20     assumed by the state.

      21               CHAIRMAN GILMORE:  Okay.  Now, Mr. Peha,

      22     I believe, said there would be an audit.









                                                             203
       1     Didn't you, Mr. Peha?

       2               MR. PEHA:  Well, I don't speak for

       3     the NGA.  I can't tell you if there would be

       4     an audit.  I can tell you that I'd be very

       5     worried if there isn't, because we've already

       6     said that -- they've already said in the

       7     proposal, as I understand it, that not enough

       8     information has gone -- only the barest

       9     details have gone to the trusted third-party

      10     about the transaction.  That's great.  That

      11     preserves privacy.

      12               But that means the only one who has

      13     enough information to stand up to an audit is

      14     the vendor.  So they'd better have to be

      15     required to keep that information and they

      16     better subject to audit, that would be one of

      17     my concerns.

      18               I guess the answer to that might be

      19     that it's voluntary to pay the tax in the

      20     first place, but that leaves me confused for

      21     lots of other reasons to have a voluntary

      22     tax.









                                                             204
       1               CHAIRMAN GILMORE:  Under my no-tax

       2     proposal, Governor Janklow, mom and pop

       3     operations would for the first time in

       4     history be in a position to compete in the

       5     marketplace with the big guys with all the

       6     capital.  Under this proposal, mom and pop

       7     operations have got to buy the software and

       8     -- no, I'm not sure that's right.  I think

       9     under Mr. Kisber, the states are going to buy

      10     the software for all the mom and pop

      11     operations in America; is that right?

      12               MR. KISBER:  The states would bear

      13     the costs of development so that that could

      14     be deployed to those who volunteer to

      15     participate.

      16               CHAIRMAN GILMORE:  Do you know how much

      17     that would cost?

      18               MR. KISBER:  No, sir, I don't.

      19               CHAIRMAN GILMORE:  No estimate?

      20               GOVERNOR JANKLOW:  Sir, mom and pop

      21     operations will be able to compete with the

      22     big boys in E-sales only.  They wouldn't be









                                                             205
       1     -- they would be unfairly competing with the

       2     existing merchants that are on the ground

       3     that have already invested their capital.

       4               So it really wouldn't be mom and --

       5     it would only be mom and pop operations that

       6     are getting into E-commerce, because if their

       7     not getting into E-commerce, they'd be

       8     treated like all the other moms and pops.

       9               CHAIRMAN GILMORE:  That's true.  Moms

      10     and pops and small businesses out there --

      11     we're using that term, but we're really

      12     talking about small business associations.

      13     They, at this point, are at a competitive

      14     disadvantage in this country.  E-commerce

      15     gives them an opportunity to get back in the

      16     game.

      17               My question, I guess is, is this

      18     going be -- is the NGA proposal going to put

      19     an additional financial burden on small

      20     business as opposed to liberating them?

      21               GOVERNOR JANKLOW:  They're not --

      22     they're not paying anything now, so they're









                                                             206
       1     liberated right now.  A remote seller's

       2     paying nothing if they have nexus, so they're

       3     liberated.

       4               CHAIRMAN GILMORE:  Well, no --

       5               GOVERNOR JANKLOW:  The question is are

       6     they being treated fairly vis-a-vis the other

       7     people?

       8               If I start E-commerce business in

       9     California, I'm going to pay taxes on

      10     everything I do in California.  I'm just not

      11     going to pay them on what I send to Virginia.

      12     So I'm being treated very fairly in

      13     California.  And the merchants existing in

      14     California are being treated fairly vis-a-vis

      15     me.  What's not happening is the Virginia

      16     merchants are not being treated fairly, that

      17     are on the ground in Virginia, when I just

      18     send it though the wire or through the pipe.

      19               CHAIRMAN GILMORE:  Well, the small

      20     business guy has an opportunity to get on the

      21     Internet and to be in a position to be with a

      22     burgeoning and growing opportunity to









                                                             207
       1     society, whereas larger corporations that

       2     have the major bricks and mortar and big

       3     investments are gathering in most of the

       4     customers.  That's the phenomena that's going

       5     on today, which is why most of the Main

       6     Streets are not doing particularly well.  So

       7     is this not an opportunity for them to get

       8     back on and to get in the game?

       9               GOVERNOR JANKLOW:  Sir, I'm going to

      10     personalize this, if I can.

      11               CHAIRMAN GILMORE:  I wouldn't do that,

      12     Bill.

      13               GOVERNOR JANKLOW:  No, Ted Waitt sits on

      14     this panel.  Ted Waitt is living proof that

      15     in E-commerce you can be phenomenally

      16     successful in America.  He's living proof of

      17     that.  This isn't the guy that's got a lot of

      18     R&D and has factories all over the place.

      19     How does he really sell?  He sold through

      20     catalogues and through magazines and through

      21     E-commerce.  That's how Ted Waitt started.

      22     That's how he continues, and he's been









                                                             208
       1     phenomenally successful.

       2               He's a little guy who figured out

       3     how to go whip the big guys.  I just want to

       4     make sure everybody can still do that in

       5     America, no matter where they're located and

       6     not because of where they're located.

       7               CHAIRMAN GILMORE:  Last question from

       8     Mr. Parsons and then I think we'll take a

       9     break for lunch and then come back and pick

      10     up the other panel.

      11               Mr. Parsons?

      12               MR. PARSONS:  Just so that I can

      13     understand this voluntary system.  First of

      14     all, it does appear to me that what is being

      15     proposed -- if it's truly voluntary and it

      16     doesn't affect Quill -- I guess you're right,

      17     Governor, that you're just here saying don't

      18     do something else while we put this voluntary

      19     system in place.

      20               But the question I have is why --

      21     it's sort of a question that Mayor Kirk was

      22     raising yesterday -- why -- take for example









                                                             209
       1     of the guy in California who's sending goods

       2     through the pipe to Virginia.  Why does he

       3     volunteer to now, you know, get himself in

       4     the cue to start collecting taxes for

       5     Virginia and that there instead of just doing

       6     business like he's doing business now?

       7               GOVERNOR JANKLOW:  Sir, I think for only

       8     one reason and I think most wouldn't.  It

       9     would give them protection from a subsequent

      10     audit and a later determination that they may

      11     have had nexus, and then they would have a

      12     huge fiscal obligation.  That is the only

      13     thing that I see as I look at it.  Now I

      14     don't think that may be enough, but I do

      15     think that's the only thing.

      16               MR. PARSONS:  If most wouldn't,

      17     let's just assume that that's correct,

      18     because I can't understand why, particularly

      19     in E-commerce, a retailer would -- if most

      20     wouldn't, is this really viable?

      21               GOVERNOR JANKLOW:  The bigger ones will.

      22     My colleagues on either side of me are both









                                                             210
       1     whispering in my ear, the bigger ones will.

       2     Mom and pop won't.

       3               GOVERNOR LEAVITT:  Mr. Chairman, could I

       4     just respond briefly to that?  I recognize

       5     you're trying to break, but --

       6               CHAIRMAN GILMORE:  Certainly.

       7               GOVERNOR LEAVITT:  It seems to me that

       8     if you're a large vendor and you have nexus

       9     in 30 states, and you're responding to tax

      10     commissions from cities, counties, and

      11     states, to audits, that you might say to

      12     yourself, here's my choice.  I can continue

      13     down this mess or I can go to another system

      14     and the system would provide me with no

      15     audit, I'd be certified as having complied, I

      16     would not have to have tax audits, and I

      17     would be protected from anything in the past.

      18     This sounds like a better system.

      19               This is a remarkably good 21st

      20     century idea.  It's an opportunity for

      21     vendors to be able to say, if I choose to do

      22     this, because it's better for me, I can do









                                                             211
       1     it.  If I don't, I don't have to.

       2               I can also say, you're fired, to my

       3     tax administrator.  You can't say that to the

       4     Utah State Tax Commission today, but you

       5     could under this system.  Therefore, it might

       6     have some advantages to me, because it might

       7     be more efficient.

       8               Now, we don't know how many will

       9     and how many won't.  And, as Governor Janklow

      10     has suggested, this is just -- this is really

      11     trying to put a concept on the table.

      12               The standard that we ought to be

      13     holding as a Commission to these proposals

      14     isn't, will this exact proposal work?  The

      15     issue we're dealing with here is, is the

      16     sales tax a viable tool for the 21st century?

      17     Can it be fixed?  If it can't, we ought to

      18     scrap it and get on with the next discussion.

      19     This is a question of, generally speaking,

      20     can we use this in the 21st century, and if

      21     so, what kind of criteria does it need to

      22     meet and what kinds of things do we need to









                                                             212
       1     do?

       2               CHAIRMAN GILMORE:  I don't think the

       3     sales tax is broken, nor do I think it should

       4     be scrapped.  But the issue before the body

       5     today is, is the NGA proposal feasible today

       6     as a process?  Is it?

       7               GOVERNOR LEAVITT:  I think you could

       8     suggest that today, if you had to take this

       9     exact proposal, we'd find some serious

      10     problems in it.  We had 45 days as a

      11     community of state and local governments to

      12     come up with an idea.  Is it a good idea?

      13     There's some very good ideas.  Are there

      14     things that can be improved?  Yes.  Is the

      15     sales tax feasible?  I believe it is.  Is it

      16     feasible in its current form?  The answer is

      17     no.

      18               CHAIRMAN GILMORE:  The Congress asked

      19     this Commission to argue through the issues.

      20     To address them, to bring them forward, to

      21     have competent and sound people bring them

      22     forward, so that we could argue through these









                                                             213
       1     matters.  This Commission is successfully

       2     doing this and the members of the panel have,

       3     today, immeasurably helped us do it.

       4               And now we will continue for the

       5     rest of the day.  But, first, we will break

       6     for lunch and come back at 12:30 and pick up

       7     the other panel.  Thank you.

       8               GOVERNOR JANKLOW:  Mr. Chairman, if I --

       9               CHAIRMAN GILMORE:  Governor Janklow?

      10               GOVERNOR JANKLOW:  If I may, Mr.

      11     Chairman, I would like to say, realizing

      12     where the Chairman is on this issue, you've

      13     been incredibly fair to all of us today, and

      14     I want you to know I really appreciate that.

      15     Thank you.

      16               CHAIRMAN GILMORE:  Thank you.

      17                    (Whereupon, at 12:05 p.m., a

      18                    luncheon recess was taken.)

      19

      20

      21

      22









                                                             214
       1           A F T E R N O O N   S E S S I O N

       2                                         (12:45 p.m.)

       3               CHAIRMAN GILMORE:  The system we have

       4     set up here to listen to expert people who

       5     are engaged in this industry or people from

       6     think tanks is designed to create a vehicle

       7     by which that the Commission people can argue

       8     back and forth and to argue through you and

       9     to have some discussions.  And we have been

      10     doing that so effectively that we're running

      11     out of time.

      12               We have asked you come because of

      13     the extreme value that we see in people who

      14     are standing here before this panel.  I would

      15     only ask that to the extent that you can save

      16     some time for us, even a couple of minutes at

      17     this point, so that we reduce the total

      18     presentation of this rather broad panel --

      19     from one, two, three, four, five, six, seven

      20     -- 70 minutes -- to somewhat less in the

      21     aggregate than 70 minutes, would be

      22     appreciated.









                                                             215
       1               So do the best you can and we're,

       2     however, not disrespectful of the quality of

       3     the material that you have to bring before

       4     us.

       5               These companies that are

       6     represented here today include bricks and

       7     mortar retailers, clicks and mortar retailers

       8     -- as some people have worked their way

       9     towards a hybrid or both -- virtual retailers

      10     -- and we are offering this to understand the

      11     perspectives on the proposals that we have

      12     heard over the past day and a half.  And, in

      13     fact, all the people who are engaged in this

      14     business -- there were members of the

      15     Commission that requested the opportunity to

      16     get some reaction from people who were

      17     affected.  This is the opportunity to do

      18     that.

      19               Mr. Peter -- is it Lowy?  Is that

      20     correctly pronounced?  Mr. Lowy, who is of

      21     Westfield American Incorporated, the

      22     International Council of Shopping Centers.









                                                             216
       1     Mr. David Bullington, the vice president of

       2     Wal-Mart.

       3               Mr. Bullington, thank you very

       4     much.  Mr. Frank Julian, operating vice

       5     president and tax council, Federated

       6     Department Stores, Incorporated; Mr. Craig

       7     Winn, the chairman of ValueAmerica.Com, an

       8     E-commerce retailer; Ms. Cindy Oakes of the

       9     Dell Computing Company; Ms. Katrina -- I

      10     believe it's Doerflerr -- Doerflerr, the senior

      11     manager for planning and external tax

      12     affairs, CISCO; and Mr. Dan Kostenbauder.

      13     Mr. Kostenbauder is the tax council for

      14     Hewlett Packard.

      15               Again, I'm going to ask all of the

      16     presenters to remember that time is tight.  I

      17     know it sounds sarcastic when we took a

      18     little extra time to get started, but we're

      19     trying to keep the panel together the best

      20     way we can.  So due to the schedule, I'm

      21     going to ask of all you to try to condense

      22     your remarks to about eight if you could,









                                                             217
       1     please, and I think that would help us out a

       2     great deal.

       3               Mr. Lowy, if you would proceed,

       4     please?

       5               MR. LOWY:  Mr. Chairman and members

       6     of the Commission, thank you for the

       7     opportunity to make some observations about

       8     the issues before you.  My name is Peter Lowy

       9     and I'm co-president of Westfield America, a

      10     New York Stock Exchange Company, which owns

      11     interests in 38 major shopping centers across

      12     the country that are home to approximately

      13     4,700 specialty stores.

      14               In many communities we are one of

      15     the largest contributors to the local tax

      16     base, through the property taxes we pay and

      17     the sales taxes we generate.  As an example,

      18     we currently own two regional malls in the

      19     city of San Jose:  Westfield Shopping Town's

      20     Valley Fair and Oakridge.  In 1999, they will

      21     generate combined sales and property taxes of

      22     almost $66 million to the City of San Jose,









                                                             218
       1     Santa Clara County, and the State of

       2     California.

       3               Of this, $60 million is produced

       4     through sales tax.  Sales tax revenue is the

       5     largest single line item in San Jose's

       6     general fund budget.

       7               In the Town of Islip, on Long

       8     Island, Westfield Shopping Town South Shore

       9     produces $24 million in sales and property

      10     taxes.  Of this, $19 million is sales tax

      11     which is shared by the town of Islip, Suffolk

      12     County, and the State of New York.  Sales tax

      13     revenue is approximately 51 percent of

      14     Suffolk County's budget.

      15               I'm also here representing the

      16     E-Fairness Coalition.  We support a level

      17     playing field that ensures consumers are

      18     treated fairly, regardless of where they

      19     choose to shop, in traditional or online

      20     stores.  The Coalition represents brick and

      21     mortar and online retailers, retail

      22     associations, public and privately-owned









                                                             219
       1     shopping centers, outlet centers, Main Street

       2     merchants and retailers.  Our membership

       3     represents a total of over 350,000 retail

       4     stores nationwide.

       5               We greatly appreciate the

       6     opportunity to finally give our views on

       7     these vital issues and look forward to an

       8     on-going dialogue.  We represent a major

       9     sector of the economy that will be greatly

      10     impacted by future Internet tax policy, and

      11     we are eager to work with the Commission to

      12     find solutions that work for everyone.

      13               While we do not have official

      14     positions on each of the proposals, I would

      15     like to share with you the E-Fairness

      16     Coalition's views on the issues before the

      17     Commission and provide some basic principles

      18     we support to help guide your consideration

      19     of the various proposals.

      20               We support a level playing field

      21     that insures that consumers are treated

      22     fairly regardless of where they choose to









                                                             220
       1     shop, in brick and mortar stores or online.

       2     Therefore, sales and use taxes from sales

       3     made online should be charged just as sales

       4     taxes from sales made by brick and mortar

       5     retailers are today.  To be clear, we oppose

       6     creating new taxes on E-commerce, but favor

       7     equal application of the law.

       8               Preferential tax policies and

       9     government subsidies for Internet retailers

      10     would distort the free market and place brick

      11     and mortar retailers at a competitive

      12     disadvantage.  Competition is the hallmark of

      13     business and our tax policies should foster

      14     competition in a new economy, not hinder it.

      15     Therefore, any proposal you endorse should be

      16     fair and it should promote a level playing

      17     field.

      18               We are also in favor of a workable

      19     solution to ensure that sales and use taxes

      20     can be collected in a simple and easy

      21     fashion.  As the proposal by ATRAX, Taxware

      22     International and others indicate, the









                                                             221
       1     technological capability exists to simplify

       2     and securely collect sales and use tax on all

       3     transactions.  The E-Fairness Coalition

       4     supports a simple, mutual, and clear tax

       5     policy that can be easily implemented into

       6     the current E-commerce infrastructure.

       7               We also support proposals that

       8     ensure revenue neutrality and consumer

       9     privacy.  We are for a system that simplifies

      10     sales and use tax collection and eliminates

      11     the cost of compliance.  Once this zero

      12     burden system is implemented and

      13     administrative burdens of sales and use tax

      14     collection are lifted, we feel there is no

      15     logical argument for Internet retailers not

      16     to charge sales and use taxes, just as Main

      17     Street retailers do today.

      18               While E-Fairness Coalition is not

      19     taking an official position on the individual

      20     proposals, we clearly oppose the proposals

      21     that promote a permanent tax haven for

      22     Internet sales.  We oppose the tax haven for









                                                             222
       1     a number of reasons, including, firstly,

       2     retailers will be subject to an unfair

       3     government-imposed competitive disadvantage.

       4     A level playing field is what's best for the

       5     new economy.

       6               Secondly, this policy may lead to

       7     higher property taxes for homeowners, higher

       8     state income taxes, and/or higher sales tax

       9     rights, as states and cities try to re-coop

      10     lost revenue.

      11               Thirdly, E-commerce is growing so

      12     fast that it does not need preferential tax

      13     treatment or government subsidies.  As an

      14     example, as of yesterday, Amazon.com's market

      15     capitalization was $32.6 billion, twice that

      16     of Sears and JC Penny's combined.  E-toys,

      17     which went public in 1999, has a market

      18     capitalization of $5.6 billion, as opposed to

      19     Toys-R-Us with a market capitalization of

      20     $3.6 billion.  Why would this industry need a

      21     subsidy?

      22               Brick and mortar retailers will









                                                             223
       1     create separate online subsidiaries to take

       2     advantage of the sales tax exemption for

       3     online sales.  This would distort integrated

       4     business strategies that seek to include the

       5     Internet as an important and complimentary

       6     channel with brick and mortar for selling

       7     goods.

       8               We support proposals that have the

       9     following criteria:  Promote a level field,

      10     simplify sales and use tax collections, a

      11     zero burden system, uses technology to

      12     simplify the collection of sales and use

      13     taxes, and lastly, imposes no specific taxes

      14     on Internet transmissions, network services,

      15     or the medium itself.

      16               E-commerce is growing faster than

      17     even the optimists predicted.  It does not

      18     need a subsidy.  The discriminatory tax

      19     policies embodied in the proposals by

      20     Governor Gilmore, Dean Andal, and others,

      21     will have serious negative impacts on

      22     traditional retailers who charge sales tax









                                                             224
       1     and may force state and local governments to

       2     raise other taxes to make up for lost

       3     revenues.  Traditional brick and mortar

       4     retailers will be profoundly impacted by the

       5     Commission's recommendations.

       6               Therefore, we urge the Commission

       7     to carefully consider the impact of your

       8     recommendations on all segments of the

       9     economy and to use great caution, so we will

      10     not implement policies that could have a

      11     negative impact on a major sector of the

      12     economy.

      13               Brick and mortar retailers want to

      14     be part of finding a solution that works for

      15     everyone.  We at the E-Fairness Coalition

      16     look forward to working with you as you go

      17     forward.  I'll be pleased to answer any

      18     questions you might have.  Thank you.

      19               CHAIRMAN GILMORE:  Mr. Lowy, I would

      20     love to ask you some questions, as a matter

      21     of fact, but time -- hopefully time will

      22     permit.  But, in the meanwhile, we will









                                                             225
       1     continue on and then circle back, if we have

       2     time.

       3               Mr. Bullington, thank you very much

       4     for being here, Wal-Mart.

       5               MR. BULLINGTON:  Thank you.  Mr.

       6     Chairman and Commissioners, my name is David

       7     Bullington.  I am vice president of taxes for

       8     Wal-Mart Stores.  Separately we've provided

       9     written comments.  For the sake of time, I

      10     will proceed immediately into my summary of

      11     those comments.

      12               We've been asked to react to the

      13     different proposals.  I've divided my

      14     reaction into three parts.  The first part

      15     being the tax-free proposals, the second

      16     being the simplification proposals, the

      17     third, the technology solutions.  But we have

      18     a little background.

      19               Wal-Mart operates a Web site in

      20     addition to its brick-and-mortar locations.

      21               Wal-Mart currently collects the

      22     sales tax on all its Internet sales based









                                                             226
       1     upon delivery destination.  Admittedly, this

       2     is difficult and not all determinations

       3     regarding jurisdictional lines and item

       4     taxability are perfect.  It is also an

       5     expensive process and one that is a major

       6     burden for any retailer, especially any

       7     mid-size retailer.  It may be an

       8     impossibility for mom and pop Web site.

       9     Accordingly, the minimis thresholds are

      10     necessary with regard to any solution in this

      11     area.

      12               First to the tax-free Internet

      13     proposals:  Proposals to make the Internet a

      14     tax -- a sales tax-free zone are attractive.

      15     They are alluring even to us.  But they have

      16     potentially devastating economic tax and

      17     social consequences.  Yesterday's dialogue as

      18     to where the kiosk could be, whether on the

      19     premises -- maybe it's a community-provided

      20     kiosk in the common area of a shopping

      21     center.  Those type things show the

      22     difficultly of making the Internet zone tax









                                                             227
       1     free.

       2               The reality is, given the current

       3     stalemate we have, we are already in a no-tax

       4     environment when it comes to sales tax on the

       5     Internet.  Consumers can choose whether they

       6     make that purchase from a site that charges

       7     sales tax or not.  More and more, brick and

       8     mortar businesses are concluding that they

       9     too can operate a separate subsidiary and not

      10     have to collect the sales tax.

      11               Lawyers, accountants, Web

      12     consultants have advised many companies that

      13     they can sell products without collecting the

      14     sales tax by establishing a separate dot.com

      15     subsidiary, as long as they preserve the

      16     separateness of the company.

      17               Some even advise that the return of

      18     goods can be contracted for.  These experts

      19     cannot, however, tell one how many states

      20     that they will have to litigate in relative

      21     to this issue.  Sound tax policy requires

      22     certainty for all of us.  Any of the tax-free









                                                             228
       1     Internet proposals only work to encourage,

       2     again, a chase to the bottom as to how you

       3     take advantage of this tax-free zone.

       4               We've heard the call for empirical

       5     evidence as to what's the impact to this.

       6     Well, the early studies, once we get through

       7     this season -- once we go into January and we

       8     look at the new forecast, they're all going

       9     to be out-of- date.  The reality is if you

      10     look at the gross growth and the gross

      11     national product, you look at the projected

      12     growth of the Internet, with or without

      13     taxation, it's going to grow at such a rapid

      14     pace it outstrips the rest of the gross

      15     national product.

      16               Now think about the erosion that at

      17     some point in time has to occur, if this

      18     thing really ramps up and takes off, if

      19     existing tax policy is allowed to continue.

      20               For sake of -- maybe even referring

      21     to me as a de facto expert as it comes to

      22     economic policy, because I think it's safe to









                                                             229
       1     assume that Wal-Mart understands pricing --

       2     as it comes to the so-called excuse, if you

       3     will, that there's somewhat rough equity in

       4     the area, because we on our side have to

       5     charge shipping and handling, where's the

       6     parity as it comes to my site as I have to

       7     charge shipping and handling and also a sales

       8     tax?

       9               But the bottom line reality is,

      10     where was the freight that was incurred in

      11     getting these goods to anyone's brick and

      12     mortar site to begin with?  Where's the

      13     equity as it relates to that consumer's

      14     decision as to whether they choose to go and

      15     spend the money in their car to go to my

      16     store?  That is a very, very, made-up excuse

      17     as to rough justice in this area.

      18               As to the simplification programs

      19     -- proposals.  These call, basically, for the

      20     states to fix the existing system.  We agree

      21     that major overhaul of the state systems are

      22     required.  We believe, however, that the









                                                             230
       1     states need help and direction in this

       2     process.  Significant hurdles include the

       3     fundamental state sovereignty issues that

       4     have been explained to be so important

       5     already in these discussions:  The difficulty

       6     of moving 46 states in a single unified

       7     direction in a short time line.

       8               Several proposals call for

       9     meaningful collection allowances to be

      10     provided to the retailer to offset the burden

      11     of collection and encourage the merchant to

      12     collect voluntarily.  So as not to disrupt

      13     existing collections, such allowances could

      14     be made to apply just to sales in interstate

      15     commerce.  Going a step further, we recommend

      16     that the collection allowance percentage be

      17     structured to reward those states that take

      18     steps to simplify their systems.  Those

      19     states that have the most burdensome systems

      20     should be required to pay a larger collection

      21     allowance.

      22               And I'll wrap-up quickly, if you'll









                                                             231
       1     bare with me.  In the five states that allow

       2     local administration -- their cities, their

       3     counties are allowed to collect -- these need

       4     the most help as far as direction.  Two of

       5     those five states, in particular, I spend

       6     more time than 10 other states.  If those

       7     five states got to a uniform

       8     state-administered system, we would be down

       9     to 46 remittance points, 46 state

      10     administrators to deal with, 46 audits.

      11               Now that's not yet the greatest

      12     scheme, but it is significant simplification.

      13               And, quickly, all the discussion

      14     about the 6,000, if not 30,000, jurisdictions

      15     to deal with, that's overblown.  I deal with

      16     all of them everyday, day in and day out.

      17     There is the need for uniform definitions,

      18     better uniformity across state lines.  Yes,

      19     if the states can get to a unified rate for

      20     each.  But, again, if the collection

      21     allowance could be structured to encourage the

      22     states to move in that direction, we'll get









                                                             232
       1     the states there quickly enough.

       2               With the right direction from the

       3     Commission, we believe the states will take

       4     necessary legislative steps.  The Commission

       5     should recommend to Congress a

       6     federally-legislated, incentive-base

       7     collection allowance.  That same legislation

       8     should establish the threshold of uniformity

       9     and simplification at which remote sellers

      10     can be compelled to collect.

      11               And quickly as to technology, it's

      12     important, it's part of the solution, it

      13     needs to be encouraged, it needs to be part

      14     of the debate and the solution.  Thank you.

      15               CHAIRMAN GILMORE:  Thank you, Mr.

      16     Bullington.  We appreciate your insight.

      17               Mr. Julian?

      18               MR. JULIAN:  Good afternoon.  My

      19     name is Frank Julian.  I'm operating vice

      20     president and tax council, Federated

      21     Department Stores, Inc., in Cincinnati.

      22     Federated is one of the nation's leading









                                                             233
       1     department store retailers.  We operate more

       2     than 400 department stores in 33 states under

       3     the names of Bloomingdale's, Macy's, the Bon

       4     Marche, and others.  Federated also has a

       5     significant direct mail catalog and

       6     E-commerce with its Fingerhut, Bloomingdale's

       7     by Mail, Macy's by Mail, Macy's.com,

       8     subsidiaries.  Although Bloomingdale's by

       9     Mail, Macy's by Mail, and Macy's.com are each

      10     separate subsidiaries, they collect tax on

      11     sales into any state where Bloomingdale's and

      12     Macy's, respectively, have department stores.

      13               I'm here today to discuss the zero

      14     burden proposal that has been proposed by the

      15     National Governors' Association and other

      16     groups.

      17               Let me begin by saying that the

      18     Commission hearings have raised an awareness

      19     in an unprecedented manner of the

      20     complexities facing the current sales tax

      21     system.  Federated Collection remits more

      22     than $1 billion per year in sales tax for the









                                                             234
       1     state and local governments where we do

       2     business.  We accrue substantial costs in

       3     collecting and remitting these taxes and

       4     administering the many audits that follow.

       5               The simplification that I believe

       6     will result from these proceedings will make

       7     it much for the states to administer and

       8     enforce their tax and will make it much

       9     easier for sellers to comply with the tax.

      10     If this occurs, I think your work will have

      11     been a success.

      12               The zero burden proposal goes

      13     beyond simplification.  It calls for a system

      14     that actually removes tax collection

      15     obligations from E-commerce vendors.  We are

      16     in the business of selling goods and services

      17     to our customers.  Nothing would please us

      18     more than to be able to get out of the costly

      19     side-business of collecting and remitting

      20     sales tax.  Accordingly, we encourage the

      21     sponsors to expand the proposal so that it

      22     not only removes the collection burdens from









                                                             235
       1     E-commerce vendors, but removes the burdens

       2     from all sellers, regardless of the manner in

       3     which they sell their goods.

       4               We applaud the sponsors for

       5     devising a proposal that does not call for

       6     federal legislation overturning Quill.

       7     However, I want to express some concerns we

       8     have about certain aspects of the proposal

       9     and some issues that we believe should be

      10     considered as the sponsors develop the

      11     details.

      12               First, determination of taxable

      13     items.  Determining the taxability of certain

      14     products, such as clothing, food, and

      15     medicine, is extremely complicated in

      16     multi-state environment.  Several states

      17     exempt these items in whole or in part, but

      18     the states all have different definitions

      19     and/or interpretations.

      20               As a leader in the apparel

      21     industry, Federated is most familiar with the

      22     challenges imposed by the clothing









                                                             236
       1     exemptions.  There are nine states with

       2     permanent or temporary clothing exemptions,

       3     and that handkerchief that Mayor Kirk is

       4     wearing in his jacket is considered exempt

       5     clothing in five of those states, but in the

       6     other four it's considered taxable

       7     nonclothing.

       8               The software that is available

       9     today cannot accurately determine the

      10     taxability of all articles of clothing in

      11     these nine states, because each state has its

      12     own peculiar set of rules.

      13               To accurately tax an article of

      14     clothing in a multi-state environment, the

      15     retailer must assign one of dozens of tax

      16     product codes, or clothing product codes, to

      17     each and every item or skew, which that

      18     retailer sells.  Whether your an E-com

      19     retailer with 30,000 skews or a department

      20     store with 3 million skews, the proposal is

      21     unlikely to attract voluntary participants

      22     unless the states adopt single uniform









                                                             237
       1     definitions of food, clothing, and medicine,

       2     so that the product code decision is a simple

       3     choice.  Although development of software is

       4     important, the key to success lies in

       5     simplification and uniformity.

       6               Compatibility of software.  Every

       7     different industry uses a different type of

       8     system to identify the types of products that

       9     it sells.  The software must be compatible

      10     with each and every one of these systems.

      11     Businesses shouldn't be required to change

      12     their business practices.

      13               Protection of proprietary data.  As

      14     vendors develop new products, they will

      15     presumably be required to provide information

      16     about these products to the trusted

      17     third-parties in advance of advertising them

      18     for sell so the taxability can be imputed

      19     into the system.  Due to the competitive

      20     nature of the business, however, most vendors

      21     will have legitimate concerns about

      22     prematurely disclosing their product mix to a









                                                             238
       1     third party, particularly in the case of

       2     unique items which the seller has developed

       3     itself.

       4               In our business, for example, we

       5     develop a significant amount of private label

       6     merchandise which we do not want our

       7     competitors to know about before it hits our

       8     shelves.

       9               States will choose their trusted

      10     third-parties based on a competitive bidding

      11     process.  I anticipate that some retailers

      12     might actually submit bids to become a

      13     trusted third-party.  I can assure you that

      14     no retailer would participate in a system

      15     that requires it to turn over proprietary

      16     product information to a competitor.

      17               The system must account for exempt

      18     customers such as -- resale certificates,

      19     charitable organizations and so forth.

      20               Returns and adjustments.  The

      21     proposal must efficiently and timely refund

      22     sales tax to customers when they return









                                                             239
       1     merchandise or when the seller makes a price

       2     adjustment after the initial sale, for

       3     example, to accommodate a customer's

       4     complaint.  Bear in mind that many E-commerce

       5     vendors also have brick and mortars stores.

       6     For example, if you purchase something from

       7     Macy's.com you can return it in any Macy's

       8     store.  When that happens, the customer with

       9     legitimately expect a refund of the purchase

      10     price and the sales tax at that point in time

      11     when they're standing there in the store.  If

      12     that occurs, the system must have a way to

      13     reimburse the retailer for those sales taxes.

      14               Privacy of customers.  Maintaining

      15     customer privacy will be critical to the

      16     proposal's success.  Under no circumstances

      17     should a retailer ever be required to

      18     disclose the name and/or address of its

      19     customers to the states or a to a trusted

      20     third-party.

      21               Customer complaints.  This is one

      22     of the biggest concerns that we, along with









                                                             240
       1     most other retailers, have about the zero

       2     burden proposal.  No matter how good the

       3     system is, there will undoubtedly be errors

       4     and customer complaints due to

       5     over-collection of tax, customer confusion,

       6     and other causes.  When this occurs, it is

       7     only logical for the customer to complain to

       8     the retailer from which he or she made the

       9     purchase.

      10               It will be difficult, if not

      11     impossible, for the retailer to convince

      12     their customer that the retailer did not

      13     cause the problem and cannot do anything to

      14     fix the problem.  This puts the retailer in

      15     an untenable position.  Retailers will not

      16     participate in a system where there is a

      17     significant risk that they will lose

      18     customers by doing so.

      19               Third-party gift sales.  Under

      20     current law, if a person who lives in

      21     California, for example, orders the gift from

      22     a non-California direct marketer, or









                                                             241
       1     E-commerce vendor, to be sent directly to a

       2     third party in New York, for example, neither

       3     state may impose their sales or use tax on

       4     that transaction.  The proposal will be

       5     constitutionally flawed if it is unable to

       6     recognize this type of transaction.

       7               Applicability to mail order and

       8     check sales.  The use of a trusted

       9     third-party presumes that all payments are by

      10     credit card which, in fact, is not the case.

      11     A substantial portion of direct marketing

      12     customers pay by check.  The proposal leaves

      13     these sales unaddressed.

      14               If there is no tax collection on

      15     these sales, then the method of payment

      16     determines tax treatment and this could be

      17     very confusing to customers.  One the other

      18     hand, if remote sellers who volunteer to

      19     participate in the problem will have an

      20     obligation to collect use tax directly from

      21     their check-paying customers, then they will

      22     incur all the problems associated with use









                                                             242
       1     tax collection in multiple jurisdictions.

       2               Credit card fees.  Credit card

       3     companies typically charge vendors a fee in

       4     terms of the percentage of the amount

       5     charged.  The zero burden proposal should not

       6     allow these fees to be passed on to the

       7     sellers for the sales tax.  The states or the

       8     trusted third-party should bear the entire

       9     cost of these fees.

      10               Proprietary charge cards.  Many

      11     customers make purchases using a vendor's

      12     proprietary charge card rather than

      13     universally accepted cards such as VISA and

      14     MasterCard.  It is unclear whether charges

      15     made on proprietary charge cards will be

      16     covered under the zero burden proposal.  To

      17     the extent that a vendor must remit the sales

      18     tax directly to the state on purchases paid

      19     for with a proprietary card, the program is

      20     no longer zero burden.

      21               Bad debts.  If a customer doesn't

      22     pay all of his/her bill, the proposal must









                                                             243
       1     have a way to reimburse the entity that

       2     remitted the taxes for the bad debts.

       3               The states appear willing to bear

       4     the entire cost of this proposed system,

       5     including paying for the software to be used

       6     by all vendors and compensating the trusted

       7     third-party.  I would like to know if the

       8     sponsors ever considered offering a

       9     meaningful collection allowance to all

      10     retailers, rather than creating a complicated

      11     trusted third-party system for E-commerce

      12     retailers only.

      13               Of the 45 states with a sales tax,

      14     only seven provide for an uncapped collection

      15     allowances over 1 percent, and studies show

      16     that the cost to collect taxes is typically

      17     greater than 3 percent.  I believe the

      18     presence of permanent meaningful collection

      19     allowance along with significant

      20     simplifications in the sales tax laws would

      21     be enough for some remote sellers to begin

      22     voluntarily collecting the tax.









                                                             244
       1               As I stated earlier, the concept of

       2     being entirely removed from the tax

       3     collection process is certainly appealing,

       4     and perhaps the best mousetrap is built with

       5     help from the mouse.  As the sponsors develop

       6     the details of the proposal, I would strongly

       7     encourage them to seek some significant input

       8     from those who will be most impacted by it,

       9     the business community and the tax-paying

      10     public.

      11               And I thank you for allowing me to

      12     go over.  I feel like the guy in the Fed Ex

      13     commercial, but I will be happy to answer any

      14     questions.

      15               CHAIRMAN GILMORE:  Well, you did fine.

      16     You did well.  Mr. Winn, please?

      17               MR. WINN:  It is clear as mud, as

      18     we can tell from what we've heard thus far.

      19     This Commission is contemplating the engine

      20     that is propelling the American economy,

      21     about the tool that obliterating the

      22     geographical boundaries that today is now









                                                             245
       1     shrinking our world.  And even more

       2     important, it's about our best hope to

       3     conquer the digital divide and provide hope

       4     where there is despair and to create real

       5     opportunity where there is current

       6     dependence.

       7               And, yes, these are all related

       8     issues, because the way that we choose to tax

       9     will propel our throttle, our success, and

      10     theirs.

      11               My name is Craig Winn.  I am

      12     founder of Value America.  We are one of the

      13     nation's largest E-tailers.  We are a pure

      14     E-tailer.  We are expected to do

      15     approximately one-half billion dollars next

      16     year in revenue, which sounded significant to

      17     me until I recognized I was sitting next to

      18     Wal-Mart, Federated, and Dell, and now fairly

      19     anemic by comparison.  We are a very fast

      20     growing company and a extremely innovative

      21     company, and today my testimony is going to

      22     be fairly simple.  That we must stop and we









                                                             246
       1     should not start.

       2               If we are to optimize this

       3     opportunity, this engine that is driving our

       4     nation, we stop taxing telecommunications and

       5     Internet infrastructure so outrageously, and,

       6     I believe, unwisely.  We are already paying

       7     an extraordinary tax because the sales tax

       8     and excise taxes and surplus taxes on the

       9     infrastructure that we use is four to five

      10     times greater than is the sales tax or use

      11     tax on anything else.

      12               For example, in Virginia, while the

      13     state tax fairly modest at 1 percent, it's

      14     actually 18 percent by the time you put on

      15     all of the municipality taxes on this

      16     Internet infrastructure.  It is perhaps one

      17     of the most regressive taxes in our nation,

      18     and what we need as a nation now is to use

      19     this technology, to reach out a conquer the

      20     digital divide and create opportunity for

      21     underprivileged children so that we all have

      22     equal opportunity.  Why would we want to tax









                                                             247
       1     something like this so disproportionately?

       2               Imagine what would have happened if

       3     100 years ago a panel of distinguished

       4     politicians and businessmen had gathered

       5     together and decided they wanted to tax the

       6     railroads, just as we now tax Internet

       7     infrastructure?  Well, that was the engine

       8     that brought our nation together and

       9     propelled the industrial revolution that

      10     built the great American economy that

      11     actually liberated the world from the tyranny

      12     that we would all live under today.

      13               And I don't think anyone can come

      14     to the conclusion that the Internet and

      15     e-commerce is any less important as an

      16     economic engine to drive the future of our

      17     economy and the progress of our people.

      18               Therefore, we must recognize that

      19     the first law of taxation is if you want more

      20     of something, tax it less.  If you want less

      21     of something, tax it more.

      22               We need more and open and less









                                                             248
       1     expensive access for all of Americans to the

       2     telecommunications and the cable and the

       3     communications industry that is powering this

       4     E-commerce revolution and empowering our

       5     children's opportunity to learn and compete,

       6     and we need to tax it less.

       7               That is the easy part.  The hard

       8     part is what in the world do you do about

       9     goods and services that are sold online?  The

      10     first is that we recognize we have a world

      11     right now that is based upon nexus and nexus

      12     is based upon geography, and the Internet

      13     knows no geography.  So under that basis, it

      14     is really impossible to take this structure

      15     that we have now and to apply it to a world

      16     without borders, unless we were to get all

      17     30,000 taxing municipalities to all agree to

      18     a similar plan.

      19               And now the fact is, that if we're

      20     a Virginia company and we sell goods to

      21     someone in California, do we have a nexus in

      22     California?  Well, today I'm speaking to you.









                                                             249
       1     Am I an asset to the company and therefore do

       2     we have a nexus here today?  Perhaps we do.

       3     But it's as clear as mud.  And the fact is

       4     that we do play in the sales tax world even

       5     today.  And the reason that we do is the fact

       6     that if someone in Virginia buys something

       7     from us and we're a Virginia company, we do

       8     collect and pay sales taxes.

       9               But the issues of geography are

      10     actually less complex than the issues of

      11     medium.  We've been hearing that there is

      12     brick and mortar, but brick and mortar, like

      13     Wal-Mart, is selling goods online.  We also

      14     know that cataloguer's have online stores,

      15     and we're an online store and we use a

      16     catalogue.  And then there's call centers and

      17     QVC-kinds of sellers, as well, all that have

      18     online stores and online stores that use

      19     these mediums.

      20               The fact is that businesses, retail

      21     and all forms of business, will use every

      22     tool in their arsenal to contemplate and to









                                                             250
       1     complete a sale.  And there is no way that

       2     one can say, this sale was Internet-related

       3     and this sale was not Internet-related, it

       4     was over the telephone or through the mailbox

       5     or through some brick and mortar store.

       6     They're all being brought together a

       7     converged into a singular solution.

       8               Therefore, if you're going to have

       9     a tax that is fair, it must be simple, it

      10     must be practical, it must be clearly

      11     understood and pragmatic, which means there's

      12     only one choice and that choice is

      13     impossible.  That choice is to have a

      14     singular national sales tax that supersedes

      15     the jurisdiction of municipalities and

      16     states.  One tax, all products, all

      17     companies, regardless of how goods are sold

      18     or where they are bought, who buys them or

      19     who sells them or what medium that sale is

      20     conducted on.

      21               And since that is politically

      22     impossible, I think we have to deal with the









                                                             251
       1     pragmatic reality, that there is no

       2     opportunity to tax E-commerce apart from the

       3     rules of geography and nexus that currently

       4     exist.

       5               So we must stop taxing that which

       6     we are already are excessively taxing and we

       7     must not start taxing that which we are not

       8     taxing apart from the existing nexus rules.

       9     Thank you.

      10               CHAIRMAN GILMORE:  Mr. Winn, thank you

      11     very much.  Ms. Oakes?

      12               MS. OAKES:  Thank you.  My name is

      13     Cindy Oakes and I'm a state and local tax

      14     manager for Dell Computer Corporation.  Dell

      15     designs, manufactures and customizes computer

      16     products and services to customer

      17     requirements.  Our orders are accepted via

      18     phone, mail, fax, and the Internet.  We very

      19     proudly say that at the end of our last

      20     quarter, Dell's sales through the

      21     www.dell.com reached $35 million per day.

      22               For the calendar year 1999, Dell









                                                             252
       1     will collect approximately $400 million of

       2     state and local sales and use tax and file

       3     over 1,900 tax returns.  My department

       4     manages and exemption database that exceeds

       5     500,000 records and is increasing by 3,000

       6     records monthly.  Jointly, our collections

       7     and tax department are currently working a

       8     list of over 6,000 invoices where customers

       9     have short-paid the tax to us.  We have six

      10     audits that were started this year and six

      11     audits that are carrying over from last year,

      12     and we have audits currently scheduled into

      13     the year 2001.

      14               The multi-state tax Commission and

      15     some of its member states continue to

      16     challenge our catalogue company, and this has

      17     been going on for over two years now.  So in

      18     listening -- reading the proposals and

      19     listening to the panels, my company has many

      20     of the same concerns that Frank has listed.

      21               We want our customers' privacy

      22     protected.  We want to have the customer









                                                             253
       1     contact.  We also believe that the NGA

       2     proposal should be available to all sellers,

       3     not just over the Internet.

       4               A comment was made by Governor

       5     Leavitt that you were looking for voluntary

       6     participation and you were looking for the

       7     big boys.  Well, I think we fall into the

       8     big-boy category.  One of things, though,

       9     that is in the proposal is that if you have

      10     already been contacted by states regarding

      11     prior liabilities, you would not be eligible

      12     for the program or those liabilities would

      13     not be relieved.

      14               So, to Richard Parson's question,

      15     why would we volunteer?  We need the

      16     simplification on our business-to-business

      17     sales.  That's where the main complexity is,

      18     it's not on sales to consumers.  Obviously,

      19     we're a big company, I have a big department,

      20     it wouldn't be that hard for me to flip the

      21     tax switch and start collecting from

      22     consumers.  We don't do it today, because









                                                             254
       1     Quill says we don't have to.  The states and

       2     local governments have not done a

       3     particularly good job educating citizens, so

       4     we would be dealing with consumer questions

       5     about why they're being taxed, because many

       6     of them believe it is illegal for a mail

       7     order company to charge them tax.

       8               Even with our business-to-business

       9     sales today, we have to make copies of our

      10     registration statements and send them to

      11     customers, because they don't believe we have

      12     the right to collect the tax, because we

      13     don't have stores in the state, which they

      14     believe is the rule.

      15               So I will wrap up quickly here.  I

      16     have the same concerns that Frank does.  We

      17     are asking for simplification.  Before we

      18     start looking a technology solution, we have

      19     a lot concerns around bandwidth.  If we

      20     started running our $35 million a day to an

      21     outside system to calculate the tax and send

      22     it back, would it be able to support it?









                                                             255
       1     Because we do use Taxware today, its audit

       2     file cannot handle the size of our

       3     transactions, so we don't believe there is a

       4     technology solution that's available and

       5     ready to launch today.

       6               Thank you.

       7               CHAIRMAN GILMORE:  Thank you, Ms. Oakes.

       8     Ms. Doerflerr?

       9               MS. DOERFLERR:  Mr. Chairman and

      10     members of the Commission, my name is Katrina

      11     Doerflerr.  I'm with CISCO Systems, Inc.  I'm

      12     also representing the American Electronics

      13     Association, and I'd like to spend the next

      14     five minutes addressing why the American

      15     Electronics Association supports

      16     nexus-clarifying proposals like the Andal

      17     Uniform Jurisdictional Standards, and why

      18     those clear nexus standards are important for

      19     business with respect to business activity

      20     tax nexus.  And by business activity taxes, I

      21     mean those taxes that are based on things

      22     such as income or franchise tax.









                                                             256
       1               AEA supports the following

       2     E-commerce tax principles as jurisdictions

       3     look to whether and how to tax Internet

       4     sales:  One, impose no greater tax burden on

       5     electronic commerce than other traditional

       6     means of commerce.  Two, support simplicity

       7     in administration.  Three, retain and clarify

       8     nexus standards.  Four, avoid new taxes on

       9     the Internet.  And, five, consider tax issues

      10     in a global context.

      11               We believe that clarification of

      12     the nexus standards for all types of taxes is

      13     a good idea for both state tax authorities as

      14     well as business.  It will result in

      15     litigation and audit cost savings for both

      16     government and business.  It creates

      17     certainty in the marketplace, which is good

      18     for all business, including E-commerce.

      19     Without clarity, there will continue to be

      20     differing interpretations by different states

      21     as to the type and quality of nexus standards

      22     to apply.  For example -- I'm using one of









                                                             257
       1     the examples earlier -- attending a meeting

       2     such as this or attending a trade show for a

       3     number of days in state may create nexus in

       4     one state versus another state.

       5               Clarity of the nexus standards goes

       6     hand-in-hand with simplification and

       7     compliance.  The Andal proposal and proposals

       8     like it are a reasonable way to apply Public

       9     Law 86-272, in essence a codification of the

      10     Quill and the national Belles Hess standards.

      11               One comment, too, in respect to a

      12     comment that I heard earlier today, Public

      13     Law 86-272 is a codification of certain nexus

      14     standards in the income tax area, has been

      15     around for 25 or 30 years, and has worked

      16     just fine.

      17               The reason clarification and nexus

      18     standards is important, not only in the sales

      19     tax area, but also -- it's also important in

      20     the business activity tax nexus area.  This

      21     Commission has heard a lot about sales and

      22     use taxes in the context of E-commerce.









                                                             258
       1     There's a whole other area of taxes out there

       2     that affect business and are just as

       3     important and costly to business that should

       4     be considered.  We need a bright line test in

       5     the business activity tax nexus area.

       6               States have increasing used new and

       7     novel nexus theories to assert jurisdiction

       8     over out-of-state companies in this area.

       9     Some of those nexus theories include such

      10     things as agency nexus:  The theory that

      11     unrelated parties can somehow create nexus

      12     for each other, because of the type and

      13     quality of business relationships that they

      14     have.  Those -- that type of theory is

      15     represented in cases such as the Scholastic

      16     Bookclub Case and Troll Books' case law.

      17               Affiliate nexus is another area.

      18     The theory that a subsidiary of yours that

      19     does have traditional nexus in a state,

      20     creates nexus for all other legal entities in

      21     your structure, represented by

      22     Bloomingdale's-by-Mail cases and the SSA









                                                             259
       1     Folio cases.

       2               Also, economic nexus theories,

       3     which are represented by cases such as

       4     Jeffery in South Carolina and JC Penny in

       5     Tennessee.  The fact that -- or this theory

       6     that if you have a certain level of economic

       7     activity in a state, you must have nexus for

       8     income tax purposes.

       9               States have aggressively tried to

      10     use these theories to pull more states --

      11     more companies into their state for income

      12     tax purposes.

      13               Permitting such expansion would

      14     damper business innovation and expansion and,

      15     thus, bring harm, we believe, to the American

      16     economy.  When a company's presence in a

      17     state is minimal, it is not deriving material

      18     or meaningful protections or benefits from a

      19     state.  There's a whole body of case law that

      20     underpins and defines what is a

      21     constitutional tax with respect to a

      22     multi-state business.  Most of this case law









                                                             260
       1     revolves around, you know, a four-prong test

       2     to determine if a tax is constitutional.  One

       3     of those prongs is, is the tax fairly related

       4     to the benefits received in a state?  And we

       5     don't believe that happens with economic,

       6     affiliate, or agency nexus theories.  States

       7     are aggressively using those, though, to pull

       8     states in -- to pull companies in.

       9               The other area that -- or the other

      10     type of tax that this effects is city income

      11     taxes.  All the different local and municipal

      12     jurisdictions across the United States apply

      13     income taxes.  We believe that a Public Law

      14     86-272 threshold should apply to them, also.

      15     And clarity in this area, with respect to

      16     city income taxes, would also help.

      17               And just in conclusion, the

      18     imposition of new and expanded tax

      19     liabilities on the business community would

      20     seriously undermine the ability of the US

      21     economy to remain robust.  E-commerce is

      22     changing business-to-business relationships









                                                             261
       1     in a profound way.  Many unrelated companies

       2     are going to market together to jointly

       3     exploit technology or they're creating

       4     Internet ecosystems, where many businesses in

       5     a particular industry or niche work together

       6     to create a market for products and services.

       7               Businesses shouldn't be hampered or

       8     penalized in this new world by business

       9     activity tax nexus standards that are

      10     confusing and inconsistent between

      11     jurisdictions.  There should be clearly

      12     defined and uniform safe harbors for business

      13     activity tax nexus.  The business community

      14     fears that any expansion of state tax

      15     jurisdiction rules in the area of sales and

      16     use taxes may have an unintended effect on

      17     business activity tax nexus standards.

      18               We would urge the Commission to

      19     recommend clarifying the nexus standards at

      20     the same time that they're recommending that

      21     states simplify the current sales tax

      22     administration system.  We should encourage









                                                             262
       1     the states to simplify first, before we begin

       2     to discuss proposals on how or whether to

       3     tax.  Although commending many of the efforts

       4     that we heard today -- the different

       5     proposals that you've heard over the last day

       6     and a half -- it's just interesting to note

       7     that many of them are long on new process and

       8     short on the details of radical

       9     simplification.  Thank you.

      10               CHAIRMAN GILMORE:  Thank you very much.

      11     Mr. Kostenbauder?

      12               MR. KOSTENBAUDER:  Chairman Gilmore

      13     and commissioners, my name is Dan

      14     Kostenbauder.  I'm general tax counsel at

      15     Hewlett Packard Company, and among other

      16     responsibilities for the last 10 years, I

      17     have managed our sales and use tax

      18     department.  The current discussion relating

      19     to the taxation of E-commerce provides a

      20     great window of opportunity with respect to

      21     simplifying and making more uniform the sales

      22     and use tax system that we have in the US.









                                                             263
       1               One rate per state is the rubric

       2     that's used to describe that, but really the

       3     rate issue is relatively minor from an

       4     administration point of view within a

       5     company.  The various definitions of the tax

       6     base procedures relating to exemptions and

       7     audits and other factors are much, much more

       8     expensive.

       9               Just to give you an idea of how

      10     expensive the sales and use tax is to

      11     administer -- and I think this is probably

      12     true broadly of most companies -- but at

      13     Hewlett Packard Company, we have twice as

      14     many people involved in administering our

      15     sales and use tax as we do in all of the

      16     federal and state income tax compliance and

      17     planning and audit activities.  So it really

      18     is, compared to another set of taxes, very

      19     expensive and very costly.

      20               And that expense and that cost is

      21     due primarily to all of the complexity within

      22     the sales and use tax system.  And, in









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       1     particular, the lack of uniformity across the

       2     many states.

       3               You've spent a lot of time already

       4     discussing some of the system solutions that

       5     might be available for electronic commerce.

       6     I'd like to focus on one particular aspect of

       7     that expense, and that's the expense that

       8     businesses incur taking the tax calculation

       9     software which is available today, and our

      10     enterprise business software that's used to

      11     do invoicing, accounting, order processing,

      12     other business functions.

      13               That linkage, between those two

      14     software packages, is a nontrivial

      15     undertaking.  We know how to do it, but it is

      16     expensive, costly, and it takes time.  And

      17     all but the smallest companies need to do

      18     that.  The American Electronics Association

      19     recently did a survey where we asked a few

      20     companies to provide us, on an informal

      21     basis, some information, and the larger

      22     companies tended to spend a half a million









                                                             265
       1     dollars to $1 million per year.  The smallest

       2     companies spent $100- to $500,000 linking

       3     these two packages of software that they

       4     needed.

       5               In Hewlett Packard Company's case,

       6     and bearing in mind that we're a company with

       7     worldwide revenues of over $40 billion a

       8     year, we going to spend over $2 million this

       9     year on that linkage.  So it's something to

      10     keep in mind, and we urge to keep that

      11     expense in mind as you begin to deliver --

      12     deliberate and decide that perhaps that one

      13     of these software solutions is appropriate.

      14     And I'm not here to say that it isn't, but I

      15     just want to make sure that this Commission

      16     understands that there is great expense, and

      17     a large measure of that expense is a function

      18     of the complexity and the lack of uniformity

      19     in the current system.

      20               One of the other general

      21     recommendations that everyone has been making

      22     and I'll make it, too, is that we must move









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       1     forward and the Commission would do great

       2     good if it strongly recommended to the

       3     Congress that the Congress do whatever it can

       4     and the states do whatever they can to

       5     achieve a level of simplicity and uniformity.

       6     One of the ways that some of the states help

       7     deal with the cost of compliance with all the

       8     system is in a regime called, vendor's

       9     compensation or vendor discounts, where the

      10     states actually provide some revenue to

      11     companies involved in the compliance for

      12     collecting sales tax.

      13               A number of states have this.  I

      14     think a majority do not, but it is a great

      15     idea, because the companies are, in a sense,

      16     compensated, but it also provides a

      17     recognition by the state that the companies

      18     are doing, in fact, a service on their

      19     behalf, helping them with the tax collection

      20     opportunity.

      21               One of the very interesting things

      22     that has not been said yet about the National









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       1     Governors' Association's proposal, is a very

       2     subtle undercurrent, which is that the

       3     philosophy that has been used thus far in the

       4     entire history of the sales tax, which is the

       5     vendor is responsible for dealing with the

       6     customer and then dealing with the tax

       7     authority to pay this tax, it potentially

       8     severs that link, and the government is now

       9     going to deal directly with the taxpayer,

      10     potentially leaving out the vendor, who

      11     really is now just facilitating the

      12     collection, but is not really involved as a

      13     taxpayer in this particular situation.

      14               And either through -- think about

      15     it, through either the vendor's compensation

      16     approach or something along this

      17     philosophical change that the NGA has

      18     proposed, if the state governments and the

      19     local governments who are getting the benefit

      20     of the sales tax, were, in fact, bearing the

      21     cost of collecting the sales tax, we would

      22     see the simplification that we've been









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       1     talking about happening at a much more rapid

       2     pace.

       3               And today I think it hasn't

       4     happened, despite the national Belles Hess

       5     case and the Quill case -- the obvious

       6     advantages of simplifying things hasn't

       7     happened because businesses are forced to

       8     bear the expense of the complexity rather

       9     than the tax collectors.

      10               So I can see there's an opportunity

      11     here and I think if the simplification

      12     occurs, a lot of the questions that we've

      13     been dealing with that seem intractable

      14     relating to remote sales and also relating to

      15     digital delivery, will become much easier to

      16     solve and will be much easier to manage and

      17     to come to some content -- consensus on.

      18     Thank you very much.

      19               CHAIRMAN GILMORE:  Thank you, Mr.

      20     Kostenbauder.  Ladies and gentlemen of the

      21     Commission, it's 1:45.  If we were to get

      22     back on schedule, after a short break at 2:00









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       1     -- like at 2:05 -- we've got about three

       2     hours and 15 minutes to talk about the issues

       3     and options paper, and to take up Mr.

       4     Norquist's resolutions, and then still a few

       5     minutes after 5:15 to talk about the budgeted

       6     administration, although I think they're non-

       7     controversial matters.

       8               Therefore, we can take about a

       9     quarter of an hour, right now, to talk to

      10     these folks and to ask them questions.  And I

      11     think that's a pretty good thing to do, with

      12     the caliber of the people who are here today.

      13               However, I would ask the

      14     Commissioners -- we had a free-for-all this

      15     morning that, I thought, very positive, but

      16     it was very long.  If we could ask the

      17     Commissioners to avoid the speeches this time

      18     and ask questions to the panel people and get

      19     answers from the panel people, we can get

      20     some questions and answers in within this

      21     period of time and stay more-or-less on

      22     schedule.  If that is satisfactory to the









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       1     Commission, why don't we take a few minutes

       2     for Q and A to this panel?

       3               Governor Leavitt?

       4               GOVERNOR LEAVITT:  Thank you, Mr.

       5     Chairman.  I'll just make one point to

       6     several of you who queried about the National

       7     Governors' Association proposal.  I believe

       8     it is the intention of that group to have the

       9     system apply to both retail and E-tail.  This

      10     was just something several of you brought up.

      11     I agree with what you've suggested, that it

      12     would difficult to have those duel systems.

      13               I like the idea of the better

      14     mousetrap involving the mouse, and I'd like

      15     to ask all of the panel members who would

      16     wish to respond very briefly, as you look --

      17     being the tax experts that you are, dealing

      18     with the day-to-day, where the rubber is

      19     meeting the road, and if you assume that it's

      20     going to take us three to five years to do

      21     anything that will fundamentally change this

      22     system, I'd like to know if you believe it's









                                                             271
       1     possible for us to radically simplify, to

       2     dramatically change the system to be

       3     compatible with the technology as we've

       4     talked about it and benefit the retail

       5     segment as well as the electronic commerce?

       6     I'd like to know if you believe it's possible

       7     and worth the endeavor.

       8               MR. JULIAN:  Governor, if I may

       9     respond?  I certainly think it's worth the

      10     effort.  The proof will be in the pudding,

      11     whether or not it's possible.  I know that

      12     members of the industry and members of

      13     government have worked together in the past.

      14     For example, I also -- I chair the Direct

      15     Marketing Association's Tax Committee, and on

      16     two occasions, in the last 10 years, members

      17     of the DMA and members of the states --

      18     generally represented by Mr. Duncan and Mr.

      19     Bodson and some of those organizations --

      20     have gotten together to try to work out, what

      21     at the time was called a voluntary collection

      22     agreement.  It was done once before the Quill









                                                             272
       1     decision and once a few years ago, even

       2     though I personally didn't participate in the

       3     efforts a few years ago.

       4               I can say that both sides

       5     approached it in good faith and gave it an

       6     honest effort.  They did not succeed, but

       7     that's not to say that shouldn't try.  And,

       8     as I said earlier, if nothing else occurs

       9     from this Commission, I think that the sales

      10     tax system is in dire need of simplification

      11     and I think the efforts would be worthwhile.

      12               CHAIRMAN GILMORE:  Any other responders

      13     to Governor Leavitt, on the panel?

      14               Mr. Winn?

      15               MR. WINN:  I don't think it's

      16     possible to get 30,000 jurisdictions to agree

      17     on anything.  And unless you do, both, deal

      18     with the geography issues and eliminate all

      19     the nexus issues, which are -- put all of us

      20     at great risk.  We spend enormous amounts of

      21     money trying to deal with states who wish to

      22     be litigious and sue us for decisions that









                                                             273
       1     really don't have any basis of law, but yet

       2     they have deeper pockets than we do.  And so

       3     you've got to deal with those issues, which I

       4     think would be very difficult.  And then you

       5     have to deal with the issues of medium, which

       6     means you have to have one policy, regardless

       7     of how goods are sold:  By mailbox, by

       8     telephone, by brick and mortar store, or on

       9     line.

      10               And the combination of those things

      11     means that the only solution would be a

      12     national sales tax which would supersede the

      13     rights of municipalities and states, which I

      14     don't think is politically palatable.

      15               GOVERNOR LEAVITT:  So you're suggesting

      16     is that we either have inequity or a national

      17     sales tax?

      18               MR. WINN:  I believe that we either

      19     have the disaster that we have now or a

      20     singular national plan that is clear, simple,

      21     and comprehensive.

      22               CHAIRMAN GILMORE:  Mr. Bullington?









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       1               MR. BULLINGTON:  Governor Leavitt,

       2     we owe it to our cities, our counties, our

       3     states, to make the effort.  We'll be along

       4     the way with you.  The trade organizations

       5     that I belong to, The International Mass

       6     Retail Association, the E-Fairness Coalition

       7     -- we'll be there, state-by-state, to help

       8     you get the job done.  And it's going to take

       9     more of us, it's going to take a grassroots

      10     effort to understand the issue, to understand

      11     that the tax already applies, and to educate

      12     people, and we'll be with you on Capitol

      13     Hill.

      14               CHAIRMAN GILMORE:  Any other -- if not

      15     any other questions, Mr. Andal then Mr.

      16     Guttentag.

      17               MR. ANDAL:  I have just two

      18     clarifying questions.  Is it Mr. Lowy?

      19               MR. LOWY:  Lowy.

      20               MR. ANDAL:  Lowy.  You represent a

      21     company that actually owns malls.  You

      22     also -- did you say you represented an









                                                             275
       1     association?

       2               MR. LOWY:  The ICSC.

       3               MR. ANDAL:  Which is the

       4     International Council of Shopping Centers?

       5               MR. LOWY:  Yes.

       6               MR. ANDAL:  I just -- I'm trying to

       7     understand where the mall owners are.  There

       8     seems to be dissension in your ranks.  This

       9     is a publication, the industry standards, and

      10     is it Malachi Cavanah?  The spokesman for the

      11     International Council of Shopping Centers

      12     said the following:  "Those in the mall

      13     business say that the Internet is an

      14     opportunity, not a threat.  We really don't

      15     see the Internet causing any downsizing in

      16     traffic," said Malachi Cavanah, a spokesman

      17     for the International Council of Shopping

      18     Centers.  "For the most part, the data shows

      19     that the Internet is driving sales to the

      20     stores.  It has created an educated consumer,

      21     one who searches the Web but buys at our

      22     store."









                                                             276
       1               Who's right?

       2               MR. LOWY:  I don't think it's a

       3     question of who's right and who's wrong.  The

       4     issues that the Commission are dealing with

       5     are going to be the tax polices for what will

       6     happen with E-commerce and bricks and mortar

       7     retail in the future, really in the years

       8     2003, 2004, 2005.

       9               If you start to look at the

      10     estimates of where E-commerce will be, the

      11     estimates are that 9 percent of retail sales

      12     will be done over the Internet by the year

      13     2003.  Those issues and that amount of sales,

      14     then, have a profound effect on what goes on

      15     in the cities and the towns that we do

      16     business in.  So I don't actually think there

      17     is any difference between what we're saying

      18     and what's being said by the ICSC.

      19               MR. ANDAL:  Let me move to Mr.

      20     Bullington.  I was amazed at one of

      21     statements you made which was that you think

      22     that the complexities of the sales and use









                                                             277
       1     tax system are overblown.  And I represent a

       2     district that's in the other California, the

       3     Central Valley, and we -- part of my district

       4     includes the Fresno area.

       5               Wal-Mart has come through the

       6     Central Valley in the last 10 years and put

       7     stores in virtually every city down the

       8     Central Valley, and one of the places they

       9     put a store was Fresno.  Fresno had a very

      10     unusual tax that has recently been declared

      11     unconstitutional.

      12               It was called the Arts to Zoo tax

      13     -- one I opposed as a legislator.  Anyway,

      14     the Arts and Zoo tax was specific, not just

      15     to the city of Fresno, but to a smaller

      16     subset of the city of Fresno.  You happened

      17     to place your store in that subset.  It was

      18     designed so the tax would pass.  You built

      19     your first store there, in California.  You

      20     built the store and you called my agency, The

      21     Board of Equalization, and said, what's the

      22     tax rate?  We told you.  For that area, it's









                                                             278
       1     a certain rate.  It had an add-on for the

       2     Arts to Zoo tax.  You later, the next year,

       3     built a store in Selma.  Selma is outside of

       4     the area that the Arts to Zoo tax collected

       5     in and thus had a lower rate.

       6               Your guys didn't call on that one.

       7     You assumed that the rate in Fresno, which is

       8     only five miles away, would be the same as in

       9     Selma.  And it took you three years and an

      10     audit to figure out that you had been

      11     overcharging the customers in Selma, a $3

      12     million overcharge.

      13               And so I think it's astonishing for

      14     a company like Wal-Mart, who actually deals

      15     with these problems and for whom I have great

      16     sympathy for on questions like this, to make

      17     such a blanket statement that it is not

      18     difficult to comply with the complexity of

      19     local tax rates.  It's an extraordinary

      20     complex -- complexity, and that's just one

      21     example of 100 that I could offer.

      22               MR. BULLINGTON:  If you were doing









                                                             279
       1     your job, why didn't you tell us about it?

       2               Now, let me explain.  In states

       3     like Connecticut -- in states like

       4     Connecticut business is tough, competition's

       5     tough, that's why we want a level playing

       6     field.  But look at Connecticut.  There's 16

       7     retailers there that have been sued by class

       8     action, because of the very issue of, is a

       9     20-ounce bottle a single serve or not?  We

      10     face those issues day in and day out.  It's

      11     not easy.

      12               I didn't say it was easy, but it's

      13     been overblown that there's 30,000

      14     jurisdictions.  There's maybe, at most, 6,000

      15     rate determinations to be made.  If it

      16     weren't for those five states that allow

      17     local optionists to administration of their

      18     base, I would have 46 returns.  So we need to

      19     simplify lots of things.

      20               It can be moved in that direction.

      21     Drastic simplification would be to move to 46

      22     states -- excuse me, 46 filings, but let's









                                                             280
       1     combine that with uniform definitions as to

       2     what is or isn't food, single serve, what is

       3     or isn't exempt as far as

       4     business-to-business, those type

       5     requirements, and let's get on down the road.

       6     It can done.

       7               MR. GILLMORE:  Mr. Guttentag?

       8               MR. GUTTENTAG:  Thank you, Mr.

       9     Chairman.  I was going to ask Ms. Doerflerr --

      10     I would like to understand your position with

      11     respect to what you described as Mr. Andal's

      12     proposal and the proposal to codify Quill,

      13     because I want to make sure that I understand

      14     it.  It seems to me that those are not

      15     synonymous.

      16               For example, under Mr. Andal's

      17     proposal, as I understand it, he would make

      18     the test to be substantial physical presence,

      19     which under the Quill case, the test is

      20     physical presence.  So that -- that proposal

      21     would then limit state jurisdiction.  I just

      22     want to understand that that's -- whether









                                                             281
       1     that's your proposal or not.

       2               Also, you say, that this would

       3     simplify and remove us from so much

       4     litigation.  We are then instituting, are we

       5     not, under the substantial physical presence

       6     test, a new standard which I assume would

       7     generate litigation, because we are moving

       8     away from Quill and then we would then have

       9     to test that in the courts.  So I'm not sure

      10     I understand why you believe this would

      11     reduce litigation.

      12               Also, it seems to me that you

      13     raised the issue under the Andal approach,

      14     which Mr. Bullington noted, and that has to

      15     do with related corporations.  As I

      16     understand Mr. Andal's proposal, related

      17     corporations would not create nexus, so that

      18     there could be the E-commerce subsidiary and

      19     the bricks and mortar subsidiary and the

      20     E-commerce committee could -- a subsidiary

      21     could be free of tax collection

      22     opportunities.  I just trying to see if









                                                             282
       1     that's your proposal.

       2               And, also, the Quill case deals

       3     with sales taxes, and your discussion focused

       4     a great deal on other kinds of taxes, such as

       5     income and franchise taxes.  So that you

       6     would propose, then, if you were to adopt the

       7     Andal proposal and to limit state taxing

       8     jurisdiction with respect to income taxes.

       9     And I wonder if you could, in that connection

      10     -- I'm not aware of cases, income tax cases,

      11     which involve the issues we're discussing

      12     now, such as jurisdictional issues arising

      13     from e-commerce activities, such as locations

      14     of servers or not.  But maybe you are aware

      15     of those cases.

      16               And, also, on the 86-272, do you

      17     think that's a good model?  Well, you made

      18     these proposals, so I'm just asking for

      19     clarification.

      20               MS. DOERFLERR:  I'll just make a

      21     comment, that's a lot of questions.  I don't

      22     know if I can remember back to the first one,









                                                             283
       1     but go ahead.

       2               MR. GUTTENTAG:  Yes, it is.

       3     86-272, hadn't there been quite a bit of

       4     litigation to use under that legislation and

       5     to use that as a model for a legislative

       6     standard to simplify the law, do you think

       7     that's appropriate?

       8               MS. DOERFLERR:  If I'm remembering

       9     the first one, you were making a comparison

      10     between codification of Quill and the Andal

      11     proposal.

      12               My comment was that AEA feels that

      13     the Andal proposal -- and proposals like it

      14     -- are a reasonable way to apply Public Law

      15     86-272.  In other words, a codification of

      16     Quill and national Belles Hells would be

      17     good.

      18               It's interesting that in the public

      19     law -- and I think your next question was,

      20     gee, that's just substituting one standard

      21     for another.  Isn't that just trading one

      22     bunch of litigation for another?









                                                             284
       1               It's interesting that in the Public

       2     Law 86-272 area for income tax nexus there

       3     are generally less litigation cases than in

       4     the sales and use tax area under Quill.

       5     That's as far as -- then your next?

       6               CHAIRMAN GILMORE:  Can we do one more,

       7     Joe?  And then move on to the next question.

       8               MR. GUTTENTAG:  Yes.  Let me --

       9     were you proposing -- there is a difference,

      10     then, between Mr. Andal's proposal and the

      11     proposal that you're -- and the codification

      12     of Quill.  Mr. Andal's proposal is not

      13     limited to codification of Quill.

      14               MS. DOERFLER:  You're right.  And I

      15     guess the main point that I want to make

      16     there is that those proposals are steps in

      17     the direction of a clear nexus standard.

      18               The reason why it's important to

      19     have a clear nexus standard and not a

      20     deterioration of the standard we have today

      21     in the sales and use tax area, is because

      22     business fears that any expansion of









                                                             285
       1     jurisdiction or any deterioration of those

       2     standards in the sales and use tax area will

       3     have an unintended effect of having that same

       4     effect on the income tax area.

       5               So as you lower and deteriorate on

       6     one, you will lower and deteriorate on the

       7     other.

       8               MR. GUTTENTAG:  Have you considered

       9     other standards?  For example, if you wanted

      10     a clear, bright line, to set a monetary sales

      11     threshold for nexus standards?  Wouldn't that

      12     -- or some other alternatives create a

      13     brighter line than this physical presence

      14     test which you've described?

      15               MS. DOERFLER:  Certainly it may be a

      16     brighter line, but that's just right along

      17     the same line of thinking as an economic

      18     nexus theory, which generally we don't

      19     support because it doesn't -- again, you're

      20     not addressing the issue of is the tax fairly

      21     related to the benefits received?  Just

      22     because you economically sell a lot into a









                                                             286
       1     state, doesn't necessarily mean that you're

       2     benefitting that much from state services.

       3               CHAIRMAN GILMORE:  Mr. Norquist, and

       4     then I have a question or two, and then we

       5     will be, I think, concluded.

       6               Mr. Norquist?

       7               MR. NORQUIST:  Yes.  I wanted to

       8     thank Craig Winn for reminding us of the

       9     tremendous tax burdens now carried by the

      10     Internet, before we discuss adding to them.

      11               I wanted to get a yes or no from

      12     Katrina.  Katrina, as I understand it, your

      13     answer, would the passage of Dean Andal's

      14     legislation at the federal level reduce in

      15     more or fewer court cases in litigation?

      16               MS. DOERFLER:  Yes.  We believe it

      17     would.

      18               MR. NORQUIST:  Okay.  Because there

      19     were some people earlier who didn't seem to

      20     understand that.

      21               And could -- Dan, could you give us

      22     that number again for how much it cost you to









                                                             287
       1     do the software, to interact with the --

       2     somebody gives you software to make it easy

       3     for you to pay your sales taxes.  You have to

       4     pay how much to write your own software or

       5     hardware, and what would that be for a small

       6     store rather than a big business?

       7               MR. KOSTENBAUDER:  The number for

       8     Hewlett-Packard for this year, and comparable

       9     numbers last year and into the future, was

      10     over $2 million a year just to link up the

      11     business offer we need, invoicing,

      12     accounting, order processing, and those

      13     things with the tax software.

      14               And in large measure due to

      15     complexity.  For smaller companies -- smaller

      16     AEA companies that are using a systematic

      17     approach to their sales tax compliance --

      18     which is to say they're not so small that

      19     they can do it manually.  But when they've

      20     got to, you know, do it using computer

      21     systems, our range for even the smaller

      22     companies was in the hundred to $500,000









                                                             288
       1     range from some of the advisors that we

       2     talked to, who were estimating the cost of

       3     that linkage.  So it's fairly substantial.

       4               And I think the message there for

       5     me is not that we shouldn't go forward and if

       6     the NGA proposal otherwise has good things to

       7     recommend it, that we don't go there because

       8     of that cost.  But the cost is because of

       9     complexity.  And we can make the whole

      10     economy work better if we take the cost out

      11     of the system for the tax authorities and for

      12     all the companies complying with all of the

      13     Main Street taxes today, and it will

      14     facilitate and provide a better environment

      15     in which we can figure out the right way to

      16     tax electronic commerce and remote commerce

      17     and digital delivery and those issues.

      18               MR. NORQUIST:  Yes, but 100,000 to

      19     500,000 cost --

      20               MR. KOSTENBAUDER:  Is our estimate.

      21     Thank you.

      22               MR. NORQUIST:  Okay.  Not my idea









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       1     of zero burden.  Okay.

       2               CHAIRMAN GILMORE:  Let me ask one or two

       3     questions, if I could.

       4               Mr. Bullington and Mr. Lowy, too --

       5     especially Mr.  Bullington -- is it

       6     Bullington or Billington?

       7               MR. BULLINGTON:  Bullington.

       8               CHAIRMAN GILMORE:  Mr. Bullington, most

       9     governors in most localities like Wal-Mart.

      10     They come in, they build, they enhance the

      11     property value, they hire new jobs, they

      12     increase commercial activity.  And as a

      13     result, a lot of people are prepared to

      14     subsidize Wal-Mart, aren't they?

      15               They build -- they build roads,

      16     they offer tax breaks and incentives and so

      17     on, and it's not just Wal-Mart.  It's

      18     thousands and thousands of other businesses

      19     that are asked to do the same thing.

      20               MR. BULLINGTON:  Can I respond to

      21     that?

      22               CHAIRMAN GILMORE:  Sure.









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       1               MR. BULLINGTON:  Retail is the one

       2     segment that gets almost no incentive

       3     relative to locating in a particular place.

       4     There are some aspects of distribution, yes,

       5     that get incentives.  In the location of a

       6     retail store, there are no incentives. There

       7     are no particular tax breaks.  It's expected

       8     that retailers are -- in the vast majority of

       9     cases -- there to pay the property taxes, to

      10     pay the sales taxes collected on behalf.

      11     Retail is the one segment -- you go out and

      12     look at across the board -- that gets

      13     essentially no incentives as to location.

      14               CHAIRMAN GILMORE:  I believe that's not

      15     correct.  I beg to differ.  Come on down to

      16     Richmond and we'll chat about it.

      17               But in the meanwhile, is it not

      18     true, also, Mr.  Lowy, that -- is it not also

      19     true that shopping malls are considered good

      20     things for the community?  They bring in new

      21     businesses, they create more commercial

      22     activity and new jobs.  And, in fact, that









                                                             291
       1     very frequently people work to build

       2     on-ramps, off-ramps, roads into malls, and so

       3     on like that, which is an incentive and an

       4     advantage that sometimes small businesses

       5     don't get; isn't that right?

       6               MR. LOWY:  It depends on which

       7     state you do business in.  If you look in

       8     some states, actually we build the roads, we

       9     rebuild the highways, and the cities and the

      10     states use the approvals that they need to

      11     give you so that you can do the expansions,

      12     to actually have you build the

      13     infrastructure.

      14               There are some states in some

      15     cities where you can get -- there's things

      16     known as tax incremental financing, which is

      17     where the city actually borrows the money,

      18     uses the increased real estate taxes that you

      19     generate by expanding your malls, and builds

      20     infrastructure for the city for that.

      21               But on the main, we actually --

      22     when we go and develop, have to spend more









                                                             292
       1     money in developing the infrastructure for

       2     the cities.

       3               CHAIRMAN GILMORE:  One last question.

       4     Mr. Bullington, how's business?  Things

       5     pretty good at Wal-Mart?

       6               MR. BULLINGTON:  The economy is

       7     exceptionally good.  You look at all

       8     retailers right now, it's exceptional in most

       9     segments.  And, again, to what I said

      10     earlier, you look at the growth and the gross

      11     national product.  You look at where the

      12     Internet is expecting to go.  We, like many

      13     other people, want to be part of that

      14     exponential growth associated with the

      15     Internet.

      16               But from the standpoint of good tax

      17     policy, good social policy, what it means to

      18     communities, that erosion will occur to the

      19     tax base unless we set out to fix the system

      20     now.

      21               CHAIRMAN GILMORE:  Sales are up, Mr.

      22     Bullington?









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       1               MR. BULLINGTON:  We continue to

       2     grow and expand, yes.

       3               CHAIRMAN GILMORE:  Mr. Lowy, how are the

       4     malls doing?  Business good?

       5               MR. LOWY:  Sales are up, except, as

       6     I said before, I think the issue that the

       7     Commission is looking at is where will sales

       8     and where will E-commerce sales be in five

       9     years' time, not where they are today.

      10               CHAIRMAN GILMORE:  Wish we had that

      11     crystal ball.  Thank you very much,

      12     gentlemen.

      13               MAYOR KIRK:  May I ask one quick

      14     question?

      15               CHAIRMAN GILMORE:  Yes, Mayor Kirk.  Go

      16     right ahead.

      17               MAYOR KIRK:  I'm going to follow your

      18     admonition and ask a question, not make a

      19     statement.

      20               Dan, I think -- just to put that $2

      21     million in perspective, that was on $40

      22     billion of revenue?









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       1               MR. KOSTENBAUDER:  That's our

       2     worldwide number.  The U.S. --

       3               MAYOR KIRK:  I understand, but I

       4     presume that's a $2 million worldwide?

       5               MR. KOSTENBAUDER:  No, it's the

       6     U.S. piece.

       7               MAYOR KIRK:  What's the U.S. part of

       8     that 40 billion?

       9               MR. KOSTENBAUDER:  Half of 40,

      10     roughly.

      11               MAYOR KIRK:  Still, we're talking

      12     less than -- and I don't have my

      13     Hewlett-Packard with me -- fortunately,

      14     because I still couldn't compute it, but it

      15     seems like in my mind -- and I'm not saying

      16     that's insignificant.  But, you know, in

      17     relative terms that still seems like it's

      18     about less than one-tenth of a percent.

      19               MR. KOSTENBAUDER:  It's a small

      20     number, but it's also --

      21               MAYOR KIRK:  That's all I wanted.

      22     How much you imagine you all pay for, say, a









                                                             295
       1     brand new set of golf clubs?  Do you write

       2     any of this off on your taxes or you all eat

       3     that up?

       4               MR. KOSTENBAUDER:  It's all income

       5     tax deductible.  If you make a simpler sales

       6     tax system, we'll have more income and you'll

       7     get more tax.

       8               I think it's important to --

       9               MAYOR KIRK:  Do you think you spend

      10     more on corporate memberships than you spend

      11     on tax compliance?  Corporate memberships to

      12     supper clubs, golf clubs, country clubs?

      13               MR. KOSTENBAUDER:  I'm sure we --

      14               MAYOR KIRK:  I'm just curious.

      15               MR. KOSTENBAUDER:  I will assure

      16     you that we spend a lot more on tax

      17     compliance than we spend on those things.

      18     Absolutely.

      19               MAYOR KIRK:  Okay.

      20               MR. KOSTENBAUDER:  No question.

      21               MAYOR KIRK:  Okay.  Thank you.

      22               CHAIRMAN GILMORE:  Ladies and gentlemen,









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       1     come back in five minutes and we'll start

       2     issues and answers papers.

       3                    (Recess)

       4               CHAIRMAN GILMORE:  Okay.  Everyone,

       5     please have your seats.  The trouble with

       6     breaks are, the five-minute breaks are always

       7     20-minute breaks.  There's nothing you can

       8     seem to do about it, but we're doing the best

       9     we can.

      10               Now, under the agenda that we have

      11     set forth, we still have until about 5:30.

      12     To the extent that members wish to leave

      13     early, I can't help that.  But we're doing

      14     the best we can to get everything in within

      15     the period of time that we have.

      16               Now it's time for us to discuss the

      17     issues and options paper.  Just as a preface,

      18     the work plan called for preparation of an

      19     issues and options paper to crystallize

      20     specific policy options and to facilitate a

      21     constructive discussion of the Commissioners

      22     at a level of specificity that we haven't yet









                                                             297
       1     engaged in.  Although, I think that we have

       2     engaged dramatically yesterday and today over

       3     most of the issues and concepts.  Now, we can

       4     get down into talking about what it is that

       5     we're trying to put down onto paper.

       6               As you recall, the Commissioners

       7     were concerned at the beginning of the

       8     process that we didn't know exactly how we

       9     were going to produce a document in time to

      10     meet our charge.  And this drafting work plan

      11     was put into place in order to be able to do

      12     that.

      13               The drafting subcommittee has, in

      14     fact, offered a document that crystallizes

      15     these issues, although many are obviously in

      16     opposition to each other, and yet at the same

      17     time all of the ideas have been included.

      18               At the outset, let me assure the

      19     Commissioners that I do not intend to call

      20     for votes on specific policy options.  The

      21     information we have has been that all the

      22     members would prefer to argue these things









                                                             298
       1     out in San Francisco, and then make the final

       2     votes -- up or down -- on these issues in

       3     Dallas.  But we will at that point have a

       4     final document, which can be finally edited

       5     and sent on in time.  But the votes will be

       6     saved for Dallas, unless someone wants to

       7     re-raise that issue.

       8               Now, I'm sorry that Bob Pitman was

       9     unable to be with us today -- of America

      10     Online, because of illness.  I think he has

      11     the flu, and we wish him speedy recovery from

      12     that.

      13               Bob and his staff at America Online

      14     took the lead in drafting the issues and

      15     options paper.  And so in Bob's absence, I've

      16     asked George Vradenburg, who's the senior

      17     vice president of America Onlne, to introduce

      18     the issues and options paper to the

      19     Commission.

      20               I've also asked George to remain at

      21     the presenter's table to our discussions, to

      22     answer any questions about the policy and









                                                             299
       1     options paper, and because he and AOL staff

       2     will be instrumental in drafting the final

       3     report, as well in support of the drafting

       4     subcommittee.

       5               So with that, I'll turn the podium

       6     over to George Vradenburg.

       7               MR. VRADENBURG:  Thank you, Mr.

       8     Chairman, Governor Gilmore, and members of

       9     the Commission.

      10               Just as a reminder to the

      11     Commission, you appointed a report drafting

      12     subcommittee to develop an issues and options

      13     work paper, as the Chairman has described,

      14     and the report drafting subcommittee was made

      15     up of nine members of this Commission --

      16     virtually half of the Commission.  Governors

      17     Gilmore and Bob Pitman of AOL co-chaired that

      18     report drafting subcommittee.  Governor

      19     Locke, Ms. Jones, Messrs. Andal, Parsons,

      20     Pottruck, Pincus, Pitman and Sokul were on

      21     the Commission, as well.  So we had nine

      22     members.









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       1               The charge for the work plan was to

       2     come up with an effort to develop a

       3     spring-board for discussion, to try and

       4     classify the issues before the Commission, to

       5     provide a variety of options in as objective

       6     and a straightforward and nonpartisan manner

       7     as we could.

       8               We did that.  We met on a number of

       9     occasions by teleconference and exchanged

      10     substantial comments on each other's work.

      11     And all staff members, and then members of

      12     the report drafting committee, had a very

      13     substantial hand in the final -- in the final

      14     work product.

      15               Indeed, notices of the meeting were

      16     sent to staff of all the Commissioners, and a

      17     number of other Commissioner staffs listened

      18     in on the phone.

      19               The working process in putting this

      20     issues and policy options paper together then

      21     was a corroborative -- very much a team

      22     effort, very much inclusive and tended to be









                                                             301
       1     essentially staff work to this Commission,

       2     and not a set of binding recommendations in

       3     any form or fashion.  It intended to be

       4     provocative on how we classified and looked

       5     at the options, but not exhaustive.  And

       6     something to spark discussion and to present

       7     alternatives and to determine where the

       8     controversial issues lay.

       9               We have got to remember that we are

      10     working within the context of a congressional

      11     charge to us, pursuant to the Internet Tax

      12     Freedom Act, in which we have to produce our

      13     recommendations to Congress by next April

      14     21st, and pursuant to which at the moment

      15     there is a moratorium on two types of taxes:

      16     Multiple and discriminatory taxes on

      17     electronic commerce.

      18               Thus, obviously, states continue to

      19     impose nonmultiple and non-discriminatory

      20     taxes on electronic commerce today, pursuant

      21     to existing nexus rules.

      22               There's a moratorium on taxes on









                                                             302
       1     Internet access, unless such tax was

       2     generally imposed and actually enforced prior

       3     to October 1, '98, thus grandfathering

       4     roughly 11 states' ability to continue to

       5     impose taxes on Internet access.

       6               That moratorium continues for three

       7     years from the date of the adoption of the

       8     statute, and that moratorium will expire in

       9     October of 2001.  Giving, thus, Congress an

      10     opportunity between the submission of our

      11     report and the expiration of that moratorium

      12     to determine what to do with respect to that

      13     moratorium and with respect to whatever other

      14     recommendations this Commission may make to

      15     Congress.

      16               The issues and policy options paper

      17     presents and categorizes the issues in seven

      18     sort of issue buckets, as it were.  And I,

      19     for purposes of this discussion, not

      20     intending to suggest that this is the way

      21     that any member of the Commission may want to

      22     look at this, am going to classify these in









                                                             303
       1     three categories.

       2               I think the most controversial and

       3     the most difficult, obviously, is the tax

       4     treatment of sales conducted over the

       5     Internet.  To that, I'll come back in a

       6     second.

       7               The second category of items are

       8     matters which certainly have received the

       9     attention of a number of presenters and

      10     questions from the Commission, but as to

      11     which there seems to be less controversy.

      12     I'm now speaking here of tax treatment of

      13     telecommunication service providers, as to

      14     which there's been discussion of both the

      15     federal, state, and local taxation of those

      16     providers.

      17               There are two buckets of issues

      18     within that general category, namely

      19     transactions and how to treat federal excise

      20     taxes on those kinds of services, and how to

      21     treat state and local taxation of those

      22     services, both in terms of their









                                                             304
       1     simplification and in terms of their

       2     disparate rates.

       3               The second category within

       4     telecommunications taxes is the Ad valorum

       5     property tax, which Commissioner Andal has

       6     raised.

       7               The second issue, bucket, within

       8     this second category is the tax treatment of

       9     Internet access, which did receive attention

      10     in New York, some attention here today, but

      11     as to which there seems at the moment not to

      12     be as much controversy, although clearly the

      13     options before the Commission are laid out in

      14     the issues and policy options paper in terms

      15     of extending the moratorium, with or without

      16     a grandfather, or allowing the moratorium to

      17     expire.

      18               The third category, the third

      19     bucket issue, that I would put in the second

      20     category of less controversial items is

      21     international tax and tariff, where we heard

      22     a good deal during our sessions here in San









                                                             305
       1     Francisco, but as to which, with respect to at least

       2     to customs duties, the Commission has already

       3     spoken.  With respect to international taxes,

       4     I do think that there may not be much

       5     controversy that whatever we do has to be

       6     done in an international context, and

       7     understood in that fashion.

       8               Finally, there is a third category

       9     of issues which have received less attention,

      10     but are included in the issue and policy

      11     options paper.  The impact of nexus standards

      12     on business activity taxes, as to which we've

      13     laid out some policy options in the paper,

      14     redress mechanism for imposition of

      15     unconstitutional state and local taxes, as to

      16     whether there are adequate remedies now for

      17     taxpayers who have to continue to pay taxes

      18     during their contests of arguably

      19     unconstitutional taxes, and the proposal with

      20     respect to the digital divide, that we

      21     recommend to Congress an amendment of the

      22     federal welfare guidelines to permit states









                                                             306
       1     to spend a surplus of TANF monies, temporary

       2     assistance to needy families' monies, to buy

       3     computers and Internet access for needy

       4     families.

       5               So with respect to the issues that

       6     we have laid out, the seven issue categories,

       7     I would say there are some that are highly

       8     contested, controversial, and obviously

       9     subject to quite differing opinions from the

      10     Commission.

      11               A second category, where I think

      12     while there are several policy options,

      13     there's less controversy.

      14               A third category, which certainly

      15     is included within our issues and policy

      16     options papers, as to which there's been less

      17     discussion and may, Mr. Chair, depending on

      18     your preference, may receive either less or

      19     some discussion at this time.

      20               With respect to the sales and use

      21     category, obviously the most controversial

      22     category of the issues and options paper,









                                                             307
       1     again without intending to be exhaustive, but

       2     at least provocative, provides three general

       3     potential branches in which this Commission

       4     could take.

       5               First is to preempt the state's

       6     ability to tax sales conducted over the

       7     Internet.

       8               Second, to recommend to Congress

       9     that they do nothing, essentially allowing

      10     states to tax sales conducted over the

      11     Internet pursuant to current nexus rules.  On

      12     that branch, clearly the question before you

      13     is whether you would like to try to clarify

      14     those nexus rules by statute.  If you take

      15     that route, as well, then the question with

      16     respect to all of the simplifications and

      17     cost-less approaches being proposed to the

      18     Commission is how to try to bring those

      19     about.

      20               In that particular bucket you at

      21     least have the question of what to do about

      22     the current moratorium?  Would you like to









                                                             308
       1     see a moratorium on discriminatory and

       2     multiple layers of taxation continued or not?

       3     So there's a second branch here, which is to

       4     recommend to Congress to do nothing and allow

       5     the states to tax sales.

       6               Third, there is a third branch

       7     which is to recommend to Congress to permit

       8     state tax sales over the Internet without

       9     regard to nexus.  Thus, extending the

      10     obligations to collect and remit taxes to

      11     sellers, no matter whether they have nexus or

      12     not.

      13               Those three quite divergent points

      14     of view, and received a good deal of

      15     attention from the members of this Commission

      16     through the presentations.

      17               I'll wrap up my remarks now.  But I

      18     would suggest that the report drafting

      19     subcommittee obviously works to your mandate

      20     and pursuant to your directions, but we do

      21     have the charge to try to get ourselves to a

      22     meeting in Dallas where we have some certain









                                                             309
       1     issues tee'd up for either vote or decision

       2     by the Commission and where we would like to

       3     have as much as we can of a final report

       4     before you, so that the Commission can see

       5     the work product, obviously, that it would

       6     like to submit to Congress.

       7               But we recognize very much that

       8     we're not going to have straw votes today, but it

       9     would be useful to have some direction on

      10     what direction to take, so that we can draft

      11     something up.  It may be, Mr. Chairman, that

      12     the Commissioners would like to direct the

      13     report drafting subcommittee to have either

      14     interim meetings or calls with respect to

      15     various proposals during the course of the

      16     next three months.  So that we're sure that

      17     we get to Dallas with a good work product

      18     reflecting the views of the Commissioners and

      19     of the Commission, and so that we can submit

      20     our report to Congress on time.

      21               With that, I've concluded my

      22     report.









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       1               CHAIRMAN GILMORE:  George, thank you

       2     very much.  I want to recognize the work of

       3     George Vradenburg and Ellen Fishbein of AOL

       4     in taking the lead in the document.  I think

       5     it's a constructive tool for the Commission

       6     and the public.  It's been broadly

       7     publicized.  It's on the Net.

       8               At the outset, let me tell

       9     everybody that the document doesn't represent

      10     the final report of the Commission.

      11     Everybody, I think, needs to understand that.

      12     It is merely a vehicle to guide discussion

      13     among the Commissioners today, as, in fact,

      14     the drafting subcommittee does go forward in

      15     order to produce a document which can, in

      16     fact, be voted on in Dallas.  And, see whether or

      17     not there are any areas of agreement.

      18               Now, I think we will find some

      19     areas of agreement today, which will be very

      20     instructive to the working group as they go

      21     forward.  I think that it, just as last time,

      22     it's perfectly appropriate for there to be a









                                                             311
       1     lot of involvement and engagement among all

       2     the people, that the committee is very broad.

       3               But everybody is having a chance to

       4     have their input into it, and we can go

       5     forward and just vote on this in Dallas.  Or

       6     any of its provisions, or any substitutes, or

       7     anything else that anybody wants to add when

       8     we get to Dallas.  So I think the time will

       9     be well spent there.

      10               But this is a good first step for

      11     the Commission to commit specific ideas to

      12     papers here today.  All of you should have a

      13     copy of it.  In fact, mine is dated.  It's

      14     shown a sixth draft, dated December 2nd.

      15               Why don't we turn to page 4 of the

      16     issues and options paper?  Page 4 being the

      17     question with respect to international tax

      18     and tariff issues.

      19               The option offered in No. 1 may be

      20     a topic of some discussion.  The options in 2

      21     through 4 may be consensus opinion -- may be

      22     a consensus opinion of the Commission, based









                                                             312
       1     on the resolutions that were passed at the

       2     New York meeting.

       3               The first item under policy options

       4     is "work towards harmonization of certain

       5     basic principles."  Again, inconsistent basic

       6     tax policies may impede or limit the

       7     international growth potential of electronic

       8     commerce.  Non-discriminatory and neutral

       9     taxation of electronic commerce are two

      10     fundamental principles that should be adopted

      11     worldwide in order to ensure that electronic

      12     commerce serves as a viable trade vehicle

      13     between trade countries.

      14               Jurisdictional and administrative

      15     rules should be harmonized so that tax

      16     administrators can coordinate collection and

      17     remittance of transactional taxes due with

      18     respect to cross-border transactions.

      19     Harmonization should ensure that no taxable

      20     transaction is subject to a double taxation

      21     or no taxation.

      22               This is a harmonization principle,









                                                             313
       1     to work towards on the international level.

       2     Let me read at least the headers on the

       3     others, and then come back and open the floor

       4     for further discussion.

       5               Set No. 2:  There should be no

       6     international taxes on electronic commerce.

       7               No. 3:  Recommended tariff-free

       8     Internet.

       9               No. 4, which is right at the bottom

      10     of the page, with its commentary on the back

      11     page:  Recommend continue federal leadership.

      12               Again, there is commentary on each

      13     one, which we can read through.  But the

      14     first is harmonization.  Second is opposition

      15     to all international taxes on electronic

      16     commerce.  Third is opposition to all

      17     international tariffs on electronic commerce.

      18     Fourth is aggressive leadership by the

      19     executive branch to pursue a tax and

      20     tariff-free international trading zone on the

      21     Internet.

      22               Let's open the floor for discussion









                                                             314
       1     on any of these areas.  Let's begin by asking

       2     is there opposition to any of these options?

       3               Mr. Gene Lebrun?

       4               MR. LEBRUN:  Chairman Gilmore, I don't

       5     necessarily have any opposition and I was not

       6     a member of this subcommittee, but why are we

       7     singling out E-commerce from other types of

       8     international commerce?

       9               Whether it be, you know, over the

      10     mail or shipping or telephonic commerce,

      11     information, as I understand it, is one of

      12     the largest and fastest growing items of

      13     international commerce today, whether it's

      14     trade names or whatever.  Why are we singling

      15     out electronic commerce?

      16               CHAIRMAN GILMORE:  You can certainly ask

      17     the drafting committee people that question,

      18     but I think it's because this Commission is

      19     intended to offer recommendations to the

      20     Congress with respect to the Internet and

      21     E-commerce across the world.  To extend

      22     ourselves out into general tariff and trade









                                                             315
       1     policy would probably go beyond the scope of

       2     this Commission.

       3               Mr. George, do you have a response

       4     on that?

       5               MR. VRADENBURG:  Yes, sir.  Indeed,

       6     the charge to this advisory committee on

       7     electronic commerce was to study the issues

       8     surrounding the Internet and electronic

       9     commerce.  Clearly, one ought to take account

      10     of the large context in which all of this is

      11     occurring, but the charge was to study the

      12     international tax context in the context of

      13     electronic commerce.

      14               MR. LEBRUN:  Mr. Chairman, if I may

      15     follow-up?  I guess I'd inquire, then, of the

      16     federal representatives here, who represent

      17     the Department of Commerce, the Treasury and

      18     U.S. trade, does it make sense for us as a

      19     country to single out electronic commerce and

      20     treat that differently than other types of

      21     commerce when it comes to international

      22     tariffs?









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       1               CHAIRMAN GILMORE:  Go ahead,

       2     Mr. Guttentag.

       3               MR. GUTTENTAG:  No, certainly we

       4     have to deal with all kinds of taxes, which

       5     we do internationally, but I think as

       6     Mr. Vradenburg has pointed out, that our

       7     mission has been directed in this area.  As I

       8     commented yesterday, we are working in this

       9     area along the lines set forth in some of

      10     these proposals here.  So we would support

      11     certainly the idea of agreeing to certain

      12     standards.  As I said yesterday, we would

      13     also support the US work within the OECD,

      14     which presently has a mandate to work on

      15     these.  We would certainly also involve,

      16     Mr. Chairman, all of the interested

      17     stakeholders.

      18               There's a reference in here to

      19     involving the states and localities.  We

      20     think that all of the interested stakeholders

      21     should be consulted with respect to the

      22     issues as they affect them.









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       1               CHAIRMAN GILMORE:  Let's see, let's let

       2     Robert Novick say something and then we'll

       3     come back to Grover Norquist.

       4               Robert?

       5               MR. NOVICK:  I think on the tariff

       6     issue this reflects, as we've discussed

       7     before, longstanding administration policy to

       8     keep the Net tariff-free.  It reflects the

       9     resolution that was passed by the Commission

      10     at its last meeting.

      11               E-commerce is somewhat different

      12     than tariffs on the rest of the economy, in

      13     that currently no one imposes tariffs on

      14     E-commerce.  That's what we'd like to see

      15     maintained.

      16               The administration policy over many

      17     administrations has tried to systematically

      18     reduce tariffs on goods across the world.  So

      19     this is perfectly in line with longstanding

      20     administration policy, this administration

      21     and previous administrations.

      22               CHAIRMAN GILMORE:  Mr. Norquist?









                                                             318
       1               MR. NORQUIST:  Yes.  Pat Buchanan

       2     never quite understands this, but tariffs are

       3     taxes.  As was just said, since the '60s, at

       4     least, it's been American policy from

       5     different presidents of both parties to phase

       6     down all tariff and non-tariff barriers for

       7     trade, not just regionally, but

       8     internationally.

       9               If Mr. Lebrun would like, I'd be

      10     willing to say that we're in favor of

      11     reducing all tariffs.  But if we're to limit

      12     ourselves to speaking to electronic commerce,

      13     given that that's not taxed now, we should

      14     start by saying first do no harm.  Let's not

      15     impose tariffs and international taxes on

      16     electronic commerce while we continue to

      17     support the administration's efforts to

      18     reduce tariff barriers and non-tariff

      19     barriers in all circumstances.

      20               CHAIRMAN GILMORE:  Nonetheless, I don't

      21     think there's any authority on the part of

      22     this Commission to extend itself into tax or









                                                             319
       1     into tariff policy, generally, nor have we

       2     done any research or presented anything with

       3     respect to any of that.

       4               Anyone else wish to kick in on this

       5     international section, Roman I?  David

       6     Pottruck.

       7               MR. POTTRUCK:  Chairman, I have

       8     just a question on process here.  We're not

       9     assuming that no comment means approval or

      10     agreement, it's just an opportunity to offer

      11     observation?

      12               For example, we passed by the

      13     introduction, and, in fact, there are several

      14     things I think were missing from that

      15     introduction, or that may be points of

      16     discussion.  I don't want to slow the process

      17     down, I know we have a lot of work to do this

      18     afternoon.

      19               So I just would like some sense of

      20     the process we're going to use here.  We're

      21     going to go through this, people are going

      22     to, section-by-section, offer thoughts,









                                                             320
       1     additions, dialogue, discussion, and then

       2     we'll move on to the next thing.  We'll have

       3     more work in between the meetings to see

       4     where we can forge consensus or not forge

       5     consensus, come back in Dallas, and we will

       6     have people vote there to see in the public

       7     domain where there's consensus and where

       8     there isn't.  Does that sound right?

       9               CHAIRMAN GILMORE:  Yes, that is, I

      10     believe, what we're doing here today.  We'll

      11     have a very clear sense, I think, at the

      12     conclusion of this two hours about where the

      13     controversial areas are and where the likely

      14     serious votes will be in Dallas.  So I would

      15     agree with that.  I think there will be

      16     ongoing discussions.

      17               Let me also say again, as we have

      18     said in the work plan and otherwise, anyone

      19     can offer a resolution at any time if it's

      20     properly filed.  Anyone can offer an

      21     amendment to this in Dallas, either to take

      22     something in or to put something out.  So I









                                                             321
       1     would agree with all of that.

       2               With respect to the introduction, I

       3     have no difficulty, once we've completed with

       4     Roman I, doubling back and picking up the

       5     introduction.  No difficulty at all.

       6               Would anyone else like to add

       7     anything on Roman I?  Mayor Kirk?

       8               MAYOR KIRK:  Just one procedural

       9     question in that vein.  Because regrettably

      10     so, I may have to leave pretty close or right

      11     before 5:00 to make my plane.

      12               Is it your intent that we would

      13     vote on the Norquist resolution today, or

      14     that we're going to vote on everything in

      15     Dallas?

      16               CHAIRMAN GILMORE:  As a matter of fact,

      17     the rules say that if a Commissioner has

      18     properly filed and wishes to bring them

      19     forward, he has the right to do so.  It's my

      20     understanding that he wishes to do so.  It

      21     would be my intention of bringing those up

      22     right around 5:00, that would be my thought.









                                                             322
       1               MAYOR KIRK:  Does bringing them up

       2     presuppose that we're going to vote on them?

       3               CHAIRMAN GILMORE:  Oh, absolutely,

       4     unless they're tabled, they will be voted on.

       5               MR. ANDAL:  How about 4:45 or

       6     whenever?

       7               CHAIRMAN GILMORE:  Sure.

       8               MR. ANDAL:  So that he can

       9     participate?

      10               CHAIRMAN GILMORE:  Sure.  Would you like

      11     to do that?

      12               MAYOR KIRK:  I'd like to do that or

      13     just wait and hold off and have all the votes

      14     in Dallas.

      15               CHAIRMAN GILMORE:  At 4:45, let's take

      16     it up and see what the pleasure of the

      17     Commission is as to whether to take it up and

      18     discuss it or whether there's any other

      19     motion to be made here.  But I would like to

      20     bring it up before you have to leave.  Or any

      21     other Commissioner.  Unless, of course, some

      22     Commissioner wants to bolt out of here in the









                                                             323
       1     next five minutes, in which case we can't do

       2     anything about that.

       3               How about international tax and

       4     tariff issues, anybody else want to offer

       5     anything on this?

       6               I think that the point, really,

       7     that we're getting to here is that this

       8     Commission, through a lot of work and a lot

       9     of effort and a lot of staff work and a lot

      10     drafting, has pretty much reached an

      11     agreement on policy with respect to

      12     international tax and tariff issues, and

      13     reached a consensus on this matter.  Once

      14     again, they are not closed and may be

      15     readdressed again in Dallas.

      16               Mr. Pottruck, let's double back to

      17     the introduction and get your comments on

      18     that.

      19               MR. POTTRUCK:  Thank you.  First of

      20     all, this is a statement of broad, sweeping

      21     themes.  I would offer a theme that I think

      22     is important here.  That is the theme that









                                                             324
       1     perfection is not practical.  We cannot let

       2     perfection be the enemy of the good.  So we

       3     may come up with an approach that is not

       4     perfect, but which goes a long way to a great

       5     solution to move the ball forward.

       6               So I would simply offer that as a

       7     theme that we may want to offer to the

       8     Congress as a guiding principle.

       9               Secondly, we say here in No. 11,

      10     not to nitpick, but just as a thought "In

      11     order to foster the growth of electronic

      12     commerce any recommendations for change

      13     should remove financial and logistical

      14     burdens on sellers."  That's a pretty big

      15     step forward, as oppose to the word

      16     "minimize."

      17               So I thought that was a very big

      18     standard to set for ourselves, something,

      19     perhaps to think about.

      20               Then I think at some point there's

      21     going to be some degree of robust discussion

      22     around No. 7.  It's listed here, I think,









                                                             325
       1     very nicely, as a central policy question.

       2               It's about whether the Internet

       3     should receive some sort of preferential tax

       4     treatment temporarily, permanently.  I would

       5     suggest that we're going to need to have a

       6     dialogue around that in Dallas to see how

       7     people feel about that point.

       8               That's all.

       9               CHAIRMAN GILMORE:  No one would object,

      10     I suppose, to the introduction of the word

      11     "minimize financial and logistical burdens on

      12     sellers," as opposed to "remove."  So just be

      13     aware of that, Mr. Drafter, that we can do

      14     that and take that up, if necessary.

      15               I might say, by the way, that I had

      16     penciled in sellers and buyers.  But that can

      17     be delayed to another time.

      18               I agree with that "perfection is

      19     not going to be possible."  Does anyone

      20     object to that type of an approach?

      21               In the absence of that, let's go

      22     back to the point that Mr. Pottruck made on









                                                             326
       1     No. 7 and No. 8.  Let's just read that:

       2               "State and local and federal

       3     governments often grant tax preferences to

       4     certain forms of businesses, marketing and

       5     commerce, for a variety of public purposes.

       6     Internet commerce produces significant

       7     benefits affecting the general public.  A

       8     central policy question for government at all

       9     levels is whether these benefits produced by

      10     the Internet commerce justify similar

      11     preferential tax treatment or whether they be

      12     tax treatment that neither advantages nor

      13     disadvantages electronic commerce."

      14               I agree that that will be a robust

      15     discussion in Dallas and shortly.

      16               MR. POTTRUCK:  My own perception,

      17     and I'm not trying to mince words, is that

      18     what's driving our economic expansion is

      19     innovation.  The Internet happens to be an

      20     enormous source and focus of innovation, but

      21     we have innovation on entertainment.

      22               We have innovation on education.









                                                             327
       1     We have innovation in the stock market.  We

       2     have innovation on things called ECNs, which

       3     is creating competition with stock markets,

       4     the result of which are lower and lower costs

       5     to all participants.  The burgeoning of

       6     innovation is largely tied to lots of things

       7     that are going on.  The Internet is a piece

       8     of it.  Technology is a piece of it.  Reduced

       9     regulation, greater global competition, all

      10     of this is part of what's powering our

      11     economy forward.

      12               So I sometimes find that we have

      13     given all of our economic wonder to the

      14     doorstep of the Internet.  I think that's

      15     rather an overstatement of where the United

      16     States is today.

      17               CHAIRMAN GILMORE:  More comments?  Ron

      18     Kirk?

      19               MAYOR KIRK:  I'm trying to be brief,

      20     but, David, I think that is a wonderfully

      21     astute observation.  It occurred to me that,

      22     and I'm not arguing that we should go back,









                                                             328
       1     but I don't know that we've ever defined the

       2     Internet economy.  It just seems to me that

       3     we entered into this and just said the

       4     Internet economy is great, and everything

       5     that's happening to the economy we've just

       6     presumed has been a part of that.  I think

       7     that's a very astute observation.

       8               But I will tell you that I think

       9     the policy, the question itself, is phrased

      10     exactly correctly, that we should make the

      11     determination of whether it's due special

      12     treatment.  I think, David, your observation

      13     goes more to the previous sentence, that this

      14     Internet commerce has produced all of these

      15     benefits, separate from all of those

      16     distinctions that you made.  But I appreciate

      17     you for bringing that up.

      18               CHAIRMAN GILMORE:  Electronic commerce

      19     is defined in the statutory definitions,

      20     which can be reviewed.  Again, the Council,

      21     of course, is in a position to read that to

      22     you, if necessary.









                                                             329
       1               We may have an issue about whether

       2     or not that kind of this, this article,

       3     whether this should be included in the final

       4     report or not.  We can take that up to

       5     Dallas.

       6               My own position is that this is

       7     exactly the issue with respect to the task

       8     that we have before us.  I concur that the

       9     economy is doing well generally and that the

      10     Internet is only a piece of it.  But our

      11     treatment of that piece is what is the topic

      12     of this conference, of this Commission.

      13               Shall we proceed?  Off we go to

      14     Roman II, which I believe is on page 6.

      15               MR. SOKUL:  Governor?

      16               CHAIRMAN GILMORE:  Yes, sir?  Stan

      17     Sokul?

      18               MR. SOKUL:  Can I make a comment,

      19     just a brief comment on international before

      20     we move on?

      21               CHAIRMAN GILMORE:  Certainly.

      22               MR. SOKUL:  Keeping in mind that









                                                             330
       1     we're recommending policy positions or other

       2     recommendations to Congress, on a couple of

       3     these, the first and the fourth, in

       4     particular, I wonder what the role of

       5     Congress is.  Should we add that Congress

       6     upstep its involvement in these areas, this

       7     oversight over the Executive Branch so that I

       8     think if there were tariffs, Congress would

       9     be involved.

      10               If there were taxes, Congress would

      11     be involved.  But in terms of harmonization,

      12     the principles, and federal leadership, and

      13     the way this is phrased, the involvement of

      14     different groups and interests that maybe

      15     Congress does have a role to play in that, to

      16     ensure that there are hearings, processes,

      17     and other things that Mr. Guttentag,

      18     Mr. Pincus, maybe Mr. Novick, are pursuing

      19     these things and are actually involving as

      20     many people as possible.  So maybe we should

      21     add some words about congressional activities

      22     in this regard, as well.









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       1               CHAIRMAN GILMORE:  Mr. Norquist?

       2               MR. NORQUIST:  I hope that it's a

       3     friendly amendment to point out that

       4     Congress, obviously, is going to have to pass

       5     legislation to reduce tariffs working with

       6     the administration.  So I assume it would be

       7     friendly to give Congress also a role in

       8     reducing tariffs and keeping electronic

       9     commerce internationally tax-free.

      10               But I think it would be appropriate

      11     to single out and praise the Clinton

      12     administration and previous administrations

      13     for their continued policy of reducing

      14     tariffs over time, and of keeping the

      15     Internet tax-free.  So I think we should both

      16     specifically commend the Clinton

      17     administration for its positions, and also

      18     make the comment that obviously Congress

      19     plays a role in continuing this process.

      20               CHAIRMAN GILMORE:  Being nonplussed.

      21               MR. NORQUIST:  I don't get to do

      22     this a lot, so I thought I'd take the









                                                             332
       1     opportunity.

       2               CHAIRMAN GILMORE:  We don't get

       3     commended a lot.  Mr. Novick?

       4               MR. NOVICK:  Just for the record,

       5     in the area of E-commerce, since we have a

       6     tariff-free environment, there is no action

       7     that's necessary.  It's rather taking no

       8     action.  In the area of reduction of tariffs

       9     as to goods and other matters, to the extent

      10     that we don't already have authority to do

      11     it, Congress would be involved in that.

      12               But to the extent our mandate is

      13     limited to E-commerce, there's no

      14     congressional involvement in implementing the

      15     maintenance of the existing structure.

      16               In terms of oversight, I can assure

      17     you that Congress exercises that role quite

      18     diligently, and all of us have appeared

      19     before Congress and briefed members and their

      20     staffs on all of the issues we're pursuing,

      21     and our policies in this arena.

      22               MR. SOKUL:  In response, my only









                                                             333
       1     comment is, I guess more stylistic than that.

       2     When we make our recommendations in these

       3     options.  Keep in mind who we're talking to.

       4     We're not talking necessarily to the USTR.

       5     We're talking to Congress.  But it's as

       6     simple as that.

       7               CHAIRMAN GILMORE:  Stan, I would suggest

       8     you draft a little language to be included

       9     as 5.  Let's let Mr. Novick, Guttentag, and

      10     Pincus see it and see if they wish to offer

      11     an alternative.  Then we'll vote in Dallas,

      12     although this is, of course, perhaps not

      13     central, but it is a nuance, and if you would

      14     add it about communicating with AOL and staff

      15     people, I would appreciate it.

      16               Mr. Guttentag?

      17               MR. GUTTENTAG:  Just briefly.

      18     Mr. Norquist mentioned that there seemed to

      19     be some agreement there should be no

      20     international taxes on electronic commerce.

      21     I'm not quite sure what that means in the two

      22     sentences under there.  You mentioned,









                                                             334
       1     Mr. Chairman, that you thought there was

       2     consensus on these issues.

       3               I find that somewhat problematic.

       4     We heard, for example, the E.U. say they

       5     impose a value added tax on goods coming from

       6     the United States.  Do we really mean here

       7     that the U.S. should prohibit such taxes?  If

       8     so, it's rather difficult to know how we

       9     would do that and whether that is the best

      10     policy.  And whether we would want goods

      11     coming into the United States from overseas

      12     being exempt from sales taxes.

      13               So, I think those issues are open.

      14     I think some of the issues Mr. Sokul raised

      15     are good.  As he said, maybe drafting issues

      16     that we can solve.  This one here seems to be

      17     a more substantive issue, and I think should

      18     be one of the open issues.  Thank you.

      19               CHAIRMAN GILMORE:  Open issue it is,

      20     although I certainly would not approve the

      21     E.U.ís VAT tax approach.  I think I

      22     implied as much, and I certainly would hope









                                                             335
       1     that this group would not think that the

       2     E.U.'s taxation policy should be a guide post

       3     to the United States.  Nonetheless, it is an

       4     open issue for further discussion.

       5               Mr. Pincus?

       6               MR. PINCUS:  I was just going to

       7     add I think that I concur with a lot.  As I

       8     said, a lot of concern about what the EU's

       9     doing.  But probably what we say in this

      10     paragraph may be influenced by what we say

      11     with respect to our domestic system.  So it

      12     may depend on things that come later on in

      13     the document.

      14               CHAIRMAN GILMORE:  Let's move on, then,

      15     to page 6, tax treatment of Internet access.

      16               Tax treatment of Internet access,

      17     this is the area where there indeed may be a

      18     consensus point of view.  There are three

      19     policy options that are outlined here for

      20     final report.

      21               First, to extent the current

      22     moratorium against Internet access taxes









                                                             336
       1     contained in the Internet Tax Freedom Act for

       2     an additional five years.  But to eliminate

       3     the grandfather clause for those states that

       4     have taxes on the Internet access.

       5               If you'll recall, there was a

       6     grandfather clause put into the Internet Tax

       7     Freedom Act, allowing any states or

       8     localities that are, in fact, taxing access

       9     to be able to continue to do that.

      10               In our final report to the

      11     Congress, this option would suggest that it

      12     be consistent across the nation, that there

      13     should not be access taxes on the Internet.

      14               The second element in this is:

      15     Prohibit all taxes on Internet access, which

      16     is the same, a similar approach.  It might

      17     not be an extension of the moratorium, but

      18     just simply a straight-up prohibition on

      19     taxes on the Internet access.

      20               Third:  Permit states and

      21     localities to tax Internet access.

      22               Those seem to be the three options









                                                             337
       1     that have been discussed and presented in the

       2     paper.  Anyone else may have an additional

       3     point to put in, or may wish to comment on

       4     any of these.  The floor is open to

       5     discussion of taxation of Internet access in

       6     the United States.

       7               We may conclude, of course, this

       8     fairly represents the choices.  Would anyone

       9     like to argue for or against this?

      10               MR. POTTRUCK:  I'd like to make a

      11     comment.

      12               CHAIRMAN GILMORE:  David?

      13               MR. POTTRUCK:  I see the

      14     alternatives here, Governor, and yet I'm

      15     trying to recall all of the dialogue we've

      16     had.  I can't remember anybody saying that

      17     they're in favor of imposing transaction

      18     taxes on Internet access.

      19               So I see it here as an option, to

      20     permit it, but I'm wondering if it's an

      21     option that anyone at all supports or it's

      22     simply presented here to define the potential









                                                             338
       1     range of choices that we have.  I realize the

       2     effort your group has made, and AOL, to be

       3     fair.  But I have yet to hear anyone suggest

       4     that there should be access taxes for the

       5     Internet.

       6               CHAIRMAN GILMORE:  We'll let George

       7     Vradenburg on it, and I may call for a

       8     consensus on this.

       9               MR. VRADENBURG:  David, you're

      10     right.  These policy options are intended to

      11     be options.  So the first option is extend

      12     the moratorium for five years, eliminating

      13     the grandfather.  The second one is make

      14     permanent, essentially, any state taxation on

      15     Internet access.  The third one was to

      16     permit.

      17               So these are choices.  What we

      18     needed for the drafting subcommittee is at

      19     least some directional element.

      20               As you will see at the end, as an

      21     area of potential agreement, we thought that

      22     there was an emerging consensus for either









                                                             339
       1     Option 1 or 2.

       2               So Option 1 is an extension for

       3     five years, on the grounds that we shouldn't

       4     decide this permanently.  Option 2 is a

       5     permanent bar on it.  So I think if, in fact,

       6     you thought there was consensus emerging

       7     against taxing the basic access to the

       8     Internet, then I think the choices, if

       9     there's a direction here, is either 1 or 2,

      10     and not 3.

      11               CHAIRMAN GILMORE:  Dean Andal?

      12               MR. ANDAL:  I agree with David.  In

      13     fact, it's one of the few items where I've

      14     actually heard no dissent on the Commission.

      15     Maybe what we could do is unless, at least

      16     one Commissioner here today wants it to stay

      17     in the policies and options paper, we could

      18     remove item 3.

      19               I haven't heard from a single

      20     Commissioner that supports that view.

      21               CHAIRMAN GILMORE:  Gene Leburn?

      22               MR. LEBRUN:  I think it's premature









                                                             340
       1     to start removing anything.  I think this

       2     sets forth the issues.  But I think there's a

       3     lot of things we have to consider like

       4     bundling of types of Internet access.  We

       5     have companies in South Dakota that are going

       6     to provide access to your phone systems, the

       7     Internet, your cable, all as a bundled

       8     process.  I think all of those issues have to

       9     fairly developed before we make any final

      10     decisions.

      11               If you start prohibiting taxes on

      12     the access, is the question then going to be

      13     protection?  There is a tax in place now to

      14     access some things and not others.  If you

      15     bundle those, I think there's too many issues

      16     for us to start making final decisions.

      17               I think there's phraseology that's

      18     included in here that I don't agree with

      19     in 1, 2 and in 3.  I think it should be left

      20     on the table for further consideration when

      21     we get to Dallas.

      22               MR. ANDAL:  I stand corrected.









                                                             341
       1               CHAIRMAN GILMORE:  Mr. Guttentag?

       2               MR. GUTTENTAG:  Yes, I think we

       3     would say that Internet-specific access fees

       4     should not be charged.  I'm concerned, just

       5     as a matter of process as we get into that, I

       6     can't agree with some of this language, or I

       7     would propose that we have to review the

       8     language.  I would think we want to define

       9     what we mean by Internet access fees.

      10               I'd like to know, for example, when

      11     we talk about grandfathering, before we

      12     eliminate this, and, therefore, put a mandate

      13     on whatever states or localities are imposing

      14     them, I'd like to know how much is involved.

      15     What are we talking about specifically?

      16               So I think it's the language and

      17     getting some more information.

      18               But other than that, I think that

      19     we see eye-to-eye pretty much on those

      20     issues.

      21               CHAIRMAN GILMORE:  All right.

      22     Mr. Norquist.  I have a comment, but go









                                                             342
       1     ahead, Mr. Norquist.

       2               MR. NORQUIST:  I guess apart from

       3     wanting to wait, is there any of the

       4     Commissioners who think that we ought to be

       5     taxing access?  I mean, I brought it up in

       6     New York, largely because Governor Locke had

       7     brought it up consistently back in

       8     Williamsburg.  Everybody seemed to agree with

       9     Governor Locke's position in Williamsburg,

      10     which is why I put it together as a

      11     resolution for New York, and here, as well.

      12               I'm pleased to say that I think

      13     we're getting consensus not just in this

      14     Commission on this issue, but nationally.

      15     All of the Republican presidential candidates

      16     have weighed in.  I understand.  I sent a

      17     letter to Vice President Gore asking his

      18     position.  I was told today that he is quoted

      19     in Newsweek saying he's opposed to taxing

      20     access.  I have not seen this article, but

      21     one of the reporters told me about it.  I

      22     think that level of broad-based consensus in









                                                             343
       1     the country bodes very well and probably

       2     flows from our Commission's fine work.

       3               CHAIRMAN GILMORE:  I'm going to ask the

       4     legal counsel to read the definition of

       5     Internet access, as contained in the Internet

       6     Tax Freedom Act.

       7               Tom?

       8               MR. GRIFFITH:  This is from Section 2(b),

       9     Internet Access Services.

      10               "The term 'Internet access

      11     services' means the provision of computer and

      12     communication services through which a

      13     customer using a computer and a modem or

      14     other communications device may obtain access

      15     to the Internet, but does not include

      16     telecommunication services provided by a

      17     common carrier."

      18               MR. LEBRUN:  Mr. Chairman?

      19               CHAIRMAN GILMORE:  Mr. Lebrun?

      20               MR. LEBRUN:  That makes my point.

      21     If we have a provider who bundles all of

      22     those things together and there's one charge,









                                                             344
       1     and that includes not just Internet access,

       2     as just read, but other types of commerce and

       3     telecommunications or whatever, how are you

       4     going to split them out?  I think those are

       5     issues we have to address, and we're not

       6     prepared to do so at this point in time.

       7               CHAIRMAN GILMORE:  This, it seems to me,

       8     would be a place where we typically could get

       9     some consensus, even if it is bundled into

      10     something else.  But I don't think that we're

      11     in any kind of draconian position here with

      12     this Commission today.  So, does anyone have

      13     any comment on it?

      14               I think we'll bow to Mr. Lebrun's

      15     suggestions on this and maintain the document

      16     as is, but we at least know that we may have

      17     an issue here that requires a little more

      18     attention when we get to Dallas.

      19               All right.  Ladies and gentlemen?

      20               MAYOR KIRK:  Governor?  I'm sorry,

      21     one though I had, Gene, and for someone much

      22     more knowledgeable in this that may help Gene









                                                             345
       1     through that.  There might be one option

       2     under No. 1 is rather than eliminating the

       3     grandfather clause, if you extend it for five

       4     years and somehow gives those states that

       5     have the bundling problem that five-year

       6     period to try to work that out.  So that they

       7     can continue to apply the telecom or others

       8     and not tax.  That might be a way we can get

       9     that resolved in which we can get comity

      10     on that issue.

      11               CHAIRMAN GILMORE:  That language could

      12     go into Option 1.  Would that be satisfactory

      13     so as to remove 3, or would you just still

      14     want everything.

      15               MAYOR KIRK:  I wasn't suggesting to

      16     remove 3.  I was just saying somebody smarter

      17     than me can take that and work with it, and

      18     maybe in Dallas that may be a way to break

      19     that log jam.

      20               CHAIRMAN GILMORE:  So you're not trying

      21     to break the log jam today?

      22               MAYOR KIRK:  No.









                                                             346
       1               CHAIRMAN GILMORE:  Okay.

       2               MAYOR KIRK:  It was just a thought.

       3               CHAIRMAN GILMORE:  Move, if you would,

       4     George, if your staff please would make a

       5     note of that point?

       6               Move, if you would, please, to page

       7     8 of the issues and options paper.  This is

       8     policy options regarding the tax treatment of

       9     telecommunications service providers.  The

      10     paper outlines five options regarding

      11     telephone taxes paid by the consumers of

      12     America.

      13               It appears that some of these

      14     options are hybrids of some of the others,

      15     and maybe the discussion today can merge some

      16     of these options.  Let's talk about what they

      17     are.

      18               Policy Option 1 is to dramatically

      19     simplify current telecommunications taxes and

      20     repeal the federal three percent tax on local

      21     and long distance telephone service.  So

      22     we're talking about a simplification.  As we









                                                             347
       1     have learned repeatedly in our discussions,

       2     there are, of course, state and local taxes

       3     on telecommunications.  And there is a

       4     federal three percent tax.  This Option 1

       5     would call for the repeal of that.

       6               2 is:  Eliminate the federal 3

       7     percent tax all consumers pay on their local

       8     and long distance telephone bills, and call

       9     for the federal government to undertake an

      10     in-depth study of the disproportionate tax

      11     burden on the telecommunications industry.  I

      12     don't know if we have any telephone people on

      13     this panel, or not, but that's probably where

      14     that came from.

      15               3:  Eliminate, and this is, I might

      16     say, is my proposal, eliminate 2 percent of

      17     the federal telephone tax and make the other

      18     one percent available to states as an

      19     incentive to encourage them to simplify their

      20     state and local telephone taxes.

      21               Number 4:  Encourage state and

      22     local governments to work cooperatively with









                                                             348
       1     the telecommunications industry to reduce

       2     complexity in state and local telephone tax

       3     structures, with the objective of treating

       4     like services the same for tax purposes.

       5               And 5:  Present the current tax

       6     structure for telecommunications taxes.

       7               Any of those, of course, would be

       8     options.  I might say that as people are

       9     certainly aware, my proposal, which has been

      10     filed appropriately with the Commission, is

      11     about seven elements, and that is contained

      12     within the various categories of this paper.

      13     This is one piece of that that I have

      14     proposed.  But the array of other options are

      15     there, as well.

      16               Is there discussion on this,

      17     particularly perhaps on the issue of the

      18     federal three percent telecommunications tax?

      19     There are two formats suggested, one is the

      20     elimination of the three percent tax, the

      21     other is my proposal to offer one percent as

      22     an incentive to the states, that would go









                                                             349
       1     back to the states.

       2               I will just say that I don't think

       3     that there is any loss because of Internet

       4     taxes, I think I've made that clear.  But if

       5     there is, the numbers of losses of Internet

       6     commerce, some estimates have been that

       7     Internet commerce is in the range of $270

       8     million a year nationwide.  This would put

       9     $1.7 billion on the table to go back to the

      10     states.  Nice windfall.  The feds might not

      11     like it, but it certainly would eliminate

      12     this possibility of all the states and little

      13     people starving.

      14               Mr. Norquist?

      15               MR. NORQUIST:  Yes.  This has come

      16     up before and we've discussed this, getting

      17     rid of the three percent telecommunications

      18     tax, which was originally put in to fund the

      19     Spanish-American War 101 years ago.

      20               I would just ask here whether

      21     anyone feels strongly that it's a good idea

      22     to have this and we should keep it.  Also,









                                                             350
       1     specifically does this administration, the

       2     Clinton administration, have a position on

       3     whether you consider this an important tax to

       4     maintain.

       5               CHAIRMAN GILMORE:  Hands are raised.

       6     Mr. Lebrun first, I think, even though the

       7     question was directed to some of the fed

       8     guys.  But, still, Mr. Lebrun?

       9               MR. LEBRUN:  My only comment would

      10     be is whether or not we recommend a repeal of

      11     that should be part of a final

      12     recommendation.  I think it would be wrong

      13     for us to start singling out that issue and

      14     making a decision that early.

      15               I think when we get our whole

      16     package done, then we make a decision whether

      17     or not that's part of it.  And I would urge

      18     that we wait until then before we just start

      19     taking any positions on it.

      20               MR. NORQUIST:  We'll have an

      21     opportunity to vote on my resolution later.

      22     I was just asking where people were on this.









                                                             351
       1     It's not a vote or anything.  I'm just asking

       2     does anybody think this is an important tax

       3     to maintain.  Specifically, since it's

       4     federal revenue, whether the Clinton

       5     administration has a position.  And if you

       6     don't know that they have one, could you get

       7     one for us?

       8               CHAIRMAN GILMORE:  It's certainly a much

       9     cleaner document if we can agree on any of

      10     the policy positions that are contained

      11     within the document.  But the document is

      12     designed to be a broad array of putting the

      13     options down on paper.

      14               Mr. Guttentag, you had your hand

      15     up?

      16               MR. GUTTENTAG:  Yes.  I think in

      17     answer to Mr. Norquist, the administration

      18     does feel that this is an important tax.

      19     This is a tax which raises $4 billion a year

      20     over the next 10 years.  Our figures show $52

      21     billion over a 10-year period of revenue loss

      22     if it were to be repealed.









                                                             352
       1               In putting it in terms of what it

       2     buys, it's far larger, these tax revenues,

       3     than the administration tax proposals on

       4     child care, dependant care, health and the

       5     environment all combined.  So in answer to

       6     Mr. Norquist's issue, this is an important

       7     tax.  Of course, the tax policy is decided at

       8     the highest levels of the Clinton

       9     administration in connection with the entire

      10     budget process with which I know some of you

      11     are familiar.

      12               We can understand.  I understand

      13     Mr. Norquist and other comments and positions

      14     regarding this tax, and certainly I can

      15     understand there are various sides to this

      16     issue.  But in answer to the question of the

      17     importance of this, I think you can see the

      18     importance of this revenue and the need to

      19     give careful and most careful consideration.

      20     Therefore, we certainly are not in a position

      21     to believe that there could be consensus on

      22     this issue.









                                                             353
       1               CHAIRMAN GILMORE:  Mr. Pottruck?

       2               MR. POTTRUCK:  I'm speaking here

       3     simply as a consumer.  My company really has

       4     no real stake in this issue, but as a

       5     consumer and as an observer, as a member of

       6     our Commission, I would like to urge the

       7     Commission to consider recommending the

       8     repeal of this tax.  This is the time to do

       9     it.

      10               We have the tax revenues we need.

      11     Grover has made the quip and I suppose it's a

      12     joke, but it's really serious.  I mean, we

      13     obviously won the Spanish-American War.  We

      14     don't need this tax any more.

      15               But more importantly this tax is a

      16     very regressive tax.  The poorest households

      17     are paying this tax.  We want to make access

      18     to the Internet to all telecommunications

      19     more available, less expensive, and I think

      20     we'd be taking a step forward to have a clear

      21     position coming out of Dallas that supports

      22     the repeal of this tax and as a good step for









                                                             354
       1     improving the telecommunications in America.

       2               CHAIRMAN GILMORE:  Paul Harris?

       3               MR. HARRIS:  Yes, I'd like to ask

       4     Mr. Guttentag, given the fact that the

       5     federal excise tax on telecommunications

       6     makes it more difficult for poor people

       7     across the country to access the Internet,

       8     how does that square with the

       9     administration's position on closing the

      10     digital divide?

      11               MR. GUTTENTAG:  As I suggested,

      12     there's no question that there are some

      13     merits for some of the proposals to reduce or

      14     eliminate this tax.  But they have to be

      15     considered in connection with these other

      16     budgetary considerations.  I mentioned what

      17     is happening to those funds that are provided

      18     by this tax.  Those are important budgetary

      19     issues and we can't just drop those from the

      20     budget.

      21               MR. HARRIS:  Which of the budgetary

      22     issues are more important in the 21st century









                                                             355
       1     than closing the divide that now exists

       2     between middle income families and poor and

       3     rural families who don't have access to all

       4     of the information services, goods,

       5     marketplaces, that are available over the

       6     Internet?  Which one of the items, I'm

       7     curious to know, are more important than

       8     that?

       9               MR. GUTTENTAG:  I don't have the

      10     liberty of making those calls, Mr. Harris,

      11     but I did point out what these, the kinds of

      12     programs that a tax of this magnitude funds.

      13     We're spending, we're collecting more on this

      14     tax and it's used for child care, dependant

      15     care, a lot of which goes to the same kinds

      16     of people that you're talking about.

      17               MR. NORGUIST:  Could I get a

      18     clarification?  Are you telling us that the

      19     $4 billion a year is set aside for child

      20     care?

      21               MR. GUTTENTAG:  The federal excise

      22     tax goes into the general funds.









                                                             356
       1               MR. NORGUIST:  So it could be spent

       2     on tobacco subsidies?  I mean, the government

       3     does a lot of different things with money.

       4     You're not telling us that this is earmarked

       5     just for good things.  It goes into general

       6     revenues and gets spent, right?  Am I

       7     correct?

       8               MR. GUTTENTAG:  Yes, that's right.

       9               MR. NORGUIST:  So you had a list of

      10     things that didn't have any relationship to

      11     this tax, though.

      12               MR. GUTTENTAG:  I'm quantifying the

      13     amounts collected on this tax with the tax

      14     benefits provided in these other programs.

      15               MR. NORGUIST:  That's about the size

      16     of the sugar subsidy.

      17               CHAIRMAN GILMORE:  I want to get in on

      18     my proposal on this here in just a moment,

      19     but I don't want to jump ahead of anyone.

      20               Mr. Pincus?

      21               MR. PINCUS:  Thank you, Governor.

      22     Just to elaborate on what my colleagues said.









                                                             357
       1     I think that we recognize the policy issue

       2     that Mr. Pottruck and others have raised, but

       3     we're in an era of fiscal responsibility and

       4     budget cuts have to be paid for.

       5               The question just is what the

       6     offset is.  It's something that we're looking

       7     at and would welcome input from people on the

       8     Commission as we look toward Dallas.  A

       9     question if we're going to eliminate $4

      10     billion worth of revenue is how to make that

      11     up on the expenditure side if we're going to

      12     maintain fiscal discipline, which I think

      13     everyone would agree is important to our

      14     economic growth, maybe as important as the

      15     Internet.

      16               So I think that's just an issue

      17     that has to be wrestled with, as anyone does

      18     when they balance a budget.

      19               MR. NORQUIST:  But the budget could

      20     be balanced by reducing the growth of

      21     spending by $4 billion, not just by other

      22     taxes.  You only left one option and that's









                                                             358
       1     not the only option, correct?

       2               MR. PINCUS:  I didn't leave that

       3     option, actually, Grover.  I'm just saying it

       4     has to be paid for by an offset.  An offset

       5     could be an additional tax or it could be a

       6     reduction in expenditures.

       7               But everyone has to agree, and many

       8     people have different priorities.  What you

       9     might think was inappropriate $4 billion

      10     towards those expenditures, many other people

      11     on the Commission might not agree, and that's

      12     just a question that has to be played out as

      13     we look toward resolving this issue in

      14     Dallas.

      15               MR. NORQUIST:  You're telling us,

      16     then, that the Clinton administration opposes

      17     eliminating this tax, correct?

      18               MR. PINCUS:  No, I'm telling you.

      19               MR. NORQUIST:  That's the Clinton

      20     administration's position?  Question.

      21               MR. PINCUS:  I'm telling you that

      22     the Clinton administration's position is that









                                                             359
       1     we recognize the policy concern that

       2     motivates it, and we're certainly sympathetic

       3     with the things that Mr. Harris mentioned,

       4     but that we have to identify the $4 billion

       5     that we're going to reduce the budget by

       6     before we can sign on the dotted line.

       7     Because the President has the responsibility

       8     of presenting a budget that balances, which

       9     other people on this Commission may not have.

      10               CHAIRMAN GILMORE:  We're getting a

      11     little more discussion here than I expected

      12     on this, which is okay.

      13               Delna Jones, and then I'll come

      14     back to Dean Andal and then Stan Sokul.

      15               MS. JONES:  I think this is

      16     interesting, because, to one, it's a sugar

      17     subsidy, to another, it's tobacco, to another

      18     it's forest receipts.  But the issue, I

      19     think, is a couple of things.  First of all,

      20     I believe it is a discriminatory tax.  I

      21     think it needs to be dealt with.

      22               I don't know exactly how the









                                                             360
       1     Commission is going to come out as to how we

       2     deal with it, but I think it's an issue that

       3     we will want to deal with in Dallas.

       4               The other piece is that this is

       5     really a congressional responsibility, also,

       6     to balance a budget.  It isn't just the

       7     Clinton administration's responsibility.  So

       8     when you look at these issues, we have

       9     representation in Congress that's required to

      10     do this, as well.  That's where we ought to

      11     also direct some of our attention.  Because I

      12     know what it's like to try to speak for your

      13     boss.  It's not always easy, so.

      14               CHAIRMAN GILMORE:  But this is a

      15     communication to Congress.

      16               Let's see here, I think it was

      17     Mr. Andal and then Mr. Sokul.

      18               MR. ANDAL:  Just a point.  Other

      19     than these terribly hard choices you're going

      20     to have to make for this relatively small

      21     text, isn't one of the options that instead

      22     of cutting any spending you could take the









                                                             361
       1     excise tax out of the projected budget

       2     surplus that the administration is predicting

       3     over the next 10 years?  Instead of spending

       4     that new money, offering a tax cut and

       5     getting rid of this long-standing tax.

       6     That's one question of the administration.

       7               The second is, the administration

       8     thus far, although they sent three very

       9     bright people who sometimes agree with each

      10     other, has not made really any hard choices.

      11     This Commission is going to have to make some

      12     hard choices, one way or the other, in about

      13     three months.

      14               My strong recommendation to the

      15     administration is that you come to

      16     conclusions on some of these issues and let

      17     the rest of us know what you plan on doing.

      18     Are you for or against removing the excise

      19     tax?  We'd like to know.  Are you for or

      20     against taxing Internet access fees?  We'd

      21     like to know.

      22               Most of the rest of us are pretty









                                                             362
       1     outspoken about these subjects, but

       2     sympathizing with everybody concerned.  In

       3     other words, the administration, so far,

       4     seems to sympathize with the complexity of

       5     the Tax Code for small businesses.  At the

       6     same time, you sympathize with state and

       7     local governments that are worried about

       8     revenue loss.

       9               But sympathy doesn't offer

      10     solutions, nor does it come to a conclusion

      11     or make hard choices, which is what the

      12     Commission has to do.  So I'm hopeful that

      13     the administration in its collective wisdom

      14     will come to our next meeting prepared to

      15     vote.

      16               CHAIRMAN GILMORE:  Mr. Sokul?  I'm going

      17     to Sokul, Pottruck, Gilmore and Norquist, in

      18     that order so far.  Go ahead, Stan.

      19               MR. SOKUL:  Thank you.  I'd just

      20     note that I understand the position that the

      21     three administration officials are in.  But

      22     our next meeting is in March and the









                                                             363
       1     President's budget comes out in February 1st

       2     or late January?  February 1st.  So I think

       3     on this issue, which will be a line item in

       4     the budget or maybe it will, somehow this

       5     issue will be, the highest levels will have

       6     spoken on this issue by the time we get to

       7     Dallas.

       8               Now, as to repealing the tax, I

       9     agree with what Mr. Pottruck said and Delna

      10     Jones said, and also what Mr. Harris said,

      11     that this is a highly aggressive tax that

      12     affects the digital divide.  There's a couple

      13     of ways to deal with the digital divide.

      14               You can increase taxes, including

      15     on the poor, in order to help the poor, or

      16     you can, since the digital divide is

      17     income-related, cut taxes on the poor so they

      18     can, will have more income, perhaps to go buy

      19     something as simple as web TV, which is $50,

      20     I think, for the original versions.

      21               So I note that the E-rate is talked

      22     about, I'm jumping way ahead here, getting to









                                                             364
       1     Mayor Kirk's outline of digital divide options.

       2     I mean there's a lot of talk about the E-rate

       3     and that's basically a communications tax, as

       4     well.

       5               But sometimes reducing the tax is a

       6     way to help the poor, not increasing taxes in

       7     order to have people in Washington then

       8     funnel it back in particular ways.

       9               CHAIRMAN GILMORE:  Mr. Pottruck?

      10               MR. POTTRUCK:  I'd like to make

      11     another additional point, and I'd like to do

      12     this because we're not a telecommunications

      13     company.  There's a worldwide competition

      14     right now for in the telecom industry.  We

      15     want our U.S. telecommunications companies to

      16     be competitive worldwide.

      17               The nice thing about reducing taxes

      18     or the Gilmore proposal, which has a very

      19     effective process for phasing out the tax, is

      20     that if you lower a tax rate you still have

      21     all the administrative burden of filing the

      22     returns and reporting on all of that.  You









                                                             365
       1     eliminate a tax, all that administration goes

       2     away and it improves the efficiency of our

       3     economy and the competitiveness of our

       4     telecommunications companies.

       5               So as we think about all the

       6     options we have with our surplus and people

       7     are talking about income tax reductions and

       8     so forth.  I, for one, personally would much

       9     prefer to see the complete elimination of a

      10     tax so that we can have the efficiency that

      11     comes with that and the value that that

      12     provides to the poorer parts of our nation.

      13     So that, in particular, their access to all

      14     the benefits that come with

      15     telecommunications would be improved.

      16               CHAIRMAN GILMORE:  Let me take a moment,

      17     then, to restate once again what my proposal

      18     is.  It is an elimination of the 3 percent

      19     federal excise tax on communications.  My

      20     proposal is that we get rid of 2 percent of

      21     it right away.  One percent of it remains for

      22     a period of three years.  Then that be an









                                                             366
       1     incentive to the states.

       2               So as states simplify their

       3     telecommunications taxes, which is certainly

       4     better for our industry, that locals and

       5     states could then receive one percent back to

       6     them as an incentive.  At the end of that

       7     three years, those states which have, in

       8     fact, simplified, continue to be able to

       9     charge that additional 1 percent at the state

      10     or local level.

      11               At the end, though, it is an

      12     elimination of the federal tax.

      13               Now, the last time I think I

      14     checked, the national budget is $1.7

      15     trillion.  This elimination of this tax at

      16     the federal level would be $3.3 billion

      17     annually.  I haven't done the math, but it's

      18     not much.  There's no relationship, really,

      19     to the dramatic tax cuts that have been

      20     suggested and vetoed previously.  This is,

      21     however, a good start of giving tax relief

      22     back to the people of the United States.









                                                             367
       1               In fact, it would shift $1.7

       2     billion annually from the federal government

       3     back to the states and localities.

       4               Where, as Mayor Kirk has so

       5     eloquently said, the money is being spent on

       6     education, public safety, and other areas, as

       7     well.

       8               So it's not like the money will be

       9     lost.  The services that are being provided

      10     will simply be provided at the place where

      11     it's best provided, which is at the state and

      12     at the local level.

      13               So that's my proposal, and I

      14     certainly hope that the Commission will adopt

      15     it in Dallas.  But I wanted to be in a

      16     position to answer any questions that anybody

      17     might have about it.  But I wanted to lay

      18     that out.

      19               Mr. Norquist?

      20               MR. NORQUIST:  Yes, two things.

      21     One, just when we talk about $4 billion taken

      22     in this tax every year from citizens, some









                                                             368
       1     can point and say, well, the federal

       2     government is going to do bunches of stuff

       3     with it, if the federal government wasn't

       4     taking it, the citizens would have it and

       5     you'd reduce the digital divide and parents

       6     would have resource to take care of their own

       7     households and their own families.

       8               So it's not as if the government

       9     didn't have it in order to, you know,

      10     subsidize sugar production and tobacco, that

      11     somehow it would get lost somewhere.  It

      12     actually would rest with the American people.

      13               So lost revenue isn't lost if

      14     you're a taxpayer.  It's actually kind of

      15     found.

      16               I did want to clarify one thing.  I

      17     had been told by a reporter here that Vice

      18     President Gore had spoken in a Business Week

      19     article to the Internet access issue.  In

      20     point of fact, he has not.  I have sent him a

      21     letter, asking for his position.  I don't yet

      22     have his position now on access.  So I









                                                             369
       1     thought he was with the rest of us on this

       2     issue.  It hasn't happened yet.  If the

       3     administration could encourage him to make a

       4     statement on that, it would be helpful, and I

       5     could share it with everybody.

       6               CHAIRMAN GILMORE:  Mayor Kirk?

       7               MAYOR KIRK:  I'm growing in

       8     popularity by the minute.  Or disfavor.

       9               I agree wholeheartedly with David

      10     Pottruck and Delna Jones, in the sense that

      11     this Commission was asked to look at the

      12     impact of taxes on the Internet.  To me, at

      13     least, this is one that is directly applied

      14     to the instrument itself.

      15               I do think that that's different

      16     from sales taxes.  I think it's different

      17     from other taxes.  I say that with the caveat

      18     that I had complained the most about other

      19     people telling folks how to spend their

      20     money.  But, to me, if Congress is truly

      21     serious about opening up access to the Net,

      22     the best place for them to start is with the









                                                             370
       1     telecommunications tax.

       2               I do believe, with all due respect,

       3     Governor, to your proposal, I agree with

       4     David.  The best way to do that is a total

       5     elimination.  I don't think it makes the tax

       6     any better by saying we're still going to tax

       7     it, but give the money to Ron to spend on

       8     something else.

       9               If you really want to open it up,

      10     we ought to do it.  I would support Mr.

      11     Pottruck and Delna in terms of option No. 2.

      12               CHAIRMAN GILMORE:  Let me be clear that

      13     the one percent that I'm holding back to go

      14     back to the states is an incentive on

      15     simplification, which we had talked to death

      16     around here for two days.

      17               MR. NORQUIST:  I wasn't necessarily

      18     seeking clarity.  I was just aligning myself

      19     with Mr. Pottruck and Ms. Jones.  Thank you.

      20               CHAIRMAN GILMORE:  That being said, the

      21     debate is between my proposal and the general

      22     completely-total proposal elimination.









                                                             371
       1     However, as we depart this area, No. 5 is to

       2     preserve this current tax structure for

       3     telecommunications taxes.

       4               Do I gather there is not a

       5     consensus to eliminate that at this time from

       6     this draft paper?  Is there a consensus to

       7     eliminate it?  I see some shaking heads,

       8     right?

       9               It stays in for the time being.

      10               MR. PINCUS:  Governor, I don't know

      11     if we're going to leave this section, but I

      12     wanted to respond to Mr. Norquist.  I don't

      13     know whether the Vice President has had a

      14     chance to speak to this issue, but I believe

      15     that the President has said that the

      16     administration doesn't support taxes on

      17     Internet access.

      18               MR. NORQUIST:  Governor, can I just

      19     interpose a question?  There is at least a

      20     proposal on the table here to encourage

      21     states and localities to simplify and

      22     potential re-equalize state and local









                                                             372
       1     telecommunications taxes, as well.  We ought

       2     not to lose that issue in this discussion.

       3               CHAIRMAN GILMORE:  Which item are you

       4     specifically talking about?  Is there an

       5     item?

       6               MR. NORQUIST:  In my version of

       7     this final draft it's Item 4:  Encouraging

       8     state and local governments to work

       9     cooperatively with industry to reduce

      10     complexity and cost of complying with

      11     telecommunications taxes, adopt tax policies

      12     that consistently treat like services alike.

      13               CHAIRMAN GILMORE:  I think that's right.

      14               MR. POTTRUCK:  Governor, I think

      15     that we've talked a lot about simplification

      16     and there seems to be a lot of support for

      17     that idea.  In terms of getting state and

      18     local government to work together to

      19     simplify, unless there's some incentive to do

      20     that, that's going to be a tough row to hoe.

      21     I think that the likelihood is that unless we

      22     adopt something or vote for something like









                                                             373
       1     your proposal, which has an economic

       2     incentive to promote this idea of

       3     simplification, it's just not going to

       4     happen.

       5               MR. VRADENBURG:  The question may

       6     be, David, whether or not we ought to be

       7     recommending to Congress that there be some

       8     either establishment of a Commission that

       9     does that or some other incentive to induce

      10     it.

      11               But it does seem to me at least an

      12     issue of national policy whether we ought to

      13     be continuing to sustain a system that has as

      14     many tax forms to fill out with respect to

      15     state and local telecommunications taxes, and

      16     which has an average rate across all the

      17     states of something in excess of 14 percent,

      18     which is clearly significantly higher than

      19     franchise taxes on cable or other like

      20     services.

      21               So I do think your question is

      22     right.  I think maybe the issue, perhaps put









                                                             374
       1     it back to us, is, all right, drafting

       2     subcommittee, what would you suggest or

       3     recommend for your consideration might be the

       4     incentive or the mechanism to bring about

       5     that state simplification and

       6     re-equalization.

       7               MR. POTTRUCK:  George, that was

       8     exactly my point.  That I'm challenging the

       9     drafting subcommittee to come back to this

      10     group with an incentive, a way that's

      11     realistic to get this done.  To give a

      12     proposal which has no teeth is just not going

      13     to happen.  Let's go the extra mile, if we're

      14     going to put something like this on the

      15     table, and offer something that we can

      16     support that says, yes, this is what we think

      17     would be the right incentive to get that.

      18     It's not only important.  It's important

      19     enough to put an incentive on the table to

      20     get it done.

      21               CHAIRMAN GILMORE:  Ted Waitt, did you

      22     wish?









                                                             375
       1               MR. WAITT:  Yeah, I just had one

       2     comment.  By the way, things are shaping up.

       3     It looks like there's going to be a lot of

       4     off-line work that we do between now and the

       5     meeting in Dallas.  Just a clarification, so

       6     I think we can frame our report properly.

       7               In Section 1103 of the Internet Tax

       8     Freedom Act, the second sentence says:

       9               "Any recommendation agreed to by

      10     the Commission shall be tax and

      11     technologically neutral and applied to all

      12     forms of remote commerce."

      13               Now, I don't know if somebody on

      14     your staff can help clarify that definition

      15     for me.  For instance, does "tax neutral"

      16     mean "revenue neutral," for instance, if we

      17     recommend abolishing the 3 percent excise

      18     tax?  Therefore, that's three or $4 billion.

      19     Do we have to come up with another way to

      20     make up that three or $4 billion?  Was that

      21     tax or revenue neutral?

      22               And then as it applies to an









                                                             376
       1     Exception 4, that we'll be talking about in a

       2     minute, it says, "Applies to all forms of

       3     remote commerce."  A lot of times we're

       4     talking specifically E-commerce, and I think

       5     E-commerce is the definition all remote

       6     commerce, meaning telephone sales, fax sales,

       7     as well as sales made over the Internet?

       8     Because I think it's fairly specified in our

       9     charter.  I'm just looking for a

      10     clarification.

      11               CHAIRMAN GILMORE:  The suggestion is

      12     that we don't have a right to offer a tax cut

      13     at any level, because it wouldn't be

      14     revenue-neutral?

      15               MR. WAITT:  I'm asking for your

      16     interpretation, or if we have an

      17     interpretation there.  Because it says "tax

      18     neutral."  Is it tax neutral or revenue

      19     neutral?

      20               CHAIRMAN GILMORE:  We don't have an

      21     answer, but it is worth looking at between

      22     now and Dallas, to make sure that we're









                                                             377
       1     living up to the charter in the right way.

       2     Very good.

       3               MR. WAITT:  In terms as it applies

       4     to Section 4, and I think it ties back to the

       5     international tariff piece, as well, in

       6     Section 1, and possibly the introduction.

       7     When we talk about E-commerce, it specifies

       8     that we just talk about remote commerce, as

       9     well.

      10               CHAIRMAN GILMORE:  Good question.

      11               MR. WAITT:  So I think we have to

      12     look into that, because we want to make sure

      13     that in all the work that is done between now

      14     and the meeting in Dallas, that we get all of

      15     these things framed properly, so we can get

      16     things done.  Because we've been going

      17     through a lot of work.  There's some varying

      18     degrees of thought, and we really, I think,

      19     all want to get something really done when we

      20     get to Dallas.

      21               CHAIRMAN GILMORE:  If we're in a

      22     position where it's interpreted that we can't









                                                             378
       1     make any suggestions that don't change

       2     finances, then the Congress would have

       3     stopped us at the very inception.  I don't

       4     think that's what they intended to do.

       5               MR. WAITT:  I just want to make

       6     sure it's clear.

       7               CHAIRMAN GILMORE:  We'll see if we can

       8     find out.  Thank you.

       9               What else do we have, now, on this

      10     topic?  There are still hands up.

      11     Mr. Pincus?

      12               MR. PINCUS:  Governor, I just have

      13     a question about this question of state and

      14     local telecommunication taxes and fees.  We

      15     had some interesting proposals yesterday.

      16     There are some other proposals in this

      17     document.

      18               But I don't know if we've had any

      19     reaction at all by the representatives of

      20     state and local government to any of those

      21     proposals.  I don't know if it would be in

      22     order, if any of them are still here, if they









                                                             379
       1     have comments or just to say.  It seems to me

       2     if they have some interest, and these

       3     proposals range all the way from just

       4     directing simplification to providing

       5     incentives to doing nothing.  It just seems

       6     to me if I were them, obviously I'd want to

       7     have some input.

       8               There's just been no input at all

       9     on these proposals from the state and local

      10     government community.  As I say, I don't know

      11     if it's in order to ask them now or just urge

      12     them to submit something.

      13               CHAIRMAN GILMORE:  I think they can

      14     certainly submit something.  We have a

      15     virtual office and plenty of information that

      16     could be made available and sent to the

      17     Commissioners well in advance.

      18               In the meanwhile, there are state

      19     and local officials represented on the

      20     Commission who are perfectly entitled to give

      21     their point of view, so that the other

      22     Commissioners can know the point of view on









                                                             380
       1     it.

       2               I've certainly expressed my view,

       3     and so has Ron Kirk.  If there are others,

       4     naturally that's available.  And that's why

       5     they were named to the Commission, I believe.

       6               Other matters involving that policy

       7     A?  If not, on page 10 is a related topic

       8     involving property taxes.

       9               The next topic on page 10 is a

      10     related topic on tax treatment on

      11     telecommunications property.  Two options

      12     appear in the document.  One, to prohibit

      13     discriminatory ad valorem taxes on interstate

      14     telecommunications equipment.  Then the taxes

      15     that are imposed on other property.  Or,

      16     number two, leave the states and localities

      17     alone to determine the nature and level of ad

      18     valorem taxes on interstate

      19     telecommunications property.

      20               I believe this matter may have been

      21     offered by Mr. Andal.  Do you have anything

      22     that you wish to add, Dean?









                                                             381
       1               MR. ANDAL:  I have nothing else to

       2     offer, other than what I said yesterday,

       3     which is I think that the discriminatory tax

       4     offered by states on the property of

       5     telecommunications companies discourages

       6     capital investment.  Capital investment by

       7     the telecommunications companies is where the

       8     Internet backbone, infrastructure is going to

       9     be built.

      10               I think it's unwise to do that.  I

      11     also think that the burden is is that the few

      12     states that do discriminate, offer a taxing

      13     formula that's different from other

      14     businesses in their state, that is built into

      15     long distance telephone rates, which are set

      16     nationally.

      17               Which means that the states that

      18     don't do discriminatory tax and property tax

      19     are subsidizing those who do, because the tax

      20     load is higher in some states than others.

      21               But I've written all of that and

      22     all of the Commissioners have had access to









                                                             382
       1     it.  I think my option is fairly presented by

       2     the drafting committee, and so is the

       3     alternative.

       4               CHAIRMAN GILMORE:  Delna Jones, then

       5     Grover, and then Mr. Lebrun.

       6               MS. JONES:  I think this is getting

       7     into an issue where we are now attempting to

       8     determine ad valorem tax at the state level.

       9     While I might be in agreement with the idea,

      10     I have a real concern for dictating now how

      11     each state should tax.

      12               We have varying tax structures in

      13     relationship to property tax regarding farms

      14     and forest lands and various things, and they

      15     vary all over the nation.  I really have a

      16     concern having this Commission look at that

      17     as being an issue that we need to deal with

      18     and ask Congress to do something about.

      19               MR. ANDAL:  That's fair enough,

      20     Delna.  I think the difference, though,

      21     between the examples that you gave me and the

      22     one I've offered is that telecommunications









                                                             383
       1     property and especially long distance

       2     telephone cross the state lines, unlike a lot

       3     of property.  Of course, that's what the

       4     other 4-R Act for railroads, for oil

       5     pipelines, and for other similarly-related

       6     activities, including airlines now, that's

       7     what it deals with.

       8               So my point is is that long

       9     distance telephone, because it's an

      10     inter-state business, deserves protection.

      11     It's also subject to tax, more often than

      12     not, because more often than not the

      13     headquarters is located outside of the state.

      14               MS. JONES:  Let me just respond,

      15     not all is inter-state, some of it is also

      16     intra-state.  So are you going to get into

      17     that kind of a definition in which properties

      18     are which or the other?  I see a concern of

      19     getting into issues that I'm not certain this

      20     Commission ought to get into.

      21               CHAIRMAN GILMORE:  The next speaker is

      22     Mr. Norquist.









                                                             384
       1               MR. NORQUIST:  Yes.  Delna, you may

       2     not support the idea, but it is, of course,

       3     this Commission's job to talk about total

       4     level of taxation on the Internet and its

       5     component parts.  So the high level of

       6     taxation by state level governments on

       7     telecommunications, which came about during a

       8     time when they were government-mandated

       9     monopolies, and it made some sense that you

      10     were imposing taxes on a defined area, now,

      11     of course, they're opened up and we have much

      12     more a competitive market.

      13               We're not completely there, but

      14     we're getting there on a competitive market

      15     across the country.  So you may not want to

      16     vote for it, but certainly it's within the

      17     Commission's what we've been asked to do here

      18     is to look at the total tax burden.

      19               I would suggest that we not only

      20     look at extending the 4-R law to property

      21     taxes on telecommunications, but also on

      22     excise and sales taxes.  Because it's been









                                                             385
       1     reported to this group the average sales tax

       2     in the country is around, you know, four to

       3     six percent, and the average

       4     telecommunications taxes are about 14.1

       5     percent.

       6               So it's a heavily discriminated

       7     against industry, which may have made sense

       8     when it was a government monopoly and a

       9     regulated monopoly, but makes less and less

      10     sense in a competitive world.

      11               MS. JONES:  Let me see if I can

      12     respond.  First of all, don't assume that I

      13     agree that the tax level ought to be

      14     different or be discriminatory in terms of

      15     property tax.  That's not my assumption.

      16               But let me also assure you that

      17     various states are dealing with this in

      18     various ways.  Some through their public

      19     utility Commission are giving incentives in a

      20     different way to offset some of that.  Some

      21     of them are reducing that property tax burden

      22     in a very specific way, getting certain









                                                             386
       1     benefits for that company.

       2               So what I'm saying is I don't have

       3     any problem with it staying right here where

       4     it is, but since Dean was making the case for

       5     his proposal, I thought it ought also be

       6     raised that there are a lot of ways states

       7     are dealing with this issue.

       8               I'm not certain the federal

       9     government is the best place to do it.

      10               CHAIRMAN GILMORE:  Mr. Lebrun?

      11               MR. LEBRUN:  I would agree with

      12     Delna.  I think this is at least stretching

      13     the scope of our charge.  There are other

      14     factors that states look at when determining

      15     how to tax the property of utilities, whether

      16     they're telecommunication, electrical, or

      17     whatever.

      18               As an example, South Dakota does

      19     not charge utilities at all for the use of

      20     the public right-of-way.  That's a real

      21     benefit to them.  Part of the policy of the

      22     state was to encourage the spread of









                                                             387
       1     electricity throughout the state, through

       2     REAs or whatever.  But those are all factors

       3     that states individually made a policy

       4     decision on, and I think it would take much

       5     more time and study than we've got to come up

       6     with a recommendation on that issue.  I think

       7     it is beyond the scope of our charge.

       8               CHAIRMAN GILMORE:  Other comments on

       9     this matter?

      10               MR. VRADENBURG:  Mr. Chairman?

      11               CHAIRMAN GILMORE:  Yes, George?

      12               MR. VRADENBURG:  I just want to

      13     refer you to the statute, which does charge

      14     us to conduct a thorough study of federal,

      15     state, local, international taxation, and

      16     other comparable intra-state, inter-state and

      17     international sales activities.  So it's

      18     within the charter, although I understand

      19     Commissioner Jones and Commissioner Lebrun

      20     also made a different point.

      21               Which was that perhaps maybe

      22     offsets to what seems to be a discriminatory









                                                             388
       1     tax makes it non-discriminatory.  But at

       2     least it is within the charter.

       3               CHAIRMAN GILMORE:  Further comments?  If

       4     you'll turn to page 12 of the issues and

       5     options paper?  We have reached the central

       6     sales tax issue.  The application of sales

       7     and use taxes to transactions conducted over

       8     the Internet.

       9               There are seven policy options that

      10     are outlined in the document, as they go on,

      11     and they are worthy, I think, of some

      12     discussion here today.  Let's go through

      13     them.

      14               One is to extend the moratorium of

      15     the Internet Tax Freedom Act by an additional

      16     five years.  Prohibit sales tax on the sale

      17     of tangible and intangible goods or property,

      18     intellectual property, digital goods,

      19     services, securities, information, and

      20     entertainment.

      21               Two:  Make no change in the

      22     authority of state and local governments to









                                                             389
       1     tax Internet transactions.  This probably

       2     means the maintenance of the Quill doctrine.

       3               Three:  Preempting state and local

       4     sales taxes on tangible goods and services

       5     sold over the Internet.

       6               Four:  Prohibit all sales and use

       7     taxes on business to consumer, remote

       8     Internet transactions, including all sales

       9     and use taxes on the sale of tangible and

      10     intangible goods and property, intellectual

      11     property, digital goods, services,

      12     securities, information, and entertainment

      13     sold over the Internet.

      14               Actually, I don't even think the

      15     word "remote" is in there, but it should go

      16     in there.

      17               I'm not reading verbatim the items,

      18     but I shall, if that's what people would

      19     prefer.  I'll start back on 12, the first

      20     item.

      21               Extend the moratorium of the

      22     Internet Tax Freedom Act for five additional









                                                             390
       1     years.  While modifying the prohibition

       2     against sales and use taxes to prohibit all

       3     sale taxes on Internet business, to consumer

       4     sales of tangible or intangible goods or

       5     property, intellectual property, digital

       6     goods, services, securities, information, and

       7     entertainment.

       8               Second:  Recommending making no

       9     change in the state and local governments'

      10     authority to impose transaction taxes on

      11     sales of tangible personal property

      12     facilitated by the Internet.  Taxes would be

      13     imposed by state and local governments in the

      14     same manner and to the same extent as they

      15     impose transaction taxes on sales facilitated

      16     through any other means, including

      17     face-to-face retail sales and mail order

      18     sales.

      19               Third:  Recommend preempting state

      20     and local governments' authority to tax sales

      21     of tangible personal property on services via

      22     the Internet, making such sales exempt from









                                                             391
       1     any transaction taxes.

       2               Fourth:  Recommend prohibiting all

       3     sales and use taxes on business to consumer

       4     Internet transactions by amending the

       5     Internet Tax Freedom Act to prohibit all

       6     sales taxes on Internet businesses to

       7     consumer sales or tangible or intangible

       8     goods and property, intellectual property,

       9     digital goods, services, securities,

      10     information, and entertainment.

      11               Five:  Encourage the development

      12     and implementation of a voluntary system for

      13     collecting sales use taxes on electronic

      14     commerce and remote sales that would

      15     eventually utilize advance technologies to

      16     overcome certain complexities and would

      17     eliminate the financial and logistical tax

      18     collection burdens and liability of the

      19     seller.

      20               Again, there's commentary through

      21     all of this, as well, which everybody I

      22     believe has.









                                                             392
       1               Six:  Recommend requiring state and

       2     local governments to simplify sales and use

       3     tax systems in a manner meeting certain

       4     federally-mandated requirements, negotiated

       5     by interested public and private sector

       6     parties in consultation with federal policy

       7     makers.

       8               Number 7:  Recommend imposing a

       9     nationally collected single rate uniform

      10     sales and use tax on electronic commerce and

      11     remote sales in lieu of all sales tax and use

      12     taxes.  All revenues to be shared with state

      13     and local government.

      14               Those are the seven regarding the

      15     tax treatment of tangible personal property.

      16               Now, since this could interest the

      17     Commissioners, and I hope that the

      18     Commissioners will speak specifically to the

      19     different options.  Mr. Lebrun, did you speak

      20     first?

      21               MR. LEBRUN:  Just a quick question.

      22     I am assuming that each of these would apply









                                                             393
       1     the idea would be to address the issue of

       2     sales tax on services, as well as tangible

       3     and intangible property.  I think some of

       4     these donít address services, but I recognize in

       5     some states that actually tax services, and some don't.  But we

       6     talked about simplification or whatever.  It

       7     would apply to the sales tax on services,

       8     just as well as tangible goods.

       9               Is that a correct assumption?

      10               CHAIRMAN GILMORE:  I think that it

      11     would.  Again George, you may have a comment

      12     on this.  I did not draft the document,

      13     although, in fact, I think there's an

      14     essential concept in one of mine that is not

      15     in appearance here, which I'll talk about in

      16     a moment.

      17               Did you have a response to Gene

      18     Lebrun with respect to the inclusion of

      19     services in every instance?  I believe that's

      20     the thrust of what you were saying.

      21               MR. LEBRUN:  Yes.  Some of them

      22     address services, some don't.  But I am









                                                             394
       1     assuming that all of them, you're not going

       2     to make one recommendation for sales tax on

       3     goods and a different recommendation on sales

       4     tax on services.  Would that be correct?

       5               MR. VRADENBURG:  Commissioner

       6     Lebrun, you're absolutely right.  The whole

       7     heading deals with tax treatment of tangible

       8     personal and tangible services.  You'll see

       9     the next section does -- taxable services.

      10     The next section will deal with digitized

      11     goods, which may or may not warrant

      12     differential treatment.  But this one does

      13     deal with both goods and taxable services.

      14               CHAIRMAN GILMORE:  I want to make it

      15     clear that the policy options that I have put

      16     in do not deal with the taxation of services.

      17     It is specifically intended to be a

      18     narrowly-drawn, narrowly-defined benefit for

      19     the consumer, for the people who, in fact,

      20     use the Internet.

      21               Also, the original policy paper

      22     that I filed discussed remote sales.  And I









                                                             395
       1     don't believe that that appears in any of

       2     these, either.

       3               So my proposal is the elimination,

       4     prohibiting all sales and use taxes on

       5     business to consumer, not business to

       6     business, Internet transactions by amending

       7     the Internet Tax Freedom Act.  This is No. 4;

       8     to prohibit all sales taxes on Internet

       9     business to consumer sales of tangible and

      10     intangible goods and services and property,

      11     intellectual property, services, securities,

      12     information, and entertainment.  But that is

      13     for remote sales, and should be amended to

      14     that effect in the final draft.

      15               There is going to be, I think, a

      16     discussion on this, and I will engage in it,

      17     also.  But, first, the floor is open, if

      18     someone else would prefer to go first.

      19               Dean?

      20               MR. ANDAL:  Just a point of

      21     clarification.  Item B is called the taxation

      22     of digitized goods.  And I assume that deals









                                                             396
       1     with what are commonly referred to as

       2     services, as well.  Just a point.

       3               I can't remember earlier whether or

       4     not it was Governor Leavitt or Mayor Kirk who

       5     asked the question of two of our experts,

       6     Harley Duncan and Dan Bucks, whether or not

       7     my proposal would invite new litigation or

       8     reduce litigation.  It was Mr. Guttentag?  I

       9     never got a chance to respond.

      10               I'd like to ask an expert who is

      11     actually a litigator, who litigates

      12     nexus-type cases, to come forward and answer

      13     that question, as well.  Art Rosen, are you

      14     still here?  Art?  Yeah, come on up.

      15               The question, just so that you

      16     don't wander too much.  The question is, is

      17     my proposal, which codifies Quill and expands

      18     Public Law 86-272, whether or not that

      19     proposal would reduce or increase litigation,

      20     in your view.

      21               Please introduce yourself, so that

      22     the Commission knows who you are.









                                                             397
       1               MR. ROSEN:  I'm Arthur Rosen from

       2     New York.  It seems to me there's been a lot

       3     of confusion by the use of the term

       4     "codifying Quill."  I read your proposal, and

       5     heard you speak.  It seems to me it's a

       6     shorthand that you're using.  As Professor

       7     Hellerstein said earlier, you're not

       8     suggesting a statute that says what the

       9     Supreme Court in Quill is the law of the

      10     land.  Furthermore, you're not saying let's

      11     just replicate the Supreme Court's opinion.

      12               Rather, what you're doing is what

      13     the Supreme Court has done in Quill, as all

      14     courts do, is set forth an outline, general

      15     standards.  What a statute does, it fills in

      16     the details in a statute.  And the more

      17     details you have in a law, the less

      18     litigation there is.

      19               Public Law 86-272 is an example.  A

      20     pretty specific statute.  There are a handful

      21     of cases pending now in the United States on

      22     this issue.  In contrast to the Quill sales









                                                             398
       1     tax issue, where all you have is the Supreme

       2     Court decision, there are a dozen, or there

       3     are scores of cases that I know about, that I

       4     or my partners are involved in.

       5               There must be hundreds of cases

       6     going on now, in contrast to a tightly-worded

       7     statute.  We have a few cases, very narrow

       8     controversies.  It cuts down the

       9     contentiousness between taxpayers and tax

      10     collectors, as well as the amount of

      11     litigation.

      12               The only person that really suffers

      13     when you have real specific statutes and less

      14     litigation are my children.  They're going to

      15     eat a lot less good food, I guess, if we have

      16     less litigation.  But that's probably good

      17     for America.

      18               MR. ANDAL:  Yes.  So, I guess the

      19     point that needs to be made is it defies

      20     common sense that my proposal would increase

      21     litigation.  What my proposal does, and maybe

      22     it was my shorthand that was my problem, is









                                                             399
       1     it doesn't just restate what Quill says.  It

       2     offers specific definition to what

       3     substantial physical presence might mean in a

       4     real life environment.  Thus, would reduce

       5     some of the litigation that's going on now.

       6     It could not increase litigation.

       7               The other question that was brought

       8     forward was the substantial physical presence

       9     test that I use.  It was said that Quill does

      10     not say that.  That's true.  Quill does not

      11     say that.  Quill says physical presence.  But

      12     Complete Auto-Transit, which is also a

      13     Supreme Court case, uses the term

      14     "substantial nexus."  Read together, those

      15     two cases represent the Supreme Court's view

      16     on what is required to have nexus in a state.

      17               I didn't want that to go

      18     unanswered.  I don't believe Quill says

      19     substantial physical presence, either.  But I

      20     do believe that is the state of the law.

      21               MR. GUTTENTAG:  Well, read together

      22     by Mr. Andal, I'll accept that.









                                                             400
       1               CHAIRMAN GILMORE:  Mr. Pottruck?

       2               MR. POTTRUCK:  I think that it was

       3     surprising to me when I, not being a lawyer,

       4     not being a tax expert, when I came on the

       5     Commission, to find out that really the

       6     Internet tax moratorium was really not about

       7     sales taxes.  That, in fact, Quill is what

       8     governs sales taxes on the Internet.

       9               And so under any of our proposals,

      10     to continue with the moratorium or in the

      11     state we're in today, it would seem to me to

      12     make a lot of sense for us to think about

      13     this issue, about Quill.  Unless we're going

      14     to go to a recommendation that overturns

      15     Quill, that says we ought to do something

      16     different, that the time is now, which is one

      17     choice we have.  The time is now to do

      18     something different than Quill.

      19               The other choice is, remote

      20     commerce is going to be bigger than ever.  If

      21     we're going to stay where we are, then we

      22     ought to improve upon Quill.  We ought to









                                                             401
       1     take it to the next level.  I think Dean's

       2     proposal is a good beginning in that regard.

       3     To really think about all the unanswered

       4     questions that Quill leaves, isn't good for

       5     America.  If we're going to stay in that

       6     direction, and I don't know that I've come to

       7     that conclusion yet, but if we're going to

       8     stay in that direction, I think we ought to

       9     seriously think about a recommendation to

      10     Congress about clarifying the issues around

      11     Quill, so that we have something better to

      12     govern the economic expansion of America.

      13               CHAIRMAN GILMORE:  Delna?

      14               MS. JONES:  I asked one of my state

      15     tax folks to take a look at Dean's proposal, and one of the concerns I have

      16     Normally I would say, whatever you want to do

      17     about Quill isn't going to bother me one way

      18     or the other, but, in terms of my state, I

      19     think in your proposal you extend it beyond

      20     that.  Look at Public Law 86-272 and extend

      21     it to all business activity taxes.  That

      22     takes in those of us who are dependant upon









                                                             402
       1     income taxes, as well.

       2               So, I'm a little concerned as to

       3     being sure what kind of impact between now

       4     and Dallas.  If you have further

       5     clarifications, things you want to add, I

       6     think it's time for the drafting committee to

       7     look at those issues.  Because, before I can

       8     make a decision on this issue, I have to have

       9     more information.

      10               MR. ANDAL:  In response to Delna's

      11     question, she's absolutely correct.  I think

      12     I used my words carefully earlier when I said

      13     that I do three things.  I codified Quill,

      14     in that I lined it out and defined what I

      15     think is substantial physical presence.  I

      16     also integrated that into the existing Public

      17     Law 86-272, and then I added other safe

      18     harbors that should apply to business

      19     activity tax.

      20               That's been in my proposal since

      21     the beginning, in New York.  It's laid out

      22     very carefully, and it won't change between









                                                             403
       1     now and Dallas.

       2               MS. JONES:  I didn't expect it to

       3     change.  But I guess my question is the

       4     rationale for it.

       5               CHAIRMAN GILMORE:  Ron Kirk?

       6               MAYOR KIRK:  Mr. Chairman and Dean, being that

       7     we'll obviously have a much more extended

       8     debate on that in Dallas, but Delna, your

       9     observation is very astute and important.

      10     This is not a codification of Quill, at all.

      11     This takes the restrictions that the Supreme

      12     Court put in terms of how it defines nexus

      13     and takes it to an entirely different level.

      14     It takes it way beyond the aspect of what

      15     we're talking about, sales tax.  The way it

      16     could be applied to, as you said, income taxes

      17     and a number of other things and redefines

      18     the entire relationships between companies

      19     and their presence in the states in ways that

      20     I don't think we want to see encouraged, and

      21     that weren't set out within the code.

      22               Some of the definitions that Dean









                                                             404
       1     now includes, that were in his specific list,

       2     were things not envisioned by the Court, and

       3     in some cases are much more restrictive than

       4     that.  In terms of the relationship between,

       5     say, a seller and a contractor, he would say

       6     that that doesn't grant nexus.  The report in

       7     that particular case said that it does.

       8               What you would have, if we would

       9     adopt that, is a system in which we would

      10     encourage companies, and essentially give

      11     them a road map to say, "Here's how to avoid

      12     not paying any tax.  Forget the Internet,

      13     here's a way to avoid paying income taxes.

      14     Here's a way to avoid ever being brought into

      15     court."  I mean, if you want to do that, it's

      16     a great prescription for how to tell

      17     corporate America how to avoid ever having a

      18     presence anywhere.  And I, for one, would

      19     oppose that in every form of it.

      20               CHAIRMAN GILMORE:  They're going to be

      21     somewhere.  I think that the intention, if I

      22     understood the proposal from the very









                                                             405
       1     beginning, is, in fact, to redefine Quill.

       2     It's to place a statutory definition on it,

       3     so that there is a bright line, clear

       4     definition of what the Quill restrictions

       5     would be.  It wouldn't necessarily mirror

       6     exactly what the statute meant.

       7               Wasn't that your intention?

       8               MR. ANDAL:  It is, in some ways.

       9     Mayor Kirk and I don't even disagree.  One of

      10     the reasons that we're here today is that the

      11     court in Quill and in Complete Auto Transit

      12     sent out a standard using one fact pattern.

      13     They sent out a standard that wasn't clearly

      14     defined and didn't recognize a lot of the

      15     disputes that go on between states and

      16     companies that sell from outside of the

      17     state.

      18               My proposal, if you look at the

      19     seven items, I doubt you disagree with some

      20     of them as to what creates substantial

      21     physical presence.  But they're designed to

      22     take away some of the conflicts that we know









                                                             406
       1     exist right now in state courts over what

       2     substantial physical presence is.

       3               When I say "codify Quill," I'm

       4     saying Quill says physical presence, Complete

       5     Auto says substantial nexus.  We create that

       6     standard, and then we tell, using seven

       7     examples, what is not substantial physical

       8     presence.  And that is designed to clean up

       9     some of the conflict between states and

      10     companies.

      11               But what is commonly unrecognized

      12     is that 98 percent of the sales in America

      13     have nexus, and they're not in conflict.

      14               MAYOR KIRK:  I don't agree with your

      15     list.  I think it's a prescription for

      16     businesses to avoid ever having to be defined

      17     as having nexus in there.  Some of them would

      18     love your proposal.  I think it would be --

      19               MR. ANDAL:  But the 98 percent;

      20     nobody even argues it has nexus.  The

      21     companies don't argue, the states don't

      22     argue.  The tax is collected.  The 98 percent









                                                             407
       1     that's there now would continue to be there

       2     after my proposal.

       3               It is certainly an overreach to say

       4     that if my proposal passed, everybody could

       5     avoid physical presence when almost 98

       6     percent do not and cannot, even if my

       7     proposal were enacted into law.

       8               CHAIRMAN GILMORE:  Yours applies to the

       9     Internet, to e-commerce?

      10               MR. ANDAL:  No, it applies to

      11     remote sellers.

      12               CHAIRMAN GILMORE:  To remote sellers?

      13               MR. ANDAL:  Right.  I didn't want

      14     to create more ambiguity and more confusion

      15     by treating different remote sellers

      16     different ways.

      17               CHAIRMAN GILMORE:  Mr. Pottruck, you had

      18     your hand up?

      19               MR. POTTRUCK:  Thank you, Governor.

      20     If we've learned anything, it's that this a

      21     real heart and soul issue for this

      22     Commission, and it is unlikely, I think, that









                                                             408
       1     we're going to come out of here, from the

       2     Dallas meeting, and have a solution that

       3     anyone thinks can be implemented immediately.

       4     Anything we do, we're either going to vote

       5     for a continuation of the tax moratorium or a

       6     permanent tax moratorium or some new

       7     approach.  And that new approach is going to

       8     take time to implement.

       9               So in the interim, for some number

      10     of years, we're going to have growing remote

      11     sales and growing confusion over Quill.  Now,

      12     I don't know if it's really within the

      13     mandate or within the do-ability of this

      14     group to re-define Quill, but we can

      15     recommend to Congress that they take it up as

      16     a very important issue.  That it's our view

      17     that where we are today with the confusion,

      18     the lack of specificity, the lack of clarity

      19     around Quill, is not a good solution for

      20     America, and that we would recommend that

      21     Congress try to get more definition around

      22     Quill as an important order of business.









                                                             409
       1               CHAIRMAN GILMORE:  Mr. Parsons next.

       2     Mr. Sokul and then Governor Leavitt.

       3               MR. PARSONS:  Thank you, Mr.

       4     Chairman.  The first thing I would note, was

       5     that I was getting confused by the

       6     discussion, because I thought we were on Part

       7     A of the draft outline, and we've been

       8     spending a lot of time talking about Dean

       9     Andal's proposal, which is not in that part.

      10     It comes later on.  It's an important

      11     discussion, on nexus, but it's not as

      12     fundamental, I think, as the discussion in

      13     Part A.  A suggestion, The issue here in Part A is

      14     essentially, do we go back to the observation

      15     I made yesterday:  Do we conclude that there

      16     is something about electronic commerce that

      17     warrants treating it differently; sales

      18     effected by electronic commerce, treating

      19     those sales differently than sales effected

      20     in some non-electronic way?  Should they be

      21     treated the same, essentially, as sales done

      22     non-electronically?









                                                             410
       1               The problem I have with this

       2     section, while it certainly throws out a

       3     whole bunch of options around how you resolve

       4     that question, is that there isn't anything

       5     in here that would help the rational man from

       6     Mars who came down to help decide this.

       7     There isn't anything in here that would give

       8     him guidance.  There are lots of arguments,

       9     you know, and if you buy the assumptions of

      10     one argument, you would come out one way and

      11     if you buy the assumptions of another set of

      12     arguments, you'd come out the other way, but

      13     there's no analysis.  There are no

      14     projections, even.  There's no factual basis

      15     with which to intelligently grapple with that

      16     issue and come to an informed view.  Or at

      17     least that's my sense.

      18               So I wonder if we have seven

      19     different policy options under this one

      20     fundamental question.  I don't think we need

      21     to expand that list to eight or nine, seven

      22     is more than enough.  My hope would be that









                                                             411
       1     somehow between now and Dallas we could get

       2     some real analysis around this.  What does it

       3     mean?  I mean, if you extend it for five

       4     years, the policy, and extend it to sales on

       5     the Internet, which, as was pointed out by

       6     Mr. Pincus earlier, the current moratorium

       7     doesn't prevent states from attempting to

       8     reach Internet sales.

       9               So if we impose the five-year

      10     moratorium on that, what's the financial

      11     impact to the states and local governments,

      12     as best we can assess or judge?

      13               If we made it permanent, what's the

      14     long-term impact?

      15               CHAIRMAN GILMORE:  It depends on who you

      16     ask.

      17               MR. PARSONS:  Well, I understand

      18     that.  The comment was, "It depends on who

      19     you ask."  But at least to get something more

      20     than just this rather clear, but

      21     unsubstantiated, set of arguments on either

      22     side, would help those of us who, frankly,









                                                             412
       1     don't know what the answer is right now.  As

       2     I sit here today, I don't have a view.  I

       3     understand what the question is, but I'm

       4     looking for tangible facts, analysis,

       5     evidence, that would help me conclude what

       6     would be the best recommendation to the

       7     Congress.

       8               CHAIRMAN GILMORE:  Before I call on Mr.

       9     Sokul, Richard, I think there would be

      10     nothing wrong with further advocacy of the

      11     different positions by those who have

      12     submitted them, by this Commission, either in

      13     writing or otherwise.  I don't think there's

      14     any difficulty with it.  We have, of course,

      15     now heard between 40 and 50 presenters on an

      16     array of these issues.  Certainly on my part,

      17     I put some commentary in with my proposal at

      18     the time so that it could be examined.

      19     There's absolutely no reason why any member

      20     of this Commission can't come forward and

      21     debate this issue in writing or otherwise.

      22               For example, the entire panel today









                                                             413
       1     has dealt with the question of the NGA

       2     proposal and gave every member of the

       3     Commission a thorough opportunity to think

       4     about that.  They asked Governor Janklow, and

       5     any of the others who were there, their ideas

       6     about that.  In a moment I'm going to talk

       7     over with you why I have made the proposal

       8     that I have made, so that at least you can

       9     think about that, as well.

      10               I will do that, but I don't want to

      11     step ahead of those whose hands have been up

      12     first and we'll go first to Mr. Sokul.

      13               MR. SOKUL:  I found out that my

      14     comments belong in Section C, so I just want

      15     to be first in line when we get to C.

      16               CHAIRMAN GILMORE:  Remind me if you

      17     would.  Governor Leavitt?

      18               GOVERNOR LEAVITT:  I'd like to be

      19     associated with the stream of logic that's

      20     being put forth by Mr. Pottruck and also Mr.

      21     Parsons.

      22               It seems clear to me that you've









                                                             414
       1     got, in this section, at least, three basic

       2     questions that we're going to have to wrestle

       3     with.  The first one is, is the sales tax a

       4     viable tool for the 21st century, given the

       5     fact the we know all this change is going to

       6     be happening?  If we assume that it is, or

       7     that it can be fixed, then we go to the

       8     second question.

       9               The second question is, should

      10     E-commerce have a special privilege or should

      11     we have a level playing field?  If we decide,

      12     and I think that's a very basic question we

      13     have to ask ourselves, if we decide that it

      14     requires special privilege, we've got to go

      15     down a level of logic and say, how do you get

      16     there?

      17               If we decide that it is actually a

      18     level playing field we're after, then we need

      19     to go down a system of logic to get there.

      20               Now, what I heard from Mr. Pottruck

      21     is, that may take some time. And it's

      22     possible we would fail, and not get there.









                                                             415
       1     So perhaps there is some combination of these

       2     items that will ultimately come together to

       3     be part of the solution.  Maybe it is the

       4     extension of a moratorium.  Maybe it does

       5     include a period of time where we allow the

       6     system to be worked out, with an

       7     acknowledgement if that at the end of that

       8     time, if it isn't happening, then we go to a

       9     different course, which could include the

      10     re-defining by Congress in some form.

      11               So I'm not sure we have, in any of

      12     these seven proposals, the final.  It may be

      13     that there's iteration of these that will

      14     ultimately form that up, and at some point we

      15     ought to begin to talk about what those would

      16     be.  I do think that the logic chain is, is

      17     this salvageable, should it have special

      18     privilege, or level playing field, and if so,

      19     how do you get there?

      20               CHAIRMAN GILMORE:  Let me take a moment,

      21     if I could, since I put in one of the more

      22     definite proposals, and, Mike, let me say









                                                             416
       1     that I think the sales tax is viable.

       2     There's nothing that's going on in the states

       3     that says that states ought not to impose a

       4     sales tax on commerce, on goods, and maybe

       5     even services that are going on outside.  As

       6     I walk outside this door into Union Square at

       7     this hotel, there is very vigorous commerce

       8     going on and they're paying taxes.  They're

       9     paying more taxes than they pay in Virginia,

      10     I might say, in California, but they're

      11     paying them like crazy, and there are some

      12     lovely places right here along Union Square

      13     that are very impressive.  I certainly don't

      14     accept the idea, should E-commerce have a

      15     special privilege or should there be a level

      16     playing field?  I don't agree with that

      17     presentation of the issue.

      18               I see the Internet as an

      19     opportunity for the people of the United

      20     States and an opportunity for this Commission

      21     to not treat it in a privileged way, treat it

      22     differently.  I just simply don't assume that









                                                             417
       1     because it's not being taxed that that would

       2     mean that somehow it's privileged.  I just

       3     don't start from the assumption everything in

       4     America ought to be taxed.  And, therefore,

       5     to not tax it is somehow implying some type

       6     of privilege.

       7               Instead, I think the question is,

       8     do we go there?  Is that a place where we

       9     need to go, or are there legitimate policy

      10     reasons why you don't.

      11               The proposal that I put forward is

      12     specific and narrow.  It deals with remote

      13     sales, only remote sales, which, of course, I

      14     think eliminates this argument that's been

      15     going on, I think rather pointlessly, for the

      16     last couple of days about the idea of the

      17     kiosk at the cash register, and all that.  It

      18     should be dealing with remote sales, however

      19     the Congress would choose to define that.

      20               I believe that it is a narrow

      21     definition that excludes business-to-business

      22     Internet sales, which could be taxed, under









                                                             418
       1     my proposal.  And, in fact, that is the big

       2     bulk of the Internet sales and commerce that

       3     is going on right now, and all of commercial

       4     sales are not very much in the big scheme of

       5     things.  The big bulk is

       6     business-to-business.  My proposal doesn't

       7     cover that.  And why is that?  It is because

       8     of the policy objective that is involved.

       9     The point that I think has been made from

      10     time to time in these proceedings is, we are

      11     entitled to make policy decisions about what

      12     we want to do with tax policy in order to

      13     encourage certain conduct in the United

      14     States.  We do it frequently.

      15               Mr. Lebrun gave us an example just

      16     a few moments ago.  He said South Dakota does

      17     not tax the use of telecommunications usage

      18     in right-of-ways.  And he began to explain

      19     why.  Sure we have a right to make a decision

      20     that we want to encourage certain conduct,

      21     and in this case I would imagine it's the

      22     extension of telecommunications across the









                                                             419
       1     prairies of South Dakota.  They're entitled

       2     to make that decision and I think that's

       3     legitimate.

       4               We're entitled to make a decision,

       5     too, about whether or not Internet commerce,

       6     from individuals to businesses and vice

       7     versa, on remote sales, is so good for the

       8     people of the United States that we ought to,

       9     in fact, not extend taxes to that point.

      10     We're entitled to make that decision.

      11     There's nothing wrong with doing that.

      12               With respect to the question of

      13     fairness, a level playing field, it may be

      14     argued, and has been argued to death here,

      15     that if you have taxes on bricks and mortar

      16     and you do not have taxes on dollars, that

      17     that is an advantage and, indeed, it is.  But

      18     there are other advantages all throughout

      19     commerce.  There are advantages that the

      20     bricks and mortar people have that will never

      21     be equaled by the Internet.  The ability to

      22     have a facility, to draw in customers, to









                                                             420
       1     create the socialization of going out and

       2     engaging in commerce, the opportunities to

       3     present a product and see if it's the right

       4     size, right then, to try it on, to see if the

       5     color is really something you want to buy,

       6     whether the field is exactly what you want,

       7     and most importantly, to get it right then --

       8     right then -- and don't go home and think

       9     about it and order it and wait for it to

      10     come.  Instead, to be able to pick it up and

      11     take it home; which is, I suggest to you,

      12     exactly what people are doing right now.  And

      13     there is no empirical evidence that says that

      14     the growth of the Internet is going to rise so

      15     high above such a ceiling that it will, in

      16     fact, take away funds from traditional

      17     sources.

      18               Once again, we make policy

      19     decisions all the time.  We make it for

      20     pharmaceutical companies and the purchases of

      21     pharmaceuticals, because we want to encourage

      22     people who need them to buy pharmaceuticals.









                                                             421
       1     We make them for sports all the time and

       2     spend money, state money or local money, for

       3     sports complexes, because we believe that's

       4     in the best interest of our community.

       5               We have made decisions across this

       6     country.  We're not going to tax the service

       7     sector.  We make it all the time.  That is,

       8     by the way, not a level playing field.

       9               I see this as an opportunity for

      10     small business.  People who have not had an

      11     opportunity to engage the kind of capital

      12     that we see by large corporations.  For the

      13     first time, small business, which is just

      14     being squeezed out, has a chance to get out

      15     there and increase their market share and

      16     have more opportunity to do that.  We're

      17     calling them "Mom and Pops," and they are,

      18     but they're all small business.  From the

      19     individual entrepreneur who's setting up an

      20     Internet company, all the way to Mom and Pop

      21     who are running the local store.  They have a

      22     chance to increase their markets.









                                                             422
       1               There are, of course, impediments

       2     to going the other way and to finding,

       3     instead, a different kind of approach.  For

       4     example, the simple inability to do this,

       5     that is so difficult.  Nobody has been able

       6     to answer over these two days, or any other

       7     days, how we're going to tax digital goods

       8     and services.  Nobody has suggested any way

       9     to do that, and they can't do it in the

      10     European Union, either.  If they were going

      11     to get it done, they'd get it done in the

      12     European Union.  They tax there and they're

      13     good at it, and they're professionals at it.

      14               The concern of loss of revenue; I

      15     believe the proposal I put forward saves the

      16     sales tax.  All right, it doesn't do anything

      17     to say the sales tax is unviable.  It is, I

      18     think, a fundamental flaw to suggest that

      19     this is a zero-sum game and that only, if

      20     there's money that's going to be spent on

      21     Internet commerce, ergo, it must be coming

      22     out of retail commerce.  No empirical









                                                             423
       1     evidence suggests that.  There's nothing

       2     anywhere that says that we're not seeing

       3     vigorous retail that is going on everywhere

       4     all the time, including with the people

       5     who've come before the Commission today.

       6               It was said earlier today, we've

       7     got to make up for lost revenue.  Mr. Andal

       8     asked the right question, "What lost

       9     revenue?"  It's impossible to really

      10     determine what it is, but we know this, and

      11     this is very fundamental, government ought to

      12     tax what it needs, to do what it needs to do.

      13               I do not disagree with Mayor Kirk

      14     on this.  To the extent that government needs

      15     to supply the correct, proper services, they

      16     ought to tax to do that.

      17               We ought to go through the inquiry

      18     of whether or not, in fact, we're going to

      19     see a diminution of those resources as to

      20     make that unable.  Otherwise, just simply

      21     because it's a level playing field, we'd have

      22     no reason to go there, and to go to a new









                                                             424
       1     place in order to tax.

       2               And so the point I'm making is that

       3     my approach is a simple plan.  It saves the

       4     sales tax.  It is easy to implement.  It is

       5     easy to understand.  It doesn't face the

       6     other side of the coin which is, in fact, the

       7     policy debate that we're going through on

       8     this Commission, which is that if you're

       9     going to go the other way and say that you

      10     must move to tax the Internet, because it's

      11     there, because it's the same thing that's

      12     going on, theoretically, in local areas, then

      13     you have to come up with a plan that works,

      14     that isn't complicated, that does hang

      15     together, that is feasible.  This is what the

      16     discussion was in New York.  I don't think

      17     that we have that yet.

      18               I think that Governor Janklow was

      19     fairly honest about that in his presentation

      20     today.  There is no costs of implementation,

      21     either.  Where there are dramatic costs of

      22     implementation for someone, and I think the









                                                             425
       1     NGA's suggestion was it's going to be states,

       2     and it's between $100,000 and a million

       3     dollars for every store or commerce vehicle

       4     that wants to implement this, which is

       5     apparently is going to be a state cost.

       6               So, finally, ladies and gentlemen,

       7     I would just suggest that there's no evidence

       8     that there's going to be a collapse.  But

       9     people have said, "Gee, there's going to be a

      10     collapse.  Show us, at least, where you're

      11     going to make up the losses."  I would

      12     suggest it should be made up as part of the

      13     overall plan I've put forward.  Don't tax the

      14     Internet.  Don't tax access to the Internet.

      15     Eliminate the three percent excise tax.  Use

      16     one percent as a incentive for what I believe

      17     everybody here agrees is right, which is a

      18     tax simplification.  If you go with this

      19     approach, then I think that we do good things

      20     for the individual consumers, for small

      21     businesses, and you don't kill the goose that

      22     lays the golden egg, that is helping to drive









                                                             426
       1     the economy.  That's my case.

       2               Now, there will be other hands.

       3               MR. NORQUIST:  Do you want to

       4     address your TANF proposal?

       5               CHAIRMAN GILMORE:  Well, as part of the

       6     proposal, and again, I don't have the whole

       7     proposal before me, because we're going

       8     through this piece by piece, but the TANF

       9     proposal, which does come in at a later time,

      10     also suggests that we merely clarify at the

      11     national level the use of TANF funds for

      12     the purpose of the states being able to use

      13     it to supply access and ability to people of

      14     poor means to be able to get on the Internet.

      15     If poor people can get on the Internet in a

      16     no-tax environment, it can enhance the

      17     quality of their life.  In fact, enhance the

      18     quality of everybody's life.  But right now

      19     there's some uncertainty as to whether the

      20     federal regulations will permit states to use

      21     those TANF monies for that purpose.  I

      22     merely suggest that we have the Congress









                                                             427
       1     clarify that, and then we begin to do what we

       2     ought to do, get poor people on the Internet

       3     and give them an opportunity to improve the

       4     quality of their lives and don't have a

       5     digital divide.  And don't assume, either,

       6     that people who are poor or people that don't

       7     have money will forever be shut out of this.

       8               I think that the policy goals

       9     should be the reverse.  That we should trying

      10     to get people into the Internet process and

      11     give them a chance to enhance their lives.

      12               Let's see now, I've got lots of

      13     hands up, and we're going to give everybody a

      14     chance to speak, because, you know, I've been

      15     talking for about 10 minutes.

      16               Let's go to Mr. Parsons, first,

      17     then Mr.  Pottruck, and then move around the

      18     table, and Governor Leavitt also, of course,

      19     and Mr. Sidgmore.

      20               MR. PARSONS:  I just want to make

      21     sure that I understand your proposal,

      22     Governor, as it relates to this particular









                                                             428
       1     section that we're dealing with right now.  I

       2     understand not taxing access to the Internet,

       3     the 3 percent and how you would stimulate

       4     states, but now we're on how you tax

       5     transactions, commercial transactions, that

       6     are engaged in over the Internet.

       7               As I understand it, after listening

       8     all these days, that currently, even in the

       9     face of the current moratorium, that

      10     commercial transactions over the Internet,

      11     remote sales over the Internet, would be

      12     taxable if there is a nexus under our

      13     favorite case.

      14               CHAIRMAN GILMORE:  Are taxable, today.

      15               MR. PARSONS:  Quill, right.  I

      16     forgot it, Quill.  Are taxable today.  So if

      17     we literally didn't go anywhere, that would

      18     be the status quo.  That would be the

      19     situation going forward.

      20               Your proposal is to move to a place

      21     where business-to-consumer sales, done from

      22     remote locations are not taxable if done on









                                                             429
       1     the Internet, and the theory is because that

       2     will stimulate small business growth.  I'll

       3     call it that way.

       4               CHAIRMAN GILMORE:  Among other things,

       5     yes.

       6               MR. PARSONS:  Okay.

       7               MR. ANDAL:  Which item number is

       8     your proposal and other option paper?

       9               CHAIRMAN GILMORE:  My proposal is number

      10     four, but it needs to have the language,

      11     "remote."  I didn't draft the document, I

      12     think that was just left there.  That concept

      13     is very key to what we're doing here.

      14               Let me also say, and I know

      15     Governor Leavitt will have some more to say

      16     about this in a moment, it is true, today,

      17     under the Quill situation we're existing in

      18     today, taxes are imposed on commerce on the

      19     Internet, they're owed.  There's just no way

      20     to collect them and the struggle that, I

      21     believe, the NGA is going through is to say,

      22     we should have that tax and we should collect









                                                             430
       1     that tax.

       2               My proposal is to decriminalize all

       3     those millions of people out there who owe

       4     this tax and aren't paying.

       5               MR. PARSONS:  Just to hit you with

       6     a question, is there any -- again, so that

       7     could analyze or attempt somehow to analyze

       8     this -- because I do think that those who are

       9     advocating a change from the status quo.

      10     There are a number of lawyers sitting around

      11     this table, so I'll put it in a vernacular so

      12     that they can understand it; bear the burden

      13     of proof.

      14               The question I have is, what

      15     percentage of remote Internet sales that

      16     would be picked up by this proposal would

      17     currently be taxable under Quill?  I mean, is

      18     this a lot or a little?  My impression would

      19     be that most remote sales over the Internet

      20     probably don't need a nexus test, anyway.  So

      21     it may not be all of that substantial, and it

      22     would just be codifying the kind of current









                                                             431
       1     practical state of things.

       2               I could be wrong, I just don't

       3     know.

       4               CHAIRMAN GILMORE:  I think that there's

       5     no evidence that this is a large amount of

       6     transactions today.  The anxiety is what

       7     might happen in the future, as people try to

       8     look into a crystal ball.

       9               Mr. Pottruck, I believe you were

      10     next, and then Governor Leavitt, and Mr.

      11     Sidgmore, at least.  And others, I'm sure.

      12               MR. POTTRUCK:  Thank you, Governor.

      13     I've actually a suggestion and a question.

      14               I know we're getting ahead a little

      15     bit here, but I've thought about your

      16     suggestion to use, I think it's called the

      17     TANF funds, for provision of access.  I

      18     would recommend that we think about that.  If

      19     we consider that we don't think about --

      20     well, we think about that in the context of

      21     schools.  I think, actually, giving computers

      22     to people who are having a hard time paying









                                                             432
       1     for food is likely to end up in a black

       2     market for computers and it's not really

       3     going to solve the problem.  What we need are

       4     more computers in schools, more teachers who

       5     are certified and educated to help young

       6     people use those computers.

       7               So I agree with your concept, and I

       8     would offer you the suggestion to expand upon

       9     it so that it might even be a little more

      10     workable.

      11               Let me move on and ask a question

      12     about your proposal.  When I look out into

      13     the future what I see is a greater and

      14     greater convergence of bricks and mortar

      15     retailers and online retailers, and more and

      16     more where you might order something over the

      17     Internet and pick it up at the store, which

      18     is a mile away.

      19               I'm trying to think down the road

      20     how this is all going to affect the behaviors

      21     of how retailers operate, as we have more and

      22     you know, there will be a point where









                                                             433
       1     everyone will be an Internet retailer.  To

       2     survive, it will be a part of everyone's

       3     business.  Have we thought about what this

       4     looks like, you know, five years from now?

       5     I'd appreciate that.

       6               CHAIRMAN GILMORE:  David, first of all,

       7     I think everyone will be.  I think that

       8     you're seeing the increasing incidence of

       9     bricks and mortar, clicks and mortar.  More

      10     and more people are trying to find ways to

      11     utilize both resources, and I think you're

      12     going to see more and more of that.

      13               In fact, I think that the proposal

      14     needs to include a concept of remoteness to

      15     avoid exactly the issue that you and Governor

      16     Locke raised so eloquently yesterday, which

      17     is the question of just simply finding a way

      18     to evade the sales tax.  My proposal is not

      19     intended to destroy the sales tax, but

      20     probably to save it.

      21               But with respect to the remote

      22     sales, we could define that any way we wanted









                                                             434
       1     to, under the state, under the city -- 500

       2     miles, 200 miles.  But it gets rid of the

       3     idea that you're going to evade this by

       4     running off into the showroom kiosk.

       5               I've got my list, but did you want

       6     to comment on that, Dean?

       7               MR. ANDAL:  I just wanted to add to

       8     David's question, which is part of this

       9     debate is using shorthand, and that's what

      10     makes it difficult.  Just because somebody is

      11     an Internet retailer does not mean they don't

      12     have substantial physical presence in the

      13     state.  As a matter of fact, most Internet

      14     retailers do.

      15               MR. POTTRUCK:  Yes.  But I thought

      16     Governor Gilmore's proposal --

      17               CHAIRMAN GILMORE:  First of all, remote.

      18     And there is a provision in my proposal --

      19     overall proposal -- which is on the Net,

      20     which says you should perhaps define that

      21     through nexus.

      22               The next person is Governor









                                                             435
       1     Leavitt.

       2               GOVERNOR LEAVITT:  Thank you.  I would

       3     like to make just three quick points.  One

       4     is, we're dealing with a horizon here that's

       5     20, 25, 30 years.  This is a literally once

       6     in a generation opportunity.  So I think that

       7     we ought to be thinking about the power of

       8     this remarkable thing that we're talking

       9     about, the Internet, and how big this problem

      10     is going to be 20, 25 years from now.  I do

      11     think we have to be thinking in very large

      12     portions, because of the power that you've

      13     suggested.

      14               Second, Governor Gilmore, I'd like

      15     to say there's an area in which we have

      16     agreement, and we ought to find those.  The

      17     whole question of digital, being able to tax

      18     digital transactions.  I envision a day very

      19     clearly when -- because I agree it's very

      20     difficult on software, CDs, music, movies,

      21     books, that -- where they can be digitally

      22     transmitted.  Those are almost impossible to









                                                             436
       1     tax in the long-term.  We may want to

       2     eliminate taxation of books, movies, tickets

       3     et cetera, both at the box office, at the

       4     video box, and on the download.  I mean, in

       5     order to gain that kind of a level playing

       6     field, we may ultimately have to modify our

       7     policies to do that.

       8               The last thing I'd like to point

       9     out is it's very difficult to find empirical

      10     evidence on these these days, and so we all

      11     kind of depend, I suspect, on our gut feel

      12     and our anecdotal experience.  So if you'll

      13     excuse an anecdote, my wife has been

      14     resistant to this, and recently we needed to

      15     get a sofa for our house, for our basement.

      16     And I said, "Why don't you look on the

      17     Internet?"  Which may have been a mistake,

      18     because she has now become kind of a

      19     confirmed Internet shopper, and she spent a

      20     good part of the afternoon finding what she

      21     wanted.

      22               The next thing I saw, she was at









                                                             437
       1     the yellow pages, and she was looking and

       2     found a dealer that had the sofa brand that

       3     she wanted and she went down there and sat on

       4     a sofa like that and felt the swatch, and

       5     then came back and switched it.

       6               I had a similar experience with my

       7     mother on Saturday, who was going out to do

       8     Christmas shopping for her grandchildren.

       9     There are 23 of them, it's a big job.  I

      10     said, "Mother, why don't you use the

      11     Internet?"  It was cold, snowy.  We sat down

      12     and in two hours we'd shopped for everybody.

      13               Now, in either of those cases,

      14     those weren't newcomers.  Those were both

      15     people who would normally go to the

      16     department store.

      17               I'm just curious.  I'd be

      18     interested to know in this audience, in this

      19     Christmas season, how many of us have made

      20     purchases over the Internet?  Can I just ask

      21     for a show of hands?

      22               Now, I would ask for you to ask









                                                             438
       1     yourself how many of you did that as a

       2     replacement for your trip to the mall or was

       3     it an additional purchase?  This is not

       4     entirely a zero-sum gain, but it is in large

       5     measure, people are using the tremendous

       6     power of this instrument to add convenience

       7     to their lives.  And while that may be

       8     anecdotal, I think it resonates inside the

       9     heart of every person who's made an Internet

      10     purchase at 2:00 in the morning because the

      11     store wasn't open or they didn't want to go

      12     out on a Saturday morning because it was

      13     snowy.

      14               CHAIRMAN GILMORE:  Grover Norquist?

      15               MR. NORQUIST:  Yes. I just want to

      16     make sure we address my resolutions before

      17     Commissioner Kirk has to leave.  So I don't

      18     know at what point you want to insert it, but

      19     I didn't want to -- since he's been vocal in

      20     opposing the 3 percent federal communication

      21     tax, I didn't want to lose him.

      22               CHAIRMAN GILMORE:  I'm going to call on









                                                             439
       1     Ted Waitt.  And then if we can perhaps think

       2     about what more we have to do through the

       3     issues and answers paper, as time goes on --

       4     but we will get these resolutions onto the

       5     floor, I think next.  Because we're almost

       6     done with this.  But let's continue on.

       7               Ted?

       8               MR. WAITT:  Yes.  Thanks, Governor.

       9     Just a few comments here in regards to things

      10     different people said.

      11               In terms of the nexus issue and the

      12     Quill issue that Mr. Pottruck brought up, I

      13     mean I think that is very integrated to this

      14     issue.  I mean, if you listen to the business

      15     panel that was here today, the people from

      16     Dell, Cisco, HP, I mean these are people that

      17     are driving this new economy.  And they

      18     talked about the frustration around the nexus

      19     issue and the lack of clarity.

      20               Dean Andal's proposal that he has

      21     made, as I think Mayor Kirk pointed out, if

      22     that definition of nexus would have existed









                                                             440
       1     for us a few years ago, clearly we would not

       2     have collected sales tax in any states,

       3     because it's a very loose definition of

       4     nexus.  Now, that can either be a good thing

       5     or a bad thing, but clearly it would have had

       6     pretty significant ramifications on our

       7     business, where we would not have been

       8     collecting sales tax based on his definition.

       9               But regardless of that point, I

      10     think it is important for us to clarify Quill

      11     and the nexus issue as it relates to this

      12     remote sales.

      13               I think, based on the various

      14     options that we have here, I think Governor

      15     Gilmore modified his proposal No. 4 to apply

      16     to all remote sales.  But I think options 1

      17     and 3 also need to be applied to all remote

      18     sales, as well.  Since I think they specify

      19     only Internet sales.  And I think, as Mr.

      20     Parsons pointed out, he put it much more

      21     eloquently than I could, but I think what he

      22     was saying is, you know, show me the money.









                                                             441
       1     How much is this going to cost?

       2               There's been a lot of talk about

       3     lack of empirical evidence about how much

       4     business is going to move to the Internet and

       5     move to remote sales.

       6               Just as a point of fact, and I've

       7     been trying to get the data here, but I

       8     haven't got it yet, because we just recently

       9     made a move within our business where we used

      10     to charge sales tax on the Internet.  And

      11     because of the vagaries around nexus and the

      12     current definitions of nexus, now we're not

      13     in certain states, as well as in our phone

      14     business.  I did get the data on the increase

      15     of our phone business, just recently.  I'm

      16     still waiting on the exact numbers on the

      17     Internet business.  But it looks like our

      18     telephone sales increased on the order of

      19     five percent.  And this is very short-term

      20     data, so don't take this to the bank, but

      21     just to give people some indications.

      22               And our Internet sales are looking









                                                             442
       1     like they increased at least double that kind

       2     of a rate from this sales tax issue.

       3               So this is very early data.  I can

       4     try and get some better numbers for the

       5     Commission to help quantify this issue,

       6     because we'll have real time data of what our

       7     business was in certain markets.  I mean, we

       8     sell by the phone, by the stores, and by

       9     Internet.  We've been moving around where we

      10     charge sales tax and where we don't charge

      11     sales tax.

      12               So I think we can hopefully provide

      13     some data that can help quantify that.

      14               Back to your proposal, Governor

      15     Gilmore.  I think when you open up that

      16     definition as it's specified under Section

      17     1103 in our report, when you open up that

      18     definition to include all remote sales,

      19     clearly that's going to be a much larger

      20     dollar impact to the gentleman on the states

      21     here.  So I think it is important that

      22     between now and Dallas that we at least try









                                                             443
       1     to get our arms around that.  Because the

       2     definition of just Internet sales is very

       3     small today.  But if you include all remote

       4     sales and treat them identically, as I think

       5     we're told we're supposed to do, we could be

       6     talking about a pretty big number, and I

       7     think we need to understand what we're

       8     getting into as we have these discussions

       9     between now and Dallas.

      10               And just a few comments on this

      11     issue.  I think we really do need to get this

      12     issue resolved.  I had a dinner last night

      13     with a group of people in the Internet

      14     community, and one of the things that they

      15     said was when a business -- two of the people

      16     in the Internet business said, "I want you to

      17     design my web site for me."  The most common

      18     response is, "You don't need an Internet

      19     strategy.  What you really need to do is

      20     understand what the real strategy of your

      21     business is."  What is the strategy of our

      22     company, not what is our Internet strategy.









                                                             444
       1     And then you take that strategy and take it

       2     to the Internet.

       3               I think that relates to this tax

       4     question that we're talking about today, is

       5     we don't need an Internet strategy.  It's

       6     what is our total strategy for taxation into

       7     the 21st century, as it was laid down to us,

       8     to talk about all remote commerce.

       9               A couple of points in your proposal

      10     that I'd just like to bring up in terms of

      11     benefitting small business and the digital

      12     divide issue.  I'm very cautious that if we

      13     do not collect sales tax on all Internet

      14     transactions with the current state of

      15     affairs today, that we do wide the digital

      16     divide rather than close it.

      17               A couple of points of data:  In the

      18     month of November -- in the month of October

      19     of this year, Gateway -- our company --

      20     refused 184,000 families credit for PCs.  In

      21     the month of November, it was closer to

      22     250,000 families that we declined credit for









                                                             445
       1     a PC.  We called these people back and

       2     surveyed them and found that they didn't get

       3     a PC anywhere else.  They cannot get credit.

       4     They don't have credit cards.  They do not

       5     have credit.  And the number one reason they

       6     want to buy this PC is for their children, so

       7     their children don't fall behind, and so they

       8     can get their kids on the Internet.

       9               Now, they don't have credit cards,

      10     so they're not going to be large E-commerce

      11     purchasers, and if we're giving the Internet

      12     just an exemption in terms of collecting

      13     sales tax, we do run the risk of widening

      14     that gap.

      15               Another comment is in terms of

      16     small business.  Anybody who's familiar with

      17     kind of the dot.com economy that we're in

      18     today, there's a tremendous amount of venture

      19     capital that exists today for Internet

      20     start-ups.  Take an auto parts company,

      21     right?  If you are, you know, Billy Ray's

      22     Auto Parts with five guys and you're









                                                             446
       1     somewhere, trying to sell auto parts, you

       2     might be struggling.  But if you're Billy

       3     Ray's Auto Parts.com and you've got five guys

       4     in the business plan, you're worth $20

       5     million.

       6               So I think we just need to take

       7     these things into consideration.  You know,

       8     I'm not for putting any taxes on the

       9     Internet.  I think we had a lot of good

      10     discussions and a lot of work that we can do

      11     between now and Dallas, as we can nail some

      12     of these decisions.  Thank you.

      13               CHAIRMAN GILMORE:  Thank you, Ted.  I

      14     passed by Mr. Sidgmore a few minutes ago

      15     inadvertently.

      16               John?

      17               MR. SIDGMORE:  That's okay.  I

      18     just -- two quick things.  One, a question --

      19     a short question.  How do you in your

      20     proposal differ from what Dean has proposed,

      21     in your mind, with the exception of sort of

      22     bright lining some of the issues around









                                                             447
       1     Quill?  How do you differ with Dean's

       2     proposal?

       3               CHAIRMAN GILMORE:  I'm not sure I've

       4     done the analysis, but Dean's Quill basically

       5     places you in a position where the people in

       6     the states can -- are continuing to tax on

       7     the Internet in the local state.  And he is

       8     defining exactly what that level of nexus is.

       9               I believe that's right, Dean.

      10               MR. SIDGMORE:  I was under the

      11     impression that your proposal also allowed

      12     taxation within the state where you have

      13     nexus?

      14               CHAIRMAN GILMORE:  On the general sales

      15     tax.  But we can define remote sales as to

      16     what that should be, and then beyond that, I

      17     think my proposal does reach further.  It

      18     calls for an elimination of sales tax on the

      19     Internet on remote sales, whether or not

      20     there's a nexus.

      21               Although we can fold the nexus

      22     proposal into that.  But go ahead.









                                                             448
       1               MR. SIDGMORE:  Right, because it

       2     doesn't sound like they're that far apart.

       3               CHAIRMAN GILMORE:  No.

       4               MR. SIDGMORE:  A couple of things.

       5     You know, just listening to Ted here, I think

       6     we're pretty polarized in our views, you

       7     know, to no surprise of anyone here.  And

       8     there are obviously a lot of strong views.

       9     And I was trying to think through whether

      10     there are a couple of things that we could

      11     sort of energize around.

      12               To me, with respect to your

      13     proposal, there are two fundamental issues.

      14     I -- first of all, I completely agree with

      15     Ted on the digital divide question.  I do

      16     think the digital divide gets worse if we go

      17     forward under this kind of a scenario.

      18               But I think the two issues

      19     fundamentally are a level playing field

      20     issue -- which we've heard a lot about and

      21     we've sort of debated to death here over the

      22     last couple of days.  But I don't, at least









                                                             449
       1     in my mind, feel that there is any kind of

       2     satisfactory resolution to that.  I think the

       3     fact of the matter is under the no-tax

       4     proposals of any sort, we do create sort of a

       5     special class around the Internet, for better

       6     or worse.  And I do think that will hurt

       7     traditional Main Street players, almost no

       8     matter what we do.

       9               And I think that has to be

      10     addressed if we're going to reach any kind of

      11     consensus.

      12               The second thing is this whole

      13     question about whether or not we're going to

      14     lose revenue, and whether or not there's

      15     going to be a state tax burden here as a

      16     result of all of this, we've had a lot of

      17     debate about whether there's data to support

      18     the fact that commerce is moving from

      19     traditional Main Street to the Internet.  But

      20     the fact of the matter is, E-commerce is in

      21     its infancy.  And if you look out five years,

      22     like others have said, or eight years, I









                                                             450
       1     don't think there's an economist or an

       2     investment banker or an analyst in the United

       3     States that wouldn't tell you that E-commerce

       4     is going to grow dramatically faster than the

       5     rest of retail sales.  And if you just take

       6     those two simple points and you run the math

       7     out a few years, there's no question about

       8     the fact that you're going to lose economic

       9     power from the traditional economy.

      10     Therefore, there is going to be a reduction

      11     in sales tax revenue.

      12               Now, you can argue about how much

      13     that is, is it important, should we be

      14     lowering taxes, anyway -- Grover's comments,

      15     we should have a smaller government.  Those

      16     are fair questions.  But I think there's no

      17     question about the fact that it's going to

      18     move from one pile to the other.  And

      19     therefore, coming to my conclusion here,

      20     since no one's really sure how fast this is

      21     going to happen, or how much of it is going

      22     to happen, and, you know, we didn't talk









                                                             451
       1     about this much, but the truth is that the

       2     role of infrastructure and the Internet is

       3     just starting to be examined now.  People

       4     haven't noticed this, but amazon.com is

       5     buying more and more warehouses.  They're

       6     buying toy stores, they're buying bookstores,

       7     things that they never said that they would

       8     buy before.

       9               And so there may be a situation

      10     five years from now where people have nexus

      11     in 17 states or 25 states and they actually

      12     do pay more tax.  But as you look at it,

      13     nobody knows how much it's going to move.

      14               And therefore, why wouldn't it be

      15     more prudent -- I guess in your mind, since

      16     you have sort of this one polar presentation

      17     here -- why wouldn't it be more prudent to

      18     punt and to delay the issue?  I mean, I think

      19     everybody would agree that during the infancy

      20     of a great technology like this it might be a

      21     good idea to help it along, so that it

      22     develops nicely.  Why wouldn't it be smarter









                                                             452
       1     to give it a three-year or a four-year break

       2     before we conclude for sure that it should

       3     never be taxed or that it should be taxed?

       4               CHAIRMAN GILMORE:  I suppose that's a

       5     possibility which we can discuss between now

       6     and Dallas.  And thank you.

       7               We need to move immediately now to

       8     Mr. Norquist's resolutions, even if we return

       9     to this topic afterwards, in order to make

      10     sure that Mayor Kirk's in a position to be

      11     here.

      12               MAYOR KIRK:  Before you do that, I

      13     would just do one thing.  And I regret --

      14     because I don't think I'm going to be able to

      15     remain if we visit the resolution.

      16               There's an issue paper that I

      17     provided to you on the digital divide.  It

      18     represents a compilation of thoughts that I

      19     tried to ascertain from the National League

      20     of Cities and Conference of Mayors.  I have

      21     no pride in authorship of it.  It's more of

      22     an issue piece to that, but I did want to say









                                                             453
       1     that I associate myself with the comments of

       2     John Sidgmore and Ted Waitt, particularly on

       3     that of the digital divide and the unknown,

       4     but determined economic impact of

       5     non-taxation of E-commerce.

       6               CHAIRMAN GILMORE:  Thank you, Mr. Mayor.

       7               MAYOR KIRK:  And my staff will kill

       8     me if I didn't do it, but to remind everyone

       9     on the Commission, the meeting in Dallas will

      10     be in March, the 20th and 21st -- because

      11     there was some confusion on the dates -- at

      12     the Fairmont Hotel.

      13               You should know that the very first

      14     sporting event in the next century will be

      15     telecast at 10:00 in the Cotton Bowl, when

      16     the Texas Longhorns and those red-hat,

      17     hog-wearing folk from Arkansas tip off in the

      18     Cotton Bowl.

      19               CHAIRMAN GILMORE:  I want to call on

      20     Grover Norquist.  If you can remain just a

      21     moment or two, Mr. Mayor, he could get

      22     started.









                                                             454
       1               MR. LEBRUN:  Mr. Chairman, may I?

       2               CHAIRMAN GILMORE:  Yes, Mr. Lebrun?

       3               MR. LEBRUN:  In New York, I stated

       4     that I did not think it was appropriate for

       5     this Commission to be taking piecemeal votes

       6     on such resolutions, and I retain that

       7     position.  And I've read the resolutions.  I

       8     think that they are, again, asking us to take

       9     piecemeal positions on things that should be

      10     waited on until we have our final report,

      11     which will be in Dallas.

      12               I think at this time of the day

      13     when we know people are going to have to

      14     leave, we don't have time for further

      15     substitive deliberation on these resolutions.

      16     I would hope that Commissioner Norquist would

      17     see fit to defer his resolutions until

      18     Dallas, and if he isn't so fit, I would move

      19     to table them at this point in time.

      20               CHAIRMAN GILMORE:  Mr. Norquist, you may

      21     restate what your resolutions are and whether

      22     or not you would withdraw or whether you









                                                             455
       1     would like to put them on, that is your

       2     privilege, naturally.

       3               MR. NORQUIST:  Yeah, I would

       4     certainly like the opportunity to present

       5     them.  The first resolution deals with

       6     putting a sunset on all federal taxes imposed

       7     on telecommunications.  The reason for this

       8     is to avoid the problem we all focused on

       9     with 101-year-old telecommunications tax.

      10               We have now the most recently

      11     FCC-imposed tax, the Gore Tax, the E-Rate,

      12     which has been put in and it was given sort

      13     of a specific duty.  We're going to spend

      14     X amount of money wiring schools.  But it

      15     doesn't have a sunset clause, and so I'm

      16     going to working with Congress to put in

      17     legislation to say, okay, what were you

      18     planning on doing?  How much money did you

      19     need?  And the thing sunsets in five years or

      20     six years, I'd like to suggest that we would

      21     present that in the Commission report as a

      22     policy that ought to applied in other









                                                             456
       1     circumstances.

       2               This is the first time I've put

       3     this measure forward, and so I'm not asking

       4     for a vote on it, but I wanted everybody to

       5     have a chance to look at it.

       6               CHAIRMAN GILMORE:  I will call on you to

       7     further discuss each resolution after you

       8     have stated it, unless Mr. Lebrun's motion

       9     succeeds.  But I just wanted to give you

      10     notice that if you'll just state them,

      11     I'll -- we'll let Mr. Lebrun have his day.

      12     But it's a -- I do fully intend for you to

      13     have plenty of time to present your case, you

      14     know.  But if you'll just state it now then

      15     we -- I don't want to slam down Mr. Lebrun is

      16     my point.  But go right ahead.

      17               MR. NORQUIST:  Okay.  The second

      18     resolution deals with business activity

      19     taxes.  And the reason I brought it up was in

      20     previous discussions it basically goes along

      21     the lines that Commissioner Andal had

      22     broached.  He certainly put together reform









                                                             457
       1     of nexus questions dealing with both income

       2     taxes and sales taxes, and I've heard a lot

       3     of concern from affected companies, that

       4     discussion about making it easier for Alabama

       5     to impose sales taxes on businesses in Maine,

       6     is also a Trojan horse for allowing income

       7     taxes to be imposed across state borders, as

       8     well.

       9               Because that's the first time I'm

      10     putting it forward, and because Mr. Andal has

      11     a proposal that deals with that, I'm not

      12     asking for a vote on it.

      13               The two that I'd like to submit for

      14     a vote are the ones that were discussed in

      15     this Commission, both in New York, and there

      16     was consensus on it then, and we've just

      17     discussed both here and there was

      18     overwhelming support for both, as well.  The

      19     first was not taxing Internet access.  I

      20     think that's a very important part of the

      21     digital divide.  One can guess about what

      22     else creates a digital divide, but putting









                                                             458
       1     regressing taxes on Internet access

       2     definitely augments the digital divide.

       3               And then the second one was the

       4     3 percent telecommunications tax, which was

       5     imposed to fund the Spanish-American War.  It

       6     was imposed as a tax on rich people, because

       7     only 100,000 people at the time had phones.

       8     Recently I discovered the Spanish-American

       9     War is over, and now everybody has phones in

      10     the country, as they ought.  And so this tax

      11     that was once a tax on rich people is now

      12     actually a regressive tax on families, and I

      13     would like to -- since, again, we've asked

      14     whether there's opposition to their

      15     concepts -- their two other concepts -- and I

      16     haven't seen substantial -- we polled this

      17     before in New York and we had two-thirds

      18     support for both of them.

      19               I'd like to call them up for a

      20     vote, both, so we can demonstrate to the

      21     country that we're making some progress on

      22     consensus items, because as Commissioner









                                                             459
       1     Sidgmore pointed out, we're probably not

       2     going to agree on the general questions.  I

       3     know I disagree with Governor Leavitt's

       4     direction in which he wants to go in, which I

       5     think will lead to higher taxes and more loss

       6     of people's privacy, and other people -- and

       7     I side myself with them -- want to go toward

       8     the direction where we have more competition

       9     between the states and over time less

      10     intrusive taxes and less violations of

      11     people's property in order to extract those

      12     taxes.

      13               So since we've got those two very

      14     different directions people want to move in,

      15     I think since Bill Clinton has endorsed -- as

      16     it was said -- not taxing access, and we've

      17     got the Republican candidates moving in the

      18     same direction, that it's helpful for us to

      19     point out to ourselves and to the country

      20     that on these two issues we have consensus.

      21     And that there's strong support for this and

      22     then the gentleman of the fourth estate will









                                                             460
       1     have a story to write about.

       2               CHAIRMAN GILMORE:  Mr. Norquist?

       3               MR. NORQUIST:  So I'd like to move

       4     voting the measure on telecommunications

       5     services.

       6               CHAIRMAN GILMORE:  Mr. Norquist has

       7     properly filed his resolutions and has a

       8     perfect right to bring them up, which he has,

       9     in fact, done.  I believe they are seconded,

      10     Mr. Andal, and that is fine.

      11               Now, Mr. Lebrun?

      12               MR. LEBRUN:  Thank you,

      13     Mr. Chairman.  I'd appreciate Commissioner

      14     Norquist not asking to vote on resolution

      15     number two.  My position with regard to the

      16     other two remains the same.  I think if we

      17     take a vote at this point in time, we are

      18     piecemealing matters that have been

      19     discussed, both at this meeting and at our

      20     prior meetings.  I think the consensus

      21     earlier was that we should wait and take a

      22     look at them again in Dallas, when we have









                                                             461
       1     completed our work and look at them as part

       2     of the entire package.

       3               And, therefore, Mr. Chairman, I

       4     would move that both Resolutions 3 and 4 be

       5     tabled.

       6               CHAIRMAN GILMORE:  Mr. Lebrun has moved

       7     to table.

       8               MR. NORQUIST:  May I speak to that?

       9               CHAIRMAN GILMORE:  You certainly may.

      10     Is there a second to the motion?

      11               MR. NOVICK:  Second.

      12               CHAIRMAN GILMORE:  There is a second by

      13     Robert Novick to table the motion.  The floor

      14     is open to discussion.

      15               Mr. Norquist, why do you oppose the

      16     table?

      17               MR. NORQUIST:  Well, Mr. Lebrun

      18     didn't like the last resolution we passed

      19     18-to-1, which was the one in support of the

      20     Clinton Administration's negotiating

      21     position.  So we did actually decide to do

      22     something piecemeal, and I'm glad we did.









                                                             462
       1               Because there's a time sensitivity

       2     on this, this is not something that can wait.

       3     I mean, the world is not waiting.  It's

       4     operating in real time.  If we had waited, we

       5     would not have passed our resolution in

       6     support of the Clinton Administration's

       7     position on trade until after Seattle.  That

       8     would have been a little late.  Partly

       9     because of our resolution -- and I worked on

      10     it on the hill -- we got the House of

      11     Representatives to pass 430-something to 1 a

      12     resolution in support of the Clinton

      13     Administration's position in -- a negotiating

      14     position on WTO and on Seattle.

      15               I think it's helpful for this

      16     Commission to be a part of this national

      17     debate.  And two things are going to happen

      18     between now and Dallas.  And one of them is,

      19     the Administration is going to put forward a

      20     budget, and Congress is starting to write a

      21     budget.  And whether or not -- I mean, as we

      22     went around this room, and everybody from Ron









                                                             463
       1     Kirk to Commissioner Pottruck and others said

       2     they endorsed getting rid of the 3 percent

       3     telecommunications tax.  I think it would pay

       4     for our voice to be heard before Bill Clinton

       5     writes his budget and the Congress begins to

       6     enact theirs.

       7               And the same thing with access

       8     charges.  Congress isn't going to wait until

       9     we're in Dallas before they start moving on

      10     them.

      11               So that's why I think it pays to

      12     weigh in on them now as opposed to later.

      13               CHAIRMAN GILMORE:  With my apologies to

      14     Mr. Sokul, Mr. Waitt, and Mr. Andal, who have

      15     asked to be recognized on the issue to table,

      16     the legal counsel advises me that the motion

      17     to table is not debatable.

      18               So we have heard something from

      19     both sides, with Mr. Lebrun and Mr. Norquist,

      20     but I guess now we ought to follow the rule.

      21               Motion to table is not debatable,

      22     it has been seconded.  The rules of our









                                                             464
       1     Commission call for a roll call vote on any

       2     of that matter.  There are 15 present.  Eight

       3     is a simple majority to table.

       4               Mr. Andal, do you have a point of

       5     order?

       6               MR. ANDAL:  Yeah, a point of order.

       7     I'm not sure it matters, but Mr. Norquist did

       8     not offer Resolution 4 yet, so you have wait

       9     to table.  You can't table a motion that

      10     hasn't been offered.

      11               CHAIRMAN GILMORE:  I understood that

      12     both resolutions were offered.

      13               MR. ANDAL:  I offered 3.  I thought

      14     we'd have a vote on 3 and then on 4.

      15               CHAIRMAN GILMORE:  The Chair rules that

      16     both have been offered, 3 and 4.  And there

      17     will be a motion -- the Chair rules that both

      18     have been offered.  We'll call the role.

      19               Mr. Andal, should we table, yes or

      20     no?

      21               MR. ANDAL:  No.

      22               CHAIRMAN GILMORE:  Mr. Andal votes no.









                                                             465
       1     Mr. Guttentag?

       2               MR. GUTTENTAG:  Yes.

       3               CHAIRMAN GILMORE:  Delegate Harris?

       4               MR. HARRIS:  No.

       5               CHAIRMAN GILMORE:  Governor Leavitt?

       6               GOVERNOR LEAVITT:  Yes.

       7               CHAIRMAN GILMORE:  Delna Jones?

       8               MS. JONES:  Yes.

       9               CHAIRMAN GILMORE:  Gene Lebrun?

      10               MR. LEBRUN:  Yes.

      11               CHAIRMAN GILMORE:  Grover Norquist?

      12               MR. NORQUIST:  No.

      13               CHAIRMAN GILMORE:  Mr. Novick?

      14               MR. NOVICK:  Yes.

      15               CHAIRMAN GILMORE:  Mr. Parsons?

      16               MR. PARSONS:  Yes.

      17               CHAIRMAN GILMORE:  Mr. Pincus?

      18               MR. PINCUS:  Yes.

      19               CHAIRMAN GILMORE:  Mr. Pottruck?

      20               MR. POTTRUCK:  Yes.

      21               CHAIRMAN GILMORE:  Mr. Sidgmore?

      22               MR. SIDGMORE:  Yes.









                                                             466
       1               CHAIRMAN GILMORE:  Mr. Sokul?

       2               MR. SOKUL:  No.

       3               CHAIRMAN GILMORE:  Mr. Waitt?

       4               MR. WAITT:  Yes.

       5               CHAIRMAN GILMORE:  And the Chairman

       6     votes no.  There are -- the yeas ten.  The

       7     nays are five.  The motion is tabled to

       8     Dallas.

       9               Sorry, Grover.

      10               MR. NORQUIST:  That's all right.

      11     Everybody got to see where everybody voted,

      12     so.

      13               CHAIRMAN GILMORE:  We are now returned

      14     back to the issue of the application of sales

      15     taxes.  I believe we have concluded that, in

      16     the absence of another hand.

      17               It is 5:00.  We still have a few

      18     minutes left, even on our calendar, before we

      19     go into the administrative matters.

      20               Yes, sir, Mr. Pottruck?  Before we

      21     resume the pre-policy and issues?

      22               MR. POTTRUCK:  Thank you.









                                                             467
       1     Governor.

       2               I just would like to state my own

       3     observation.  I think in the area of sales

       4     taxes, we have had a really magnificent

       5     discussion.  And over the three meetings that

       6     I have sat in on this, my own information on

       7     this has expanded enormously.  I really do

       8     think that we've had a terrific assembly of

       9     expert speakers from all corners.  I think

      10     you and your staff have done a terrific job

      11     in organizing an informing debate, which is

      12     exactly what we're supposed to do.  I think

      13     all of that has been terrific.

      14               I think the problem is clearly more

      15     complicated than I ever imagined it would be.

      16     And my own perception is that, as many people

      17     said, this is really not a problem today.

      18     E-commerce is still small, we have wonderful

      19     revenues pouring into our state, local, and

      20     even federal governments.

      21               So the question, really, becomes

      22     one of what the right long-term solution will









                                                             468
       1     be, and whether we can make a recommendation

       2     that can motivate the right approach for a

       3     21th-century solution.

       4               We have a lot of wonderful

       5     consensus here.  I think we're going to -- I

       6     think there's little debate about the fact

       7     that existing sales taxes are too

       8     complicated, the existing system produces an

       9     unusual burden on business, none of which is

      10     good for America.

      11               And so I hope that we will

      12     continue, between now and Dallas, to have

      13     active participation from the members of this

      14     Commission in one-on-one discussions, in

      15     conference calls, to not only work with the

      16     seven proposals that are on the table right

      17     now, but to look at forming new proposals as

      18     well.  I think all of these proposals have

      19     things that I like a lot, things that I don't

      20     think yet work, and that -- my presumption is

      21     that we are not at all limited to these

      22     seven, and that we will continue to work the









                                                             469
       1     process to see if we can find the best parts

       2     of each, and continue to find compromise and

       3     consensus for new ideas to continue to

       4     emerge.

       5               And this whole meeting has been

       6     around new ideas, so it's almost impossible

       7     to presume that we could come in, prior to

       8     hearing all the testimony and all the

       9     wonderful questions and answers that have

      10     been part of this debate, with the best

      11     ideas, and that, in fact, following this

      12     meeting, I would hope that we would see an

      13     enormous level of activity among our staffs

      14     and among ourselves to form the basis of our

      15     debate, discussion, and resolutions in

      16     Dallas.

      17               CHAIRMAN GILMORE:  Thank you,

      18     Mr. Pottruck.  I think this is the most

      19     high-powered and sophisticated Commission

      20     I've ever been involved in, and I'm confident

      21     there will be more discussions among all of

      22     us as we move ahead towards Dallas.  But









                                                             470
       1     things are getting crystallized, I think,

       2     pretty fast here.

       3               I would remind the Commissioners

       4     that, again, we still have a few minutes

       5     remaining before we are even late on our

       6     agenda.  We have a few more items to go

       7     through.  We can run through them quickly, or

       8     we can engage in any discussion on these as

       9     we go along.  We have covered, I think, the

      10     heart of most of them.

      11               On Page 15 of your paper, the paper

      12     outlines three options on how digital goods

      13     are taxed.  I've always wondered why any

      14     sales tax system would want to distinguish

      15     between digital goods, information and

      16     services.  The Internet blurs the distinction

      17     between goods and services, and taxation of

      18     one might inevitably lead to taxation on a

      19     service provided.  So I'm interested in this

      20     matter.

      21               The policy options that are here

      22     are, number one, to recommend sales, and









                                                             471
       1     local governments retain the authority to tax

       2     or exempt digitalized goods in a manner

       3     consistent with tangible goods and tangible

       4     services.  Two, recommend preempting state

       5     and local governments' authority to impose

       6     sales and use tax on those electronic

       7     commerce transactions involving transfers of

       8     digitized goods.  Or, three, impose a central

       9     of federal sales tax on sales of digitized

      10     goods or by formula distribute the revenue to

      11     the states.

      12               These are the policy matters that

      13     are in the document at this point.  Does

      14     anyone wish to comment on any of those, or do

      15     we move ahead?  Mr. Lebrun?

      16               MR. LEBRUN:  I think it's an

      17     excellent item for further discussion.  It

      18     would be easy if there was a clear bright

      19     line as to what's digital and what isn't.

      20     But there's mixed media.  The Uniform Laws

      21     Conference struggled for a couple of years

      22     working on a uniform information transactions









                                                             472
       1     act.  And we had people there from the

       2     entertainment industry, the banking industry,

       3     and more and more of this mixed media-type of

       4     transaction is happening out there.

       5               I think yesterday we used the

       6     example that, if I had retained a lawyer from

       7     California to write a brief for me, he can

       8     submit that to me either in the mail, over

       9     the fax, or over the Internet.  As it comes

      10     over the Internet, is that digital

      11     information?

      12               So I think this is an excellent

      13     topic.  But it's not that simple, because of

      14     the mixed media and the various options that

      15     are available for how it's transmitted.  And

      16     to just say that they shouldn't be taxed

      17     raises many questions as to say it should be

      18     taxed.  It deserves to be on the agenda, but

      19     it's too early to make any final decisions.

      20               CHAIRMAN GILMORE:  Other comments on

      21     this issue?  The next topic on this sales tax

      22     issue is involved under nexus concerns.  The









                                                             473
       1     options listed on the nexus concerns are:

       2               Number one, to recommend preserving

       3     the status quo.  Out-of-state merchants

       4     making sales of tangible personal property

       5     facilitated by the Internet should not be

       6     required to collect transaction taxes if they

       7     do not meet the substantial nexus standard

       8     articulated in Quill vs. North Dakota.

       9     That's the first proposal.

      10               The second:  Redefining existing

      11     nexus standards, to provide state and local

      12     government with expanded authority to impose

      13     tax collection duties on out-of-state

      14     sellers, even though the sellers have no

      15     physical presence in the taxing state.

      16               Or, third:  Recommend clarifying

      17     existing nexus standards by identifying with

      18     greater precision than under current law the

      19     business activities which taxpayers involved

      20     in interstate commerce may engage in without

      21     being subject to state and local tax

      22     collection obligations.









                                                             474
       1               Those are the three issues

       2     regarding nexus.

       3               MR. PARSONS:  Can I ask a question?

       4               CHAIRMAN GILMORE:  Mr. Parsons?

       5               MR. PARSONS:  Are 1 and 3 really

       6     different?

       7               CHAIRMAN GILMORE:  They have been

       8     offered by different people, I believe, and

       9     that's probably why they're both here.  It's

      10     a question of whether they're different, so

      11     we could strike one.  We're on Page 16 of the

      12     policy document paper.

      13               George, would you like to comment

      14     on that?  Mr. Parsons has asked whether the

      15     Policy Directives 1 and 3 really have any

      16     difference between them.

      17               MR. VRADENBURG:  I think 1 simply

      18     reflects the current world in which Quill is

      19     our guiding light.  And 3 is intended to

      20     reflecting the Andal suggestion that we have

      21     a statutory clarification.

      22               Number 2 would repeal nexus --









                                                             475
       1               MR. PARSONS:  No, no.  2, I

       2     understand.  I'm asking, I guess, the

       3     offerors of these, are they different?  You

       4     could state them, I guess, differently.  1

       5     would be, we don't do anything, and Quill is

       6     Quill, and the states are the states, and the

       7     law is the law.

       8               MR. VRADENBURG:  And let litigation

       9     prevail, or Dean Andal's suggestion that by

      10     statutory clarification, one would reduce

      11     litigation and increase clarity and

      12     certainty.

      13               MR. PARSONS:  Which is Item 3, is

      14     that correct?

      15               MR. ANDAL:  I'm not sure I'm right

      16     here.  I just looked at it, but it looks like

      17     Item 1 relates to sales and use tax

      18     collection, and Item 3 relates to business

      19     activity taxes.  But I'm not sure if that's

      20     right.

      21               MR. PARSONS:  I got it.  I was

      22     given bad information by somebody's staff.









                                                             476
       1               CHAIRMAN GILMORE:  Other comments on

       2     this?  We know where these issues are.  And

       3     if anyone wants to eliminate one of these,

       4     speak now.  We haven't done too much

       5     narrowing of these varying things today.

       6               Dean Andal, do you wish to say

       7     anything else about this before we move on?

       8               MR. ANDAL:  I wouldn't think of it.

       9               CHAIRMAN GILMORE:  You wouldn't think of

      10     it.

      11               Okay.  We have still three topics

      12     to cover.  The first are business activity

      13     taxes, the second is redress for

      14     unconstitutionally-imposed taxes, and the

      15     third is the digital divide.  Let's take a

      16     look at this, page 18, "Impact on Business

      17     Activity Taxes."

      18               Dean, did you want to add anything

      19     to this?

      20               MR. ANDAL:  No.

      21               CHAIRMAN GILMORE:  Those three are:

      22     Recommending adopting bright line standards









                                                             477
       1     for business activity taxes, nexus, including

       2     extending the protections of Public Law

       3     86-272 to all state and local government

       4     taxation.  And, two, recommending no change

       5     in current business activity taxes.  Or,

       6     three, recommend requiring electronic

       7     commerce businesses to pay business activity

       8     taxes on a basis reasonably equal to all the

       9     businesses earning income in the state by

      10     encouraging states to develop uniform

      11     apportionment methods for all enterprises,

      12     including those conducting electronic

      13     commerce and by adopting nexus standards for

      14     all businesses based on clear and certain

      15     levels of economic activity.  Got it?

      16               George, what we may want to do is

      17     survey the Commission members a little bit at

      18     the conclusion of the meeting.  Everybody, I

      19     think, understands what the document says,

      20     and we're giving an opportunity now for any

      21     commentary on it.  But we ought to be giving

      22     the Commission an opportunity to narrow this









                                                             478
       1     perhaps a little bit, and then put it back

       2     in, if people want to.

       3               On page 20, VI, "Redress mechanism

       4     for imposition of unconstitutional state and

       5     local taxes."

       6               I believe this is yours, Mr. Sokul.

       7               MR. SOKUL:  It's getting late, and

       8     this is perhaps viewed as a somewhat

       9     tangential issue or a side issue.  Let me

      10     just quickly explain what I'm trying to do

      11     with this proposal and the basis of it.  And

      12     I'll send everyone more information, a better

      13     explanation of it than the summary

      14     explanation in this document.

      15               But basically, if you're going to

      16     have a world with Quill or with a Dean Andal

      17     proposal, where nexus is governed by

      18     constitutional standards -- or in the future

      19     maybe a federal standard -- you end up with

      20     litigation.  We've heard a lot about the cost

      21     of litigation, and there's hundreds of cases

      22     going on.









                                                             479
       1               My proposal can be simply put as,

       2     the federal courts should hear the federal

       3     question.  Right now, one of the reasons

       4     there's so much litigation and so much chaos

       5     on the enforcement side of all these

       6     questions is that it has to go

       7     state-by-state, because of a 1937 federal

       8     law, which was obviously enacted in a

       9     different time.  And I think we can agree,

      10     and the panelists have agreed, that the

      11     Internet is inherently interstate, and that

      12     means federal.

      13               And so I think it does relate quite

      14     strongly to electronic commerce and the

      15     growth of electronic commerce, that we should

      16     establish a system, or at least consider the

      17     notion that whatever we do when it does

      18     produce litigation on a federal question,

      19     that Congress should really consider looking

      20     at what it did in 1937, and saying, "Well,

      21     you know something?  Maybe the federal court

      22     should be deciding these federal issues."









                                                             480
       1               And that's really the basis of my

       2     proposal.

       3               CHAIRMAN GILMORE:  Any other comments by

       4     any Commissioner on this?

       5               Mr. Sokul has indicated he will

       6     distribute some additional information as

       7     well.

       8               On the last document, on page 22,

       9     is on the digital divide.  We have had some

      10     commentary on this already.  Mr. Norquist

      11     asked me to define that a little further.

      12               In addition to that, Mayor Kirk has

      13     submitted an option paper as well on some

      14     additional ideas on closing the digital

      15     divide.  I think -- I want to make sure I

      16     have a copy of Mayor Kirk's paper.  It was

      17     just submitted.

      18               Everyone is aware of my proposal to

      19     amend federal welfare guidelines, to permits

      20     states to spend temporary assistance to needy

      21     families, surpluses to buy computers and

      22     Internet access for needy families.  This is









                                                             481
       1     a case where, because of welfare reform, most

       2     of the governors have substantial TANF

       3     surpluses.  It is unclear, we believe, that

       4     we have the ability to spend this money in

       5     Virginia for needy families on this issue.

       6     But this paper calls for clarification to

       7     make sure there is no misunderstanding or

       8     impropriety with respect to the use of that

       9     money for the purpose of beginning to expand

      10     the use of the money for needy families to

      11     close the digital divide.

      12               Any further discussion?  Mr. Sokul,

      13     did you have your hand up first?  You did

      14     not.

      15               Mr. Norquist?

      16               MR. NORQUIST:  I would just add

      17     that we add into this section all of the tax

      18     reduction that I and others have talked

      19     about, the 3 percent federal

      20     telecommunications tax, as well as reduction

      21     in state and local taxes, and the access tax,

      22     all of them as they exacerbate the digital









                                                             482
       1     divide.

       2               And I would also ask, just for

       3     purposes of understanding, where we are in

       4     consensus.  What is the Clinton

       5     Administration's position about this measure?

       6     And the National Governor's Association

       7     that's here, have they weighed in?

       8               CHAIRMAN GILMORE:  Does anybody chose to

       9     make a comment on this topic?  There is no

      10     gun to anyone's head, except Delna's.

      11               Delna, go ahead.

      12               MS. JONES:  Well, Delna doesn't

      13     have a gun to her head, but I do think it

      14     might be helpful also to add into this that

      15     they have the opportunity to use these funds

      16     for training of families, so that they have

      17     training to use the computers that we're

      18     talking about.  I think that would be

      19     helpful.

      20               MR. PINCUS:  We have

      21     representatives from the Clinton

      22     Administration here.  Could I just ask if









                                                             483
       1     there is a policy?  And maybe the answer is

       2     there isn't one, I don't know.

       3               MR. GUTTENTAG:  I'm not aware of

       4     any.

       5               MR. PINCUS:  No, we've asked the

       6     people who are in charge of this, when the

       7     Governor made his proposal to look into it.

       8     Their preliminary indications are that they

       9     think that unobligated funds can be used for

      10     this purpose.  And we'll certainly, well

      11     before Dallas, have a final view on that.

      12               CHAIRMAN GILMORE:  That's great.  I

      13     would like to start a new program in Virginia

      14     to use some of these welfare dollars to

      15     partner with AOL, or with Gateway, or with --

      16     to provide computers and access.  I believe

      17     we can leverage a great deal with this.  So

      18     we want to be very careful about this and

      19     make sure that we get a clarification.  I

      20     appreciate the opportunity to get an

      21     endorsement of this.

      22               Let me also emphasize, by the way,









                                                             484
       1     this would be an option for the states.  They

       2     would not be obligated to do it.  It would be

       3     merely a choice that they might make with any

       4     of those surpluses.  And they're going to be

       5     used for the same people that would otherwise

       6     be put forward.

       7               That's the proposal in a nutshell.

       8     Is there any opposition to this proposal?  I

       9     can't imagine there would be.

      10               Then this will -- Mr. Lebrun?

      11               MR. LEBRUN:  Not in opposition.

      12     But Governor Janklow -- and he didn't address

      13     this at all when he was here -- but over the

      14     last few years, he's implemented a major

      15     program in South Dakota where he's got all

      16     the schools wired for the Internet.  I will

      17     ask him to prepare -- and I'll get it

      18     distributed to the rest of the Commission --

      19     an outline of what he's done, and what funds

      20     he's used, and what his position would be,

      21     and how to implement this, before the next

      22     meeting.









                                                             485
       1               CHAIRMAN GILMORE:  Very good.

       2               MR. GUTTENTAG:  Mr. Chairman, even

       3     if there's no opposition to this, it's not --

       4     we shouldn't be looking at this -- and I

       5     don't think you meant that this would be the

       6     sole solution to the issue of the digital

       7     divide.  You may need other options.

       8               CHAIRMAN GILMORE:  I'm certain the floor

       9     will be open in Dallas.  And we're also going

      10     to, of course, include Mayor Kirk's ideas on

      11     this, as well.

      12               The day has grown long, but we are

      13     on time.  And I know everybody is tired.  I

      14     appreciate your attentiveness and your

      15     participation.  We have closing

      16     administrative matters to take up.

      17               So first of all, let me get some

      18     minor matters our of the way, just a few

      19     administrative matters.  First, everyone has

      20     had a chance to review the minutes of the New

      21     York meeting.  Does anyone have any changes

      22     to propose to the minutes?









                                                             486
       1               MR. GUTTENTAG:  Small wording

       2     changes.  Can we take them up with staff?

       3               CHAIRMAN GILMORE:  Small wording changes

       4     can be taken up with the staff, if that is

       5     the sense of the Commission, yes.

       6               Otherwise, is there any objection

       7     or addition to the minutes?  Can we approve

       8     the minutes?  Move to adopt?

       9               Second?  All in favor of adopting

      10     the minutes, please say aye.  All opposed,

      11     nay.

      12               The minutes are adopted.

      13               Now, I want to recognize Delna

      14     Jones to provide an update of federal funding

      15     on behalf of the funding subcommittee.

      16               Delna?

      17               MS. JONES:  Thank you.  I hope all

      18     of you have had an opportunity to review the

      19     budget, the revised budget.  If you have not,

      20     Heather will be glad to get you one right

      21     away.  And I know many of you are preparing

      22     to leave.  I'll make this as brief as I can.









                                                             487
       1               One of the benefits that we have

       2     today that we haven't had in the past is, we

       3     have $1.4 million approved by Congress and

       4     signed by the President, and we actually have

       5     the funds in the George Mason University

       6     Foundation available for expenditure.

       7               I wanted to also to be sure that we

       8     give credit to all of the folks who have

       9     helped in this regard:  Senator Lott, Senator

      10     Gregg, and Congressman Bliley, because I think

      11     it's important that they get credit for what

      12     they've done on our behalf, as well as Mike

      13     Armstrong, who actually chairs the committee

      14     and isn't here today.

      15               Let me also comment that, if you

      16     will notice in the budget -- and I'm talking

      17     very fast -- if you will notice in the budget

      18     that we are now looking at only federal

      19     funds, we are not relying on any private

      20     funds.  In addition to that, we are not going

      21     to be compensating for in-kind contributions

      22     that have already been received.  Those are









                                                             488
       1     received and acknowledged and will not be

       2     compensated for.

       3               That includes legal advice, that

       4     includes the digital sandbox, and other

       5     public services, including the Commonwealth

       6     of Virginia and George Mason University.

       7               Also, we do propose in this budget

       8     to reimburse the corporate folks, as well as

       9     the Commonwealth of Virginia.  But that will

      10     be the last expenditure after the balance of

      11     the budget is balanced and expended, so that

      12     we'll know that we have that money to

      13     reimburse.  But that is a part of this

      14     proposal.

      15               And I think everything else in this

      16     is pretty self-explanatory.  If you have

      17     questions, I or Heather will be glad to

      18     answer them.

      19               CHAIRMAN GILMORE:  Then I'll say that --

      20     go ahead, Delna, I'm sorry.

      21               MS. JONES:  Then I was going to

      22     make a motion.









                                                             489
       1               CHAIRMAN GILMORE:  Make a motion.

       2               MS. JONES:  I move we accept the

       3     budget.

       4               UNKNOWN:  Second.

       5               CHAIRMAN GILMORE:  Motion to approve the

       6     budget.  I want to particularly thank

       7     Gateway, AOL, Schwab, AT&T, MCI WorldCom,

       8     Time-Warner, and the Commonwealth of

       9     Virginia, for providing cash to get this

      10     started.

      11               And now we're in a position to

      12     reimburse these firms and the Commonwealth

      13     for the money that they used, the seed money

      14     to get this started.  But, as Delna has said,

      15     no in-kind or other types of services

      16     previously provided to this Commission will

      17     be reimbursed, only the cash that had been

      18     put out.  Otherwise, we have received gifts

      19     and services in large measure from people who

      20     have worked hard to make this a success.

      21               MS. JONES:  I would like to add,

      22     Governor, that, if you will notice, also









                                                             490
       1     there is a balance that, even after

       2     reimbursement, would be available to return

       3     funds to Congress if, in fact, we do not need

       4     them.  But we do have a cushion in case we

       5     need additional meetings or anything between

       6     now and Dallas.

       7               CHAIRMAN GILMORE:  I know that Congress

       8     needs it.  The motion has been made and

       9     seconded to approve the budget.  All in favor

      10     of the budget, please say aye.

      11               MULTIPLE VOICES:  Aye.

      12               CHAIRMAN GILMORE:  All opposed say nay.

      13               Finally, just a few minutes on the

      14     final report.  Let me just share with you

      15     that the work plan direction is to -- if not

      16     to a staff, to a subcommittee -- we have a

      17     subcommittee that is working on this.  The

      18     work plan says that, once a draft is written

      19     that it will be distributed to all

      20     Commissioners.  The Commission may desire one

      21     more conference calls to discuss the document

      22     prior to the Dallas meeting.  It is my sense









                                                             491
       1     that we probably do want a conference call,

       2     at least one, to discuss the final document

       3     before the Dallas meeting.

       4               At the meeting in Dallas, the

       5     primary function of the Commission will be to

       6     approve the final report, and to entertain

       7     debate on motions to modify or amend the

       8     final report as drafted.  Should the

       9     Commission decide prior to Dallas it needs

      10     any further expertise or data to inform any

      11     findings or recommendations in the final

      12     report, a limited substantive program can be

      13     placed on the Dallas agenda.

      14               So if the Commissioners feel that

      15     after they have seen it that they wish to

      16     have more substantive presentations they may

      17     do that.  Otherwise, the primary function of

      18     the Commission will be to debate and argue

      19     the final report.

      20               Following the Dallas meeting, the

      21     final edits will be made, after the actions

      22     that go on in Dallas, the actions of the









                                                             492
       1     Commission, it will be published and

       2     forwarded to Congress no later than

       3     April 21st in the year 2000.

       4               The proposed procedure that I would

       5     foresee is that the final report would

       6     include an overview of the Commission's

       7     legislative charge, a synopsis of the

       8     Commission's deliberations, an objective

       9     narrative explaining the tax issues

      10     implicated by the Internet economy, and

      11     policy recommendations.

      12               For purposes of the Dallas meeting,

      13     the section would incorporate the policy

      14     options contained in the policy and options

      15     papers, as discussed here in San Francisco.

      16               I would remind you that the

      17     Commission by statute can make a

      18     recommendation, a formal recommendation on a

      19     two-thirds vote only.  The Commission may

      20     wish to consider intensely between now and

      21     Dallas what types of proposals may come

      22     forward, although the policy and options









                                                             493
       1     paper will indeed come forward pursuant to

       2     the workforce plan.  And there may be other

       3     ways, of course, of communicating within the

       4     document without it being a formal

       5     recommendation.

       6               At the Dallas meeting, the majority

       7     of the time will be devoted to discussion of

       8     the final report and ultimate approval of the

       9     final report consistent with the statutory

      10     requirements.

      11               Any further comment on this matter?

      12     Is there any other business to come before

      13     the Commission here in San Francisco?

      14               Mr. Pincus?

      15               MR. PINCUS:  Just to thank Heather

      16     Rosenker and the staff and your staff for

      17     putting together what I felt was an

      18     exceptional meeting.

      19               CHAIRMAN GILMORE:  Heather, will you

      20     please stand?

      21               Thank you.  There is a motion to

      22     adjourn.  All in favor, say aye.









                                                             494
       1               MULTIPLE VOICES:  Aye.

       2               CHAIRMAN GILMORE:  The Commission stands

       3     adjourned in San Francisco.

       4                    (Whereupon, at 5:30 p.m., the

       5                    PROCEEDINGS were adjourned.)

       6                     *  *  *  *  *

       7

       8

       9

      10

      11

      12

      13

      14

      15

      16

      17

      18

      19

      20

      21

      22

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