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First Meeting: Transcript of June 22, Part 1

(June 21) previous transcript | next transcript (June 22, Part 2)




         3                         Meeting

         4                          of the




         9                         VOLUME I




                                   held on
                               JANUARY 22, 1999

                        THE COLLEGE OF WILLIAM & MARY
        18                 COMMONWEALTH AUDITORIUM
                            WILLIAMSBURG, VIRGINIA




        23                    COOK & WILEY, INC.
                      Registered Professional Reporters
        24                  Post Office Box 14582
                           Richmond, Virginia 23221
        25                      (804) 359-1984


         1  MEMBERS:

         2  The Honorable James S. Gilmore, Chairman
            Governor, Commonwealth of Virginia
         3  State Capitol, Third Floor
            RIChmond, Virginia 23219
            Mr. Dean F. Andal
         5  Chairman, California Board of Equalization
            754 Shoreline Drive, Suite D
         6  Stockton, California 95219

         7  Mr. Michael Armstrong
            Chief Executive Office, AT&T
         8  32 Avenue of the Americas
            New York, New York 10013
            Mr. Joseph H. Guttentag
        10  Senior Advisor to the
              Assistant Secretary for Tax Policy
        11  U. S. Department of the Treasury
            1500 Pennsylvania Avenue, NW, Room 3330
        12  Washington, D. C. 20220

        13  The Honorable Paul C. Harris
            Delegate, Virginia House of Delegates
        14  100 Court Square Annex, Suite B
            Charlottesville, Virginia 22902
            Ms. Delna Jones
        16  Commissioner, Washington County
              Administrative Offices
        17  155 North First Avenue, Suite MS22
            Hillsboro, Oregon 97124
            The Honorable Ron Kirk
        19  Mayor, City of Dallas
            1500 Marilla Street, Suite 5EN
        20  Dallas, Texas 75201

        21  The Honorable Michael O. Leavitt
            Governor, State of Utah
        22  State Capitol, Suite 210
            Salt Lake City, Utah 84114



                               COOK & WILEY, INC.


         1  Mr. Gene N. Lebrun
            President, National Conference of
         2    Commissioners on Uniform State Laws
            First National Bank Building, 8th Floor
         3  909 St. Joseph Street
            P. O. Box 8520
         4  Rapid City, South Dakota 57709

         5  The Honorable Gary Locke
            Governor, State of Washington
         6  Legislative Building
            Olympia, Washington 98504
            Mr. Grover Norquist
         8  President, Americans for Tax Reform
            1320 18th Street, NW, Suite 200
         9  Washington, D. C. 20036

        10  Mr. Robert Novick
            Counselor, U. S. Trade Representative
        11  600 17th Street, NW
            Washington, D. C. 20508
            Mr. Andrew Pincus
        13  General Counsel, U. S. Department of Commerce
            14th Street and Constitution Avenue, NW, Room 5858
        14  Washington, D. C. 20230

        15  Mr. David Pottruck
            President and Co-Chief Executive Officer
        16  Charles Schwab Corporation
            101 Montgomery Street, 28th Floor
        17  San Francisco, California 94104

        18  Mr. John W. Sidgmore
            Vice Chairman, MCI Worldcom and Chairman, UUNET
        19  MCI Worldcom
            8620 Willow Oaks
        20  Fairfax, Virginia 22031

        21  Mr. Stanley S. Sokul
            Davidson & Company, Inc.
        22  1101 Pennsylvania Avenue, NW, Suite 810
            Washington, D. C. 20004
            Mr. Theodore Waitt
        24  Chairman and CEO, Gateway, Inc.
            610 Gateway Drive
        25  South Sioux City, South Dakota 57049

                               COOK & WILEY, INC.


         1             GOVERNOR GILMORE:  Good morning, Ladies and

         2        Gentlemen.  I hereby call this historic first

         3        meeting of the Advisory Commission on Electronic

         4        Commerce to order.

         5             I want to welcome everybody to the historic

         6        Williamsburg, specifically to the College of

         7        William & Mary.  I hope everybody has enjoyed

         8        their stay in Williamsburg so far.

         9             Ladies and Gentlemen who are in attendance

        10        here today, the members of the Commission

        11        obviously are seated with their names before

        12        them so that you can see who all of the members

        13        are appointed by the members of Congress.

        14             We are very proud of the diversity and

        15        balance that exists within this Commission from

        16        the business community to private sector and

        17        private associations as well.

        18             We have a great historic task ahead of us

        19  to determine the direction of Internet Commerce and,

        20  specifically, the taxing authorities and the approach

        21  and policy that might apply to it.

        22             This is an exciting time.  We're very proud

        23  to be here.  We're honored to be able to do this in

        24  the College of William & Mary.

        25             Now I would like to call on the President

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         1  of the College of William & Mary, Dr. Timothy

         2  Sullivan, for a few introductory remarks.

         3             Dr. Sullivan.

         4             DR. SULLIVAN:  Thank you.  Thank you,

         5        Governor Gilmore.

         6             Speaking as I do just in this moment for

         7        all Virginians, may I congratulate you, sir, on

         8        being named Chair of this important Commission.

         9             Governor Gilmore, we recognize your

        10        leadership in the critical area of technology

        11        development and to the deployment of technology

        12        for the citizens of commerce.

        13             You have made all of us proud by creating

        14        the Secretary of Technology at the cabinet

        15        level, signing the Nation's first comprehensive

        16        Internet policy, and now, sir, chairing this

        17        Commission.

        18             The work of this group will produce what

        19        may well be the definitive policy that impacts

        20        the way people everywhere conduct Electronic

        21        Commerce.

        22             It's fitting, I think, that you hold the

        23        Commission's first meeting on this historic

        24        campus.  Now in our 307th year, William & Mary

        25        is the nation's second oldest institution of

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         1        higher learning.  We appreciate the past.  We

         2        don't live in it.

         3             Despite our maturity, the college is

         4        recognized as one of the most wired campuses in

         5        the country.  From top to bottom in academics,

         6        research, and administration, the college

         7        employs advanced information technology and

         8        expects all students to gain practical

         9        experience in the use of this technology during

        10        their stay here.

        11             One of the first universities to use the

        12        Apple network, William & Mary is ranked by

        13        "Yahoo!" magazine as one of the 100 most wired

        14        campuses in the country.

        15             When I was an undergraduate student here a

        16        very long time ago, I could not imagine that my

        17        alma mater's historic buildings, residences,

        18        offices, and classrooms would one day house

        19        global computer monitors that could send and

        20        receive messages from anywhere at any time.

        21        That is our situation today.

        22             Rich in tradition, William & Mary is

        23        committed to the task of preparing our students

        24        for the 21st century.  For this reason,

        25        information technology is integrated into every

                               COOK & WILEY, INC.


         1        college program and operation.

         2             As you can imagine, I find myself in this

         3        room, the Commonwealth Auditorium, quite often.

         4        But when I walked in today, I had to look twice

         5        to be sure that I hadn't happened by accident to

         6        go into a Circuit City store.  It is still the

         7        Commonwealth Auditorium.

         8             On behalf of the students, faculty, and

         9        staff of the College of William & Mary, it is my

        10        honor to welcome all of you to our campus.

        11             We're delighted to host you, and we hope

        12        this room, as old as it is, will serve your

        13        needs well as you begin your comprehensive and

        14        globally important work.

        15             Thank you.

        16             GOVERNOR GILMORE:  Dr. Sullivan, thank you

        17        very much.  We appreciate the warm welcome to

        18        the wonderful College of William & Mary.

        19             We're proud to be able to use what is a

        20        magnificent facility for this Commission to

        21        begin and to get started in this historical

        22        work.

        23             I appreciate the opportunity to be here and

        24        to join the other Commission members in

        25        welcoming you to Williamsburg, Virginia, and to

                               COOK & WILEY, INC.


         1        the first meeting of the National Advisory

         2        Commission on Electronic Commerce.

         3             Ladies and Gentlemen, nearly four centuries

         4        ago, a great journey started here in America

         5        very close to this location where we're seated

         6        right now.  That was at Jamestown Island.

         7             The site of the first permanent English

         8        settlement in North America.  Jamestown was at its

         9        core a commercial venture, and its first

        10        colonists were employed by the Virginia Company.

        11             The investors who formed the Virginia

        12        Company and the crown that chartered it

        13        eventually found commercial success. But, the

        14        colonists, through a whole period of struggle

        15        and strife, particularly near here, near

        16        Yorktown, for example, they found much more than

        17        just commercial success.

        18             They found democracy and capitalism and

        19        freedom.  They found what ultimately became

        20        America.

        21             This Commission today begins a journey, and

        22        it is not very different from the one we began

        23        at Jamestown.  We have struggled, frankly, to be

        24        able just simply to get to meet and to organize,

        25        but we're here now and prepared to face head on

                               COOK & WILEY, INC.


         1        the issues that are before us.

         2             The core issue is the intersection of a tax

         3        structure based on boundaries with an Internet

         4        which is a medium that defies boundaries.

         5             Other issues have to be considered,

         6        including the protection of consumer privacy on

         7        the Internet, the

         8        impact of Internet taxes on our economy and

         9        government, and the collection and administration of

        10        those taxes, if they are to be levied at all.

        11             But there is something at stake even beyond

        12        creating a meaningful and effective taxing

        13        technology policy.  At stake is the future of

        14        commerce in America. A future that I believe is

        15        with eCommerce is the ability of individuals and

        16        businesses to freely exchange goods and services

        17        over the Internet.

        18             We all know and appreciate this explosive

        19        potential of eCommerce for individuals and

        20        businesses, but we must also recognize the potential for

        21        eCommerce on the American economy as a whole.

        22             The University of Texas recently reported

        23        that the Internet generated over 300 billion

        24        dollars in U. S. revenue in 1998.  A third of

        25        that was eCommerce related.

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         1             That makes the United States Internet

         2        economy, by itself, the 18th largest economy in

         3        the entire world.  But it's not just the

         4        Internet blue chips that are leading the way.

         5             The top 80 eCommerce sites only generate a

         6        third of the Nation's eCommerce revenue.

         7        Established small businesses and start-ups are

         8        contributing the lion's share of revenues to

         9        America's Internet economy.

        10             Take, for example, a local business that is

        11        not too far from here called the Virginia Diner.

        12        It was started a long time ago in a railroad

        13        car.  It expanded.  It kept adding space.  Then

        14        in 1995 it opened a new wing, and that wing was


        16             So no longer do they sell peanuts on the

        17        side of the road a long way away from a major

        18        city.  Now they can deliver everywhere at the

        19        point of a click of a mouse on the Internet.

        20             So this is an example of the powerful

        21        contributions that small Main Street businesses

        22        are making to the Internet economy.  Accounting

        23        for more than three-quarters of global eCommerce

        24        of the world's eCommerce leader.

        25             Now, if we keep in mind businesses of all

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         1        sizes as we forge ahead, the potential to create

         2        opportunity is tremendous, but the potential to

         3        hinder it is tremendous, too.

         4             We have to ask several questions:  How do

         5        we levy a system of taxation based on thousands

         6        of geographic boundaries over a medium that

         7        operates in an environment without boundaries?

         8        How do we do that?  Do we want to?  Is it

         9        possible to do it?

        10             What are the implications for the medium?

        11        Are foreign competitors able to secure a

        12        competitive advantage depending upon what we

        13        recommend and what the Congress ultimately

        14        passes?  What is the cost to our businesses?

        15        What is the cost to our privacy of our citizens?

        16             Each member who is here today may have a

        17        different answer to each of these questions.  As

        18        Chairman, I want to commit that every member's

        19        point of view will be heard and valued and

        20        considered, and I believe our organizational

        21        meeting yesterday reflected that.

        22             It's vital if we're going to have any

        23        prospect at all of achieving any type of

        24        consensus in this very difficult, challenging

        25        issue.

                               COOK & WILEY, INC.


         1             The process is not one, in my view, of

         2        simply counting votes on logistical proposals of

         3        which there will be many.  Some believe in the

         4        existing tax framework over the Internet.

         5        Others call for different forms of

         6        simplification.

         7             Many don't want taxation on eCommerce at

         8        all.  Many think, after hearing input from all

         9        the affected parties, only then can our proposal

        10        be legitimate, because everybody will have a

        11        chance to have had their point to be heard.

        12             We hope this will foster an inclusive

        13        national debate, one that builds step by step

        14        with a series of formal meetings as we take the

        15        time that has been allotted to us by the

        16        Congress to conduct these meetings.

        17             Each of these meetings should be punctuated

        18        by months of research and consultation and

        19        collaboration between Commission members, the

        20        public and interested parties, and staff people

        21        to develop policy approaches as an entire group.

        22             During these meetings we're going to listen

        23        to things.  We'll listen to every voice, seek

        24        the advice of experts.  I think we're going to

        25        learn a great deal.

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         1             We should be in a position to not only

         2        learn but to educate people and to give the

         3        public information to recognize the legitimate

         4        concerns that exist on all issues at hand.

         5             Of course, state and local governments are

         6        concerned about the effect that this has on the

         7        tax base, revenue base, and businesses are

         8        concerned about the implications of the current

         9        tax framework.

        10             So if we do these things well, we're in a

        11        position to lead to a conclusion.  If together

        12        we lead and produce recommendations that are

        13        driven by a more consensus approach, then

        14        Congress, I think, is in a better position to

        15        fully consider our recommendations.

        16             So let me conclude by just returning once

        17        more to this opportunity that is before us.  I

        18        think all of us recognize that the Internet

        19        knows no geographical boundaries.

        20             But there are other boundaries that are

        21        also not recognized on the Internet:  Race,

        22        religion, economic circumstance, and offers

        23        scholars and writers and artists and

        24        philosophers some parallel opportunities to

        25        exchange ideas and conduct research and find

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         1        their audience.

         2             Thirty years ago, a Russian novelist's,

         3        Aleksandr Solzhenitsyn's, works were smuggled to

         4        the west at great risk and cost.

         5             Today, with access to a personal computer

         6        and a telephone, dissidents have instant access

         7        to a global audience.  It's the most democratic

         8        denominator devised, a medium that most closely

         9        mirrors the promises of values of a free and

        10        open society that these forefathers envisioned

        11        nearly two and a quarter centuries ago.

        12             That's why we begin here.  We believe we

        13        will carry our meetings to other key technology

        14        areas across the country.  But we begin here in

        15        the shoes of people like George Washington,

        16        Thomas Jefferson, and Patrick Henry.

        17             Now it is our turn.  It's our opportunity

        18        to reinvigorate America's founding values and

        19        set a standard that may flourish worldwide.

        20             Those who sit on the Commission have an

        21        opportunity afforded, because we stand at the

        22        dawn of a new age.  Generations have been judged

        23        by their response to challenges and

        24        opportunities that confronted them in their own

        25        time.  What will they write about us?

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         1             Will we accept the challenge to be the

         2        forefathers of the information age, or will we

         3        engage in simple and comfortable approaches or

         4        turf battles, preservation of status quo, or any

         5        type of squabbling?

         6             I think the opportunity is ours.  Let's

         7        seize it.  This is the start of an historic

         8        journey.  I'm honored to be here and to have the

         9        trust and faith of the people that are here that

        10        have asked me to serve as Chairman.

        11             I know by our working together, we can

        12        produce work and recommendations that are worthy

        13        of this challenge and the opportunity before us.

        14             I thank all of you for participating and

        15        all of you for being here today.

        16             Ladies and Gentlemen, we're beginning a few

        17        minutes late because of an effort to work out

        18        some of the administrative details that were

        19        under such intense discussion yesterday

        20        afternoon.

        21             Hopefully, we have advanced some of that.

        22        I'm not sure we have.  I think maybe we have.

        23        We talked through some of those matters.  To the

        24        extent we have used our time, that is the

        25        reason.

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         1             Nevertheless, now in terms of moving on

         2        into the policy implications of what we're

         3        doing, we would like to afford some time to each

         4        of the Commission members to be able to give a

         5        short opening statement.

         6             Of course, we have to be sensitive to the

         7        fact that there are so many of us.  I would ask

         8        you, if you could, please, to try to give your

         9        remarks in a succinct manner in about three

        10        minutes so that we could move ahead.

        11             I want to invite my fellow Commissioners to

        12        share their vision in the outcome of this work.

        13        We will begin perhaps here and move down and

        14        then come back on this side, if that would be

        15        acceptable.  Why don't we begin.

        16             Just a moment.  One of the members is

        17        prepared to give us some opening remarks, an

        18        opening presentation, and I don't want to run by

        19        that.  Why don't we do that.

        20             I have asked one of the members to open

        21        with some general discussion and have asked him

        22        to spend about 15 minutes or so doing that.

        23        Instead of going first to opening statements,

        24        why don't we talk, once again, in a general

        25        summary type of way, and then each member should

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         1        give his views in accord with the agenda.

         2             First, I would like to call on John

         3        Sidgmore.  He's the Vice Chairman of MCI

         4        Worldcom and Chairman of UUNET and Commissioner

         5        of the Advisory Commission on Electronic

         6        Commerce.

         7             John, thank You for your willingness to

         8        give us a sum-up presentation.

         9             MR. SIDGMORE:  Thank you, Governor.  It is

        10        certainly a pleasure to be here.

        11             First, I was asked to talk about 30 minutes

        12        about the future of the Internet.  I noticed

        13        yesterday it was 25 minutes.  Now it's 15

        14        minutes.  I can certainly be flexible.

        15             I have to say that these are

        16        extraordinarily exciting times for our industry,

        17        technology industry in general, wild times,

        18        crazy times.  It's almost hard to come up with

        19        adjectives anymore to describe what is going on

        20        in technology today.  It's skyrocketing.

        21             Maybe the best way to think about that,

        22        really, is Internet stock valuation, something

        23        we have all looked at over the last couple of

        24        years.

        25             If you just think about how much value has

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         1        been created on Wall Street by the Internet.

         2        Some of these things are crazy, and an awful lot

         3        of us laughed at this over time.  You just look

         4        at the market valuations of some of these new

         5        companies.

         6    didn't exist three years ago.

         7        It has no stores.  It has almost no inventory.

         8        Its market has 18 billion dollars.  It's larger

         9        than Barnes & Noble and Borders combined.

        10        Combined they have 7,000 stores.  It has ten

        11        times the revenue, et cetera.

        12             There are lots of other examples.  Ebay,

        13        one of my favorite companies, a company that

        14        actually auctions antiques and dusty objects on

        15        line, this company is now worth, after nine

        16        months of being public, 18 1/2 billion dollars.

        17        I could go on and on.

        18             Level Three, a so-called new age telephone

        19        company, started with less than 100 million

        20        dollars in revenue, a terrific business plan,

        21        now has 28 billion dollars in revenue.

        22             Now, what is going on here in the market

        23        today?  What is going on here?  Has the market

        24        gone crazy?  It's possible.  I do think some of

        25        these market valuations will rationalize.

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         1             I think the important point is, the world

         2        has recognized that the Internet is not only the

         3        future of communications, future of technology,

         4        it's probably the future of eCommerce and, I

         5        think, finally the world, and is truly the

         6        foundation of the big business models of the

         7        future.

         8             In our industry I think the combination of

         9        deregulation in communications and the new

        10        Internet technology have completely exploded an

        11        industry, which by my reckoning has been very

        12        boring and stable for 100 years, 100 years of

        13        monopoly.  All of a sudden there is this huge

        14        explosion of competition.

        15             We're facing issues of growth and change in

        16        this industry that have never been faced before,

        17        I think, by any industry.  And it's all very

        18        exciting.

        19             More importantly, it has given us a new era

        20        of innovation and technology, I think, unmatched

        21        by any era since perhaps the beginning of

        22        aviation and transportation at the beginning of

        23        this century.

        24             You know, the interesting thing is, it's

        25        not going to slow down.  It is actually going to

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         1        speed up, because we will have to speed up.  We

         2        will have to speed up the rate we employ

         3        technology.  We're going to have to speed up our

         4        transactions.  The next three years are going to

         5        be even more exciting.

         6             Let's look at the Internet and see what is

         7        going on.  You have seen these charts before.

         8        They all look exactly the same, as far as the

         9        research data showing the rate of growth and

        10        revenue on the Internet.  This is quick data

        11        showing the growth of networks on the Internet.

        12             It doesn't matter what headlines you put on

        13        the charts, because they are all exactly the

        14        same.  They all show the Internet growing like

        15        crazy.

        16             The other interesting thing on the charts,

        17        it shows it was only a few years ago that the

        18        growth accelerated.  It was really 1994 with the

        19        advent of the World Wide Web, or I should say

        20        the browsers that are available on the World

        21        Wide Web, that we actually saw this at all.

        22             All of this hype and talk we have had about

        23        the Internet, all of this growth, it has really

        24        only been the last four or five years.  Now it's

        25        between four and six.  That tells us it's a very

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         1        young industry and has a long way to go.

         2             We used to look at the growth of the

         3        Internet as sort of analogous to the growth of

         4        the PC industry because it had such a rich

         5        explosion of new technology.  We created models

         6        and so forth.

         7             Actually, if you look at it objectively, we

         8        couldn't find anything analogous to the

         9        Internet.  Think about the PC.  PC models have

        10        been driven by Moore's law for the last 25 years

        11        and been very consistent.

        12             Now Moore's law says productivity relative

        13        to its price doubles every 18 months.  It has

        14        been inconsistent.

        15             If you try to find an analogy to the

        16        Internet, you use Internet bandwidth, our demand

        17        for bandwidth on our Internet backbone, it

        18        doesn't double every 18 months.  It doubles

        19        every 3 1/2 months.

        20             What that means, if you do the math, is

        21        that it increases in scale by 10X per year,

        22        1,000 percent per year of growth in

        23        infrastructure.  If you go back in history, you

        24        will never find another example of that kind of

        25        growth.

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         1             What does that mean?  You do the math.

         2        Look what it has done at the communications

         3        industry.  It is growing 1,000 percent per year,

         4        the industry of voice is growing at 8 percent a

         5        year.  It has been around for 100 years.

         6             After the Internet has been around for only

         7        five years, half of all the bandwidth in the

         8        world is now Internet and half is voice and

         9        everything else.  It is just astounding how fast

        10        this has happened.

        11             If you do the math and you continue this

        12        out for another few years, by the year 2004, 99

        13        percent of all the bandwidth and the

        14        telecommunications infrastructure in the world

        15        will be used on the Internet, 1 percent for

        16        voice and everything else.  We won't even know

        17        it's there.

        18             That's why I think when people talk about

        19        when will voice be on the Internet, it's

        20        irrelevant.  It will be a nixed application.  It

        21        is that fundamental, this change.

        22             When people say it's going to slow down,

        23        you know what?  I can make the ridiculous

        24        argument, which I always make, it's actually

        25        going to speed up over the next few years.

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         1             All the growth we have had in the last

         2        couple of years has been solely driven by adding

         3        new subscribers to the Internet.

         4             All the multimedia applications, video,

         5        audio, distance learning, all of these new

         6        things we talk about, that is all to come in the

         7        future.  That will have a dramatic impact on the

         8        current command profile.

         9             Why is the Internet here to stay, and why

        10        is the growth going to continue?  Here is a very

        11        simple nutshell summary why the Internet is

        12        different.  By all new technologies, it does

        13        have a cost structure differential.  It's a

        14        dramatically lower-cost potential than the

        15        traditional model.

        16             The big thing about the Internet is, it

        17        gives ubiquitous access.  Businesses for the

        18        first time in history can ubiquitously reach all

        19        of its customers, all of its vendors, all of its

        20        employees in a simple way interactively.

        21             Let's face it.  This is the world's first

        22        interactive public network.  It has never been

        23        done in history.  That is what makes the

        24        difference.

        25             That's what changes all the models.  It

                               COOK & WILEY, INC.


         1        changes all the technology models.  It changes

         2        the social models.  And it changes all the

         3        business lives.  It gives us lots of new

         4        breakthroughs.

         5             As an example, take  After just

         6        a couple of years in business, they created a

         7        bookstore that is taking on the big players in

         8        the industry and surprising them with how fast

         9        they have been successful.

        10             Because they have a store that is always

        11        open.  It's always available.  It's easy to buy

        12        from.  People are buying, to the surprise of the

        13        established players.

        14             Why?  Because they buy when they want to.

        15        They don't have to go to the store in the middle

        16        of the night or whatever.  They don't have to

        17        wait for that store to be open.

        18             A friend of mine just started a business

        19        selling office supplies on line.  She started

        20        this not with hundreds of millions of dollars

        21        and thousands of stores.  In fact, there are no

        22        stores.  This is just a couple hundred thousands

        23        of dollars and some great ideas.  Now she is

        24        taking on the big players in that industry.

        25             This model is going to take time to

                               COOK & WILEY, INC.


         1        develop.  I think it's going to be very similar

         2        to the growth of ATMs.  What I mean by ATMs is

         3        not simply a transfer mode but cash machines.

         4        If you were around in the '70s, you will know

         5        that a lot of banks employed cash machines in

         6        droves.

         7             They were very unsuccessful at the

         8        beginning.  Why?  For the same reason people are

         9        concerned about Electronic Commerce.  They were

        10        worried about security.  They were worried about

        11        quality, et cetera.  Now, 20 years later, you

        12        couldn't imagine life without them.

        13             Again, you go to the store.  You go to the

        14        cash machine.  You get the cash when you want

        15        it, even if it's in the middle of the night.

        16             It's really all about freedom.  I think

        17        it's all part of the larger trend in our society

        18        towards decentralization.  People want access

        19        when they want the access.

        20             To give you some examples, I think Sony

        21        Walkmans were part of that trend, wireless

        22        phones.  People want untethered access to the

        23        technology and the content they want.  That's an

        24        example.

        25             VCRs and video stores.  It used to be you

                               COOK & WILEY, INC.


         1        had to wait for CBS or NBC for them to put on

         2        the movie you wanted.  You waited for that to

         3        show up.

         4             Now you go to the video store.  You pick

         5        the video you want.  You put it on when you want

         6        to.  You're free to do what you want.  I think

         7        that has been the huge, huge trend in America

         8        over the last 20 years.

         9             By the way, home catalogs, home shopping, I

        10        think are very, very much a part of this trend.

        11             Now, what this all means is that the

        12        Internet really levels the playing field, levels

        13        the playing field between large companies and

        14        small companies.  It allows small companies for

        15        the first time in history to do things like

        16        national advertising.

        17             So we have created a huge number of new

        18        competitors.  We have made the world much more

        19        competitive than ever, because big guys don't

        20        necessarily have the advantage they used to

        21        have.

        22             I would argue that with the development of

        23        the Internet, the winners are now determined by

        24        the best ideas, by the people who can implement

        25        new ideas the best, that have the highest

                               COOK & WILEY, INC.


         1        Internet IQ and take advantage of the new

         2        technology.

         3             It is not the guy that has the largest

         4        number of stores.  It's not the guy that has the

         5        largest distribution anymore.

         6             The players with the best ideas, I think,

         7        will win, not necessarily the biggest players.

         8        I think that is a very fundamental difference.

         9             Now, how is this all going to change in the

        10        next generation?  I'm not going to talk about

        11        this much.

        12             I think broad band local access that you

        13        have heard a lot about, a number of us like Mike

        14        at AT&T and MCI Worldcom and AOL and others are

        15        struggling and competing with the position to

        16        offer broad band local access in a ubiquitous

        17        way.

        18             Broad band will open the next generation of

        19        applications.  It will make things possible,

        20        like instant learning.  It will make things

        21        possible, like telemedicine.  We will have

        22        elections on line, as an example.  I know that

        23        is of no interest to any of you.  I do think

        24        this will bring on the next generation.

        25             Which brings up this question that has been

                               COOK & WILEY, INC.


         1        in the press lately about bandwidth and whether

         2        this will be a glut on bandwidth.

         3             There are a lot of new players in this

         4        whole economic scene in the last couple of

         5        years, like MCI, Worldcom, and UUNET that nobody

         6        heard of, Level Three, et cetera.  People are

         7        building new fiber and new bandwidth for the

         8        first time in history.

         9             The reality is that either with all this

        10        new bandwidth, if you believe what I have said

        11        about demand, you need to increase the fiber

        12        capacity every year by 1,000 percent just to

        13        stay even.  This is before broad band.

        14             I personally think there are going to be

        15        drivers of the next generation of bandwidth we

        16        don't know about.  Broad band will be the

        17        biggest piece of the equation.

        18             When broad band comes, we will see a whole

        19        string of new applications never thought about

        20        before.  You are going to see more audio.  And

        21        you will see much more video in the next couple

        22        of years.

        23             Then the biggest driver of all is what we

        24        call silicon cockroaches.  These are computer

        25        communications, and for the first time in

                               COOK & WILEY, INC.


         1        history you will see an explosion here on a

         2        scale we really never dreamed about.

         3             If you think about it, computer-to-computer

         4        communications are much different than human

         5        communications.  They use a lot more bandwidth.

         6        They have a huge purse of information, and they

         7        are not slow and unpredictable as voice

         8        communications are.  These are enormous

         9        implications for new kinds of technology.

        10             And, of course, as I said before, these

        11        kinds of applications will breed and grow much

        12        faster than just human applications.

        13             I think you are going to see an explosion

        14        of new kinds of services, new kinds of devices.

        15        If you think about the kinds of devices we have

        16        now connecting to the Internet, computers, fax

        17        machines, cell phones, PCs, you have web phones,

        18        you have daytimers, personal digital systems

        19        like Palm Outlets, these devices are exploding

        20        right now.  They are multiplying in huge

        21        numbers.  They are Increasing not only in number

        22        but also in type.

        23             I think more scary than anything else is

        24        the new generation of equipment that is going to

        25        be increasingly global.  That is a very

                               COOK & WILEY, INC.


         1        different world from where we were before.

         2             There are seers out there -- you know what

         3        sears are -- one seer talks about every human

         4        being having five Internet protocols operating

         5        on their body by next year.

         6             I don't know how you get five.  You can

         7        imagine your cell phone and a pager.  You could

         8        certainly imagine a personal digital system.  A

         9        lot of us here have them.  Internet watches now

        10        that cost $50.

        11             There are Internet glasses.  Sounds

        12        ridiculous, doesn't it, Internet glasses?  You

        13        can imagine these glasses.  They are actually

        14        voice activated.  You have these glasses on.

        15        You're driving down the road.  You're lost.

        16             Up on the side pops a map of where you are

        17        and says "Idiot, turn right!"  Hopefully, you

        18        are still looking at the road.  That's with your

        19        glasses on.

        20             That sounds futuristic.  The fact is, they

        21        are being made right now.  The company was just

        22        bought by Sony, which means it will probably

        23        work and cost 25 bucks.

        24             This is a very different world.  Maybe the

        25        best simple way to think about these new

                               COOK & WILEY, INC.


         1        computer applications is the web.  Today when

         2        you're on the World Wide Web searching, you're

         3        doing it all manually.  You search from one site

         4        to another.  Some are better than others.

         5             Suppose there are intelligent agents.  And

         6        there are intelligent agents.  They are getting

         7        more intelligent every day.  Suppose in the

         8        morning you told your computer "I want you to go

         9        out and research every single web site in the

        10        world that has these cameras.  I want you to

        11        find the price.  And here is what I'm looking

        12        for.  You find out of all these thousands of web

        13        sites the best one for me to buy and give me a

        14        report when I get home."

        15             Imagine how much bandwidth that requires,

        16        that thing out there all day searching every web

        17        site.  It's a very, very different world.  There

        18        are lots of different applications.

        19             Today web sites are built for humans.  They

        20        are built to attract humans, and they have green

        21        and pink and mauve and all kinds of great colors

        22        that people like to look at.  The computer could

        23        care less what color it is.  The computer wants

        24        to look at the price and specs.

        25             This has enormous implications.  This is my

                               COOK & WILEY, INC.


         1        view of five IP objects on your body.  No

         2        particular rhyme or reason where I placed the

         3        dots, just to show you a depiction.  It was made

         4        well before the sex scandal we had last year.

         5             I think this is a very different world than

         6        we had before.  There's one problem.  We have

         7        this enormous capability coming.  We have an

         8        expectation problem in the middle of it, because

         9        the world expects Internet access to be really

        10        cheap, actually sometimes free, but certainly

        11        the world expects it to be cheap, $21 a month or

        12        whatever Steve is selling it for this month.

        13             Bill Gates --  A lot of smart people say it

        14        should be free.  Bill Gates says bandwidth

        15        should be free.  We think software should be

        16        free, but it's not.

        17             The reality is, it is still today somewhat

        18        more expensive than we need to be to become

        19        totally ubiquitous.  What is going to save us in

        20        the next couple of years is new technology.

        21        That is what has saved us in the past.

        22             We're going to have much better fiber, much

        23        better switching equipment and optical

        24        equipment, and much more better software and

        25        caching techniques, so we won't have the cross

                               COOK & WILEY, INC.


         1        problem that we have today.

         2             I think what you're going to see here is an

         3        explosion of competition in new technology like

         4        it has never occurred in the past.  Every

         5        manufacturer knows this is where the action is.

         6        This is where the world is.

         7             I think you're going to see the next era of

         8        innovation coming in here, and I think it's

         9        going to surprise us as we continue to ride this

        10        wave.

        11             I'll tell you what, I think the Internet

        12        revolution is really just starting, really just

        13        at the beginning.  The reason is very simple:

        14        This is where all the capital is.  This is where

        15        the financial capital is going.  This is where

        16        all the intellectual capital is going.  This is

        17        where everyone wants to be.  They want to create

        18        the next Netscape or AOL.

        19             So what we have done here as a Nation is we

        20        have allowed tens of thousands of the smartest

        21        people in the world that we have ever had in

        22        history to go try new things and become sort of

        23        like a biological experiment.

        24             Since it's not totally controlled by the

        25        government, we don't know exactly how it's going

                               COOK & WILEY, INC.


         1        to come out.  What we do know is that a lot of

         2        new technology is going to come out of this, and

         3        I think it's very, very exciting because we

         4        don't have boundaries.

         5             This is going to sound corny.  I always end

         6        on this.  I really believe 50 years from now,

         7        people will look back on this time as the golden

         8        age of communication where it all changed.  I

         9        think it's very, very exciting to be part of

        10        this industry now.  I think it's the best time

        11        to be in business.

        12             I just want to show you one more chart.  I

        13        mean nothing negative by this, just to point out

        14        you have to be little concerned about helping

        15        the Internet too much because they have done

        16        pretty well.

        17             You have to remember the government

        18        controlled the Internet for 20 years, '69 to

        19        '89.  I don't know how many of you heard of it

        20        during that period.  To show you the growth

        21        rates during that period, I think we

        22        substantially outperformed the top of the model.

        23             Thank you.

        24             GOVERNOR GILMORE:  Thank you, John.  That

        25        was enlightening and perceptive, it seems to me.

                               COOK & WILEY, INC.


         1        We appreciate very much the opening remarks.

         2             We would like now to give some time to each

         3        member to state their opening thoughts about

         4        this process.  At 3 minutes per individual, that

         5        would be 48.  And by the time we do all the

         6        calling in and so on, it's closer to an hour.

         7             Please be cognizant of the time, if you

         8        would.  As Chairman, I do want to keep this

         9        thing moving.  I believe, in fact, we have some

        10        warning signs that will come up on the screen so

        11        that we can try to keep things moving in the

        12        right direction.  So I may, unfortunately, have

        13        to interrupt if it runs on too long.

        14             In the meanwhile, we're looking forward to

        15        the initial thoughts of the members of the

        16        Commission and the breadth and dynamism of their

        17        experience in this area.

        18             As I had suggested a little earlier, I

        19        think I will start and go down this row and then

        20        down this row, and that way we can move right

        21        along in an orderly way.

        22             Why don't we begin with Mr. Mike Armstrong,

        23        head of AT&T.

        24             Mike.

        25             MR. ARMSTRONG:  Thank you, Jim.  There are

                               COOK & WILEY, INC.


         1        two very fascinating things that are taking

         2        place in society today:  One is, borders all

         3        over the world are coming down, being political

         4        borders, commercial borders, monetary borders,

         5        tariff borders, nontariff borders.

         6             Societies are emerging.  They want a little

         7        bit more of that economic and educational pie of

         8        the world.

         9             At the same time, as John so eloquently

        10        described, we have the most exciting

        11        communications age in the history of the world

        12        taking place.  It's leaping over borders.

        13        Whether it's government or commerce, it's

        14        providing efficiency and access to the entire

        15        world.

        16             It's really on that platform that this

        17        Commission must reflect and decide the

        18        fundamental issue of taxing, sales taxing.

        19             I would suggest that there are two things

        20        that at least I should keep in mind:  One is

        21        that we have got to use this opportunity for

        22        simplicity.

        23             My company fills out 39,000 tax forms a

        24        year.  That's one every 3-1/2 minutes.  The

        25        potential of this Commission is to make that a

                               COOK & WILEY, INC.


         1        new world and to bring simplicity to what we're

         2        addressing as well as what is before us.

         3             The second thing is neutrality.  The last

         4        time I checked the telecom excise tax that the

         5        telecommunications industry lives under -- was

         6        born out of Spanish-American War deeds -- the

         7        last time I checked, we had settled that issue,

         8        but we continue with our taxation.

         9             In fact, I can recall back in the mid-'80s,

        10        the last time the tax policy really was not

        11        neutral in the area of real estate, we all had

        12        to invest in real estate in order to

        13        respectfully fill out our tax forms with limited

        14        partnerships.

        15             And, of course, what happened is that the

        16        real estate industry completely overbuilt and

        17        was influenced by the arbitrage of tax policy.

        18             We need neutrality to consumers, neutrality

        19        to technology, neutrality to the needs of

        20        government, neutrality and fairness to all who

        21        need to participate to make this great

        22        communications golden age the reality and

        23        potential it reflects.

        24             GOVERNOR GILMORE:  Mike, thank you very

        25        much.

                               COOK & WILEY, INC.


         1             As every member of the Commission can see,

         2        we have a very dramatic timekeeper before us as

         3        well.

         4             Mike, that was an awful lot in a

         5        three-minute period.  We appreciate that

         6        insight.

         7             The next speaker is Ron Kirk.  He is the

         8        Mayor of Dallas, Texas.

         9             MAYOR KIRK:  Thank you, Governor.  And good

        10        morning.  I'm thrilled to be here as a

        11        representative of the Nation's mayors and

        12        Nation's cities.

        13             I have great hope for the work of this

        14        Commission, that we will be able to come up with

        15        some answers to present to Congress, given the

        16        talent and energy on this Commission, and

        17        hopefully we can do that in a way it will be

        18        fair and help the lives and protect the

        19        interests of the citizens we serve.

        20             John, I was interested in your remarks

        21        about a lot of people wishing that access was

        22        free and others wish that software was free.  We

        23        live in the practical world that people wish

        24        that their schools, police, and firemen were

        25        free.  They are not.

                               COOK & WILEY, INC.


         1             The increasing concern of cities is that we

         2        don't want to be independent.  We can't be

         3        independent to this incredible technology.

         4        There is not going to be an end to this age of

         5        information and technology.  It is exploding so

         6        fast we can't control it.

         7             We don't want to have the unintended

         8        consequence of removing a major source that

         9        funds the basic sources that people rely on

        10        every day.

        11             As Mayor of Dallas, we like to claim

        12        ourselves as the birthplace of this incredible

        13        technology back in the 1950s.  We have a short

        14        history.  We don't have all of the excitement of

        15        Williamsburg.

        16             We're proud of the fact that back in the

        17        1950s, a young engineer from Texas Instruments,

        18        who was working on weekends, named Jack Kilby,

        19        stumbled across something called an integrated

        20        circuit, which allowed all of this incredible

        21        technology to come into place.

        22             Out of that, Texas Instruments created the

        23        first handheld computers, which were probably at

        24        least half the size of one of these tables.

        25        We're all from that telecommunication and

                               COOK & WILEY, INC.


         1        transportation age.

         2             Mike, you are right.  We live in a much

         3        more blended economy.  It's clear to us this

         4        next industry is going to be a century of cities

         5        and metropolitan regions taking on different

         6        roles and responsibilities.

         7             We just want to make sure whatever comes

         8        out of this process, we still recognize that

         9        government has a fundamental role to maintain

        10        people's basic needs, and we have to have a tax

        11        structure that recognizes that and gives the

        12        cities and states the ability to do that.

        13             I look forward to working with all of us.

        14        I think we can achieve all of our goals.

        15             GOVERNOR GILMORE:  Thank you very much,

        16        Mayor Kirk.

        17             The next speaker is the Governor from the

        18        State of Washington, Governor Gary Locke.

        19             GOVERNOR LOCKE:  Thank you very much,

        20        Governor Gilmore.  It's really a pleasure to be

        21        here and be part of this Commission.

        22             It's clear from my reading of the Internet

        23        Tax Freedom Act, the role of this Commission is

        24        to establish a fair and technologically neutral

        25        way of applying tax to the Internet.

                               COOK & WILEY, INC.


         1             I am not an advocate of imposing new tax

         2        burdens on the Internet or allowing any type of

         3        taxes that would hurt the golden age of

         4        communications that John is talking about.

         5             Neither am I a proponent of awarding

         6        Internet vendors substantial tax advantages that

         7        would put Main Street merchants at a competitive

         8        disadvantage.

         9             And, as the Mayor of Dallas was talking

        10        about, nor are we talking about or supportive of

        11        eroding the ability of state and local

        12        governments to provide various and essential

        13        services.

        14             We're very proud of the role of the

        15        Internet and technology firms in our state of

        16        Washington, companies like that

        17        started in Washington, and Microsoft.  We also

        18        lead the nation in the application of computer

        19        technology within government.  So we embrace

        20        this new industry.

        21             At the same time, our state relies, as do

        22        many other states, on sales taxes, and our state

        23        of Washington, we rely on sales taxes.  We have

        24        no personal income tax, which is perhaps why

        25        many of the investors and start-up companies

                               COOK & WILEY, INC.


         1        like doing business in the state of Washington.

         2             If on-line shopping grows rapidly, as many

         3        experts predict, it will impose particular

         4        challenges for governments, both local and

         5        state, all across the country.

         6             In our state of Washington, 48 percent of

         7        our general tax revenues come from sales tax.

         8        60 percent of our general state budget is

         9        dedicated to education, because in our state

        10        virtually 85 percent of funding for all schools

        11        comes from the State.

        12             It's not the responsibility of the local

        13        districts to provide uniformity and fairness.

        14        In fact, the Supreme Courts of many states are

        15        ruling it's the obligation of the state

        16        government to provide for education to nonlocal

        17        school districts.

        18             So we have a particular challenge.  Our

        19        country is the world leader in electronic

        20        commerce today, not because of simply public and

        21        private investments to the Internet, but also

        22        because of the education of the visionaries and

        23        the entrepreneurs who transformed it into a

        24        vibrant new industry.

        25             It would be ironic if the growth of

                               COOK & WILEY, INC.


         1        electronic commerce erodes our ability to

         2        educate innovators and leaders in this

         3        particular industry.

         4             We're looking for in this Commission ways

         5        to address issues of encouraging the growth of

         6        Internet commerce while not restricting and

         7        unduly hampering the ability of local and state

         8        governments to fund the very necessary services

         9        and, in fact, the education that the leaders of

        10        tomorrow need.

        11             GOVERNOR GILMORE:  Governor, thank you very

        12        much.

        13             The next speaker, next member of the

        14        Commission, is David Pottruck, CEO of Charles

        15        Schwab.

        16             MR. POTTRUCK:  Thank you, Governor Gilmore.

        17        It's nice to be here.  I know we have the

        18        important task of balancing all the interests,

        19        and competing interests, really, that we have to

        20        face.

        21             Charles Schwab has had a real front-row

        22        seat in seeing the growth of the Internet.  We

        23        had 6 million hits a day on our web site in the

        24        first quarter of 1998, and 60 million hits a day

        25        in the first quarter of 1999.

                               COOK & WILEY, INC.


         1             Today we have nearly 2 billion dollars a

         2        day transacted over the Internet at Schwab, and

         3        nearly a million clients are using the Internet

         4        each and every day to do business with us.

         5             So we have seen that the Internet is not

         6        really a channel.  It's a reinventing technology

         7        that dramatically lowers costs and dramatically

         8        improves service.  So it has a real opportunity

         9        to raise the welfare of all Americans.

        10             Now, our challenge here is not to constrain

        11        the growth but to allow the Internet to flourish

        12        and create the jobs and the opportunities that

        13        raise the standard of living for all Americans.

        14             It's our belief, however, that the Internet

        15        should not be favored over other forms of

        16        commerce.  The physical world will continue to

        17        exist.  Stores will continue to play a very

        18        important role in American commerce.

        19             We don't believe that physical distribution

        20        stores should be disadvantaged by tax advantages

        21        for eCommerce.

        22             It seems to me I'm the only financial

        23        services representative on the Commission, and I

        24        take that responsibility very seriously to

        25        represent all the investment firms and banks,

                               COOK & WILEY, INC.


         1        that custody, not just the 14 billion dollars of

         2        American financial wealth, but also the

         3        financial dreams of all Americans.

         4             So we look to find the ability and balance

         5        of all of the competing interests.  That's what

         6        is crucial to our world.  Governments need money

         7        less than they may think sometimes, but we know

         8        that governments need money.  Consumers want

         9        privacy, and tax systems need to be fair.

        10             We're delighted to be here.  I'm delighted

        11        personally to have an opportunity to

        12        participate, to listen, to learn, and to find

        13        the compromise and the balance between competing

        14        interests that the Congress and the President

        15        have asked us to do with this important work.

        16             GOVERNOR GILMORE:  David, thank you very

        17        much.

        18             The next speaker is Governor Norquist,

        19        President of Americans for Tax Reform.

        20             GOVERNOR NORQUIST:  Thank you, Governor

        21        Gilmore.

        22             I was asked to serve on this Commission to

        23        represent consumers and taxpayers.  And I think

        24        as we look through history, the factors of

        25        production become more mobile, it's not possible

                               COOK & WILEY, INC.


         1        to maintain the all-existing levels of taxation.

         2        We saw this with taxes on labor and income

         3        taxes.

         4             In the United States we used to have a tax

         5        rate of 90 percent on income.  They have the

         6        same thing in Britain and Europe.  Over time,

         7        the Beatles left Britain and other people

         8        started moving, and income tax rates had to come

         9        down to be competitive and functional in a more

        10        mobile society.  United States top rates are now

        11        40 percent, as they are in Britain.

        12             If we're now looking at similar situations

        13        with taxation on sales and commerce, it's now

        14        clear that we're in a more mobile society than

        15        those governments that have relied on old

        16        mechanisms of raising taxes and old high tax

        17        rates and continue to do so.

        18             Certainly, Main Street merchants, when they

        19        talk about the high sales taxes they face, their

        20        problem isn't the Internet.  The problem is the

        21        high sales taxes that they face.  I think we

        22        need to focus on that.

        23             I think we should start by taking the

        24        approach, we should do no harm.  We should not

        25        put burdens on this new industry, this new area.

                               COOK & WILEY, INC.


         1             We saw the very interesting chart about

         2        what 20 years of tender, loving care from the

         3        government did to begin with.  I don't think we

         4        should go back to that part of the graph with

         5        higher taxes.

         6             I think we also need, before we do no harm,

         7        we need to undo the harm that has been done, the

         8        3 percent tax on telecommunications.  It's been

         9        100 years.  The Spanish-American War is over.

        10        That should be repealed.

        11             Recent taxes that have been put on the

        12        Internet on telecommunications recently also

        13        need to be removed.

        14             The limitations on robust encryption for

        15        the Internet eCommerce and recent threats of the

        16        FBI's interest in reading everybody's e-mail and

        17        undoing people's private encryption

        18        domestically, that threat needs to be removed.

        19             We need to maintain privacy of commerce in

        20        the Internet, and remember this is an

        21        opportunity to think about how to reduce the tax

        22        burden on all Americans.

        23             Thank you.

        24             GOVERNOR GILMORE:  Grover, thank you very

        25        much.

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         1             Next member of the Commission to speak is

         2        Gene Lebrun.  He's President of the National

         3        Conference of Commissioners on Uniform State

         4        Laws.

         5             Gene?

         6             MR. LEBRUN:  Thank you, Governor.  As I

         7        stated yesterday, depending on who you read or

         8        what you read, I'm a private citizen, a lawyer

         9        from South Dakota, former legislator, former

        10        Speaker of the House.

        11             As the Governor indicated, I'm currently

        12        President of the National Conference of

        13        Commissioners on Uniform State Laws, also a

        14        friend of Tom Dashnell (ph.).  I'm not sure

        15        which of those help me get on this Commission.

        16             I'm delighted to be here.  In 1996 the

        17        National Conference of Commissioners on Uniform

        18        State Laws undertook a study of just this topic

        19        to see what, if anything, should be done about

        20        taxation of the Internet.

        21             Our study committee concluded it was very

        22        controversial at that time, still is.  Our

        23        Constitution of the Conference provides we

        24        should entertain desirability for uniformity and

        25        practicality of getting something enacted.

                               COOK & WILEY, INC.


         1             We felt, after looking at what was being

         2        done by other groups, we should monitor the

         3        situation, but the Conference was not yet in a

         4        position to start drafting an act.

         5             I believe, however, that with this

         6        Commission, the makeup of the Commission, and

         7        the charge that we received from Congress, that

         8        is, to take testimony from citizens, from

         9        interested groups, from state and local

        10        government, and industry, that this Commission

        11        can come up with the right balance and propose

        12        something that is fair and that can be adopted

        13        uniformly throughout the states.  And I truly

        14        look forward to working on the Commission on

        15        this project.

        16             GOVERNOR GILMORE:  Gene, thank you very

        17        much.

        18             Last night the members of the Commission

        19        were treated to a short presentation by former

        20        Governor of Virginia, Patrick Henry.

        21             The next speaker holds the seat that was

        22        once occupied by Thomas Jefferson.  That

        23        gentleman is a member of the House of Delegates,

        24        member of the State Legislature here in

        25        Virginia, Delegate Paul Harris.

                               COOK & WILEY, INC.


         1             Paul, thank you.

         2             MR. HARRIS:  Thank you, Mr. Chairman.  Last

         3        evening we heard a little concern about the

         4        location for this meeting, but as a member of

         5        the House of Delegates and the current occupant

         6        of Mr. Jefferson's seat in the House, I think we

         7        have chosen a most appropriate setting for our

         8        first meeting and am delighted we're finally

         9        underway.

        10             I consulted with my wife last night, who is

        11        more of a technology expert than am I, and I

        12        asked her what I might say during this three-

        13        minute period.

        14             She told me "not to try to be charming,

        15        witty, or intelligent, just go be yourself."

        16             Following her advice this morning, I will

        17        briefly state what I hope we will accomplish

        18        over the next several months.

        19             First of all, the task before us is

        20        obviously enormous.  I am privileged to

        21        represent a district that hosts one of the

        22        largest on-line shopping companies, Value

        23        America, located in Charlottesville, Virginia.

        24        And then I have folks who think the Internet is

        25        something you use to fish.

                               COOK & WILEY, INC.


         1             But in order to accomplish what Congress

         2        has set before us, I think our debates must be

         3        open and honest.  I don't think there is any

         4        higher priority for us over the next several

         5        months.  That's number one.

         6             Number two, I hope we can give due

         7        consideration to all sides of the issue that we

         8        will be discussing over the next several months.

         9        Those issues, obviously, involve taxing issues

        10        but also privacy, fraud issues, collection

        11        issues, distribution issues, Federal issues, and

        12        issues related to global competition.

        13             The third is that our recommendations do

        14        not stifle on-line eCommerce but enhance

        15        eCommerce through tax and technology neutral

        16        policies.

        17             Simplicity and neutrality have already been

        18        mentioned as bywords for this Commission.  I

        19        echo those sentiments.

        20             To accomplish the three goals I have set

        21        forward, I think we need to define the scope of

        22        our discussions quickly and decisively.  We need

        23        to make critical use of our time and our

        24        resources, and, again, I think we need to keep

        25        an open mind throughout the life span of this

                               COOK & WILEY, INC.


         1        Commission.

         2             If we can proceed in this fashion, I'm sure

         3        we will accomplish the goals that Congress has

         4        set before us.  I look forward to serving under

         5        the Chairman and working with all of you over

         6        the next several months.

         7             Thank you.

         8             GOVERNOR GILMORE:  Paul, thank you for your

         9        opening remarks.  We appreciate that.

        10             The next member of the Commission to speak

        11        is Andrew Pincus, General Counsel to the U. S.

        12        Department of Commerce.  He is the delegate on

        13        this Commission for Secretary William Daley.

        14             Andy?

        15             MR. PINCUS:  Thank you, Mr. Chairman.  It's

        16        an honor to be part of this distinguished group.

        17             As John's presentation made clear, we are

        18        truly in the midst of a revolution of historic

        19        proportions in the way we shop and the way we

        20        work and the way we organize and conduct our

        21        businesses, and the way we interact with each

        22        other and the rest of the world.

        23             For that reason, we at the Commerce

        24        Department have been spending a considerable

        25        amount of time dealing with the variety of

                               COOK & WILEY, INC.


         1        policy issues that arise from this explosion of

         2        eCommerce.

         3             These include privacy, consumer protection,

         4        electrical property standards, quality, and a

         5        host of others.  One thing I have learned from

         6        that experience is these are difficult issues.

         7             One concern I want to express now is about

         8        the time left for the Commission to complete its

         9        deliberations.  We have a lot to do in a short

        10        period of time, and I think we all agree we have

        11        to make the most of it.

        12             In that connection, it seems to me that the

        13        focus of our work should be state and local

        14        taxation.  That's what the moratorium is focused

        15        on.  That's an issue that, in itself, will be a

        16        challenging one to resolve and a lot to bite

        17        off.

        18             My view is we need to focus in on that

        19        issue.  Hopefully today, at the end of the day,

        20        we can come up with at least the outlines of a

        21        work plan that can be fleshed in so that we can

        22        meet the goal that others have stated of trying

        23        to address that issue.

        24             In terms of how to go about it, I think you

        25        set the right tone, Mr. Chairman, in your

                               COOK & WILEY, INC.


         1        opening remarks.  We have to be open and

         2        transparent.  We have to cast the wide net, be

         3        very inclusive, bring in all viewpoints, and

         4        provide a fair forum for what will be very

         5        difficult issues to resolve.

         6             I think Mike set the keynote that others

         7        have focused on.  Neutrality has to be the

         8        hallmark of what we do.  We have to be neutral

         9        to make sure that eCommerce isn't hindered in

        10        achieving its truly great potential in creating

        11        a new and different kind of global marketplace.

        12             At the same time we don't want to

        13        disadvantage traditional brick-and-mortar

        14        businesses that deserve the same kind of

        15        neutrality.

        16             I look forward to working with the other

        17        members of the Commission to try and work on

        18        this challenging task.

        19             Thank you, Mr. Chairman.

        20             GOVERNOR GILMORE:  Thank you.  Andy, thank

        21        you very much.

        22             Next speaker is Dean Andal, the Chairman of

        23        the California Board of Equalization.

        24             Dean?

        25             MR. ANDAL:  Thank you very much, Governor.

                               COOK & WILEY, INC.


         1        I would like to also thank you and the people

         2        for Virginia for having us.  This has been an

         3        extraordinary place to do this.  We appreciate

         4        your leadership.

         5             This is one of those rare occasions when I

         6        will reference "USA Today."  This morning the

         7        article reads, "E-World Fuels U. S. Economy,

         8        Report Said."  That's what I'm interested in.

         9             I believe that we're on a path of one of

        10        the most wonderful times in our history.  We're

        11        going to have rapid increases in the growth of

        12        personal income, the growth of job opportunities

        13        for ordinary people around the country, and our

        14        fundamental goal ought to be not to limit that

        15        but to accelerate.

        16             In that regard, I wanted to deal with one

        17        subject that has been of great interest and will

        18        probably dominate our conversation here, and

        19        that is what effect could Internet sales and

        20        growth of Internet sales have on the government

        21        revenues that state and local governments depend

        22        on to provide government services?

        23             I have a chart to pass out to the

        24        Commissioners.  This is California only

        25        information where I come from.  California right

                               COOK & WILEY, INC.


         1        now as we speak has the most Internet tax-

         2        friendly laws for sales tax purposes of any

         3        state in the country, other than, of course,

         4        those states who have no sales tax.

         5             To give an example, we do not believe in

         6        California that a web page alone establishes an

         7        access for sales tax purposes.  That is one of

         8        many examples.

         9             We also have more Internet users than

        10        anywhere else in the world.  I would argue that

        11        we have more Internet customers than anywhere

        12        else in the world.

        13             So if the argument that growth of the

        14        Internet is going to somehow diminish states'

        15        sales tax revenues to any substantial degree was

        16        true, you would think it would show up in

        17        California.  But the opposite has been true.

        18             Over the last five years, we are having

        19        gangbuster increases in our traditional sales

        20        tax revenue, and at the same time the Internet

        21        is growing rapidly in our state.

        22             I put a chart in front of all of you that

        23        shows our taxable sales, and, of course, the

        24        revenue generated from it is exceeding the

        25        population growth less inflation.

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         1             I believe we ought to deal with facts.

         2        Before we chase out these existing tax systems

         3        that are allowing the Internet to grow, we

         4        should make certain that we prove that there is

         5        any harm before we do it.

         6             Thank you very much.

         7             GOVERNOR GILMORE:  The next speaker is

         8        Delna Jones.  She is the Commissioner from the

         9        Washington County Administrative Offices, the

        10        state of Oregon.

        11             MS. JONES:  I would like to say for those

        12        of you watching and listening, I understand I'm

        13        the last member to be appointed to this

        14        Commission.

        15             Depending upon your view of this Commission

        16        and its work, we now have a limited amount of

        17        time as compared to in the beginning.  But maybe

        18        those of you who have watched legislators work,

        19        great, because you will benefit because we now

        20        have a product we must produce and a limited

        21        time to get it done.

        22             I am from a state that does not benefit or

        23        will not be affected, for the most part, by the

        24        acts of this Commission or the recommendations,

        25        because we have no sales tax, unless, of course,

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         1        we're requiring all states to collect.

         2             Now, you might say "Well, Lady, then you

         3        really are in a position where this isn't

         4        affecting you, so you really don't have any

         5        reason to have a participation."

         6             I think that is exactly why I have a reason

         7        to participate.  And what I'm looking forward to

         8        is to recognize that, while I may have a state

         9        that is not personally affected, I represent

        10        also a lot of local governments around the

        11        nation who are affected a great deal by what

        12        this Commission may recommend.

        13             As I know, they are watching with concern

        14        as this Commission deliberates.

        15             I also recognize and represent a lot of

        16        constituents who also expect service delivered

        17        by government.  I'm hopeful we will keep that in

        18        mind.

        19             But at the same time, I believe we need to

        20        balance the great potential that our economy has

        21        and its impact on the world as we look at

        22        expanding Internet access and opportunities

        23        without government interference for especially

        24        those people in the past who have been mentioned

        25        today that are entrepreneurial and also

                               COOK & WILEY, INC.


         1        disenfranchised by the local economies and the

         2        way that tradition has allowed them to do

         3        business and encourage that so that what we have

         4        is a Commission that looks beyond our local

         5        issues, while keeping those in mind, and looks

         6        for expansion of the opportunities of our

         7        citizens internationally.

         8             GOVERNOR GILMORE:  Delna, thank you.

         9             The next member of the Commission is the

        10        Governor of the great state of Utah, Governor

        11        Mike Leavitt.

        12             Mike.

        13             GOVERNOR LEAVicT:  Thank you, Mr. Chairman.

        14             I would also like to join in the

        15        celebration that is being expressed in this era,

        16        this Internet era, this powerful union, economic

        17        expansion, and I desire to see it assisted in

        18        any way.

        19             I want to make it clear I do not believe

        20        the Internet should be taxed.  There should be

        21        no bandwidth tax, no discriminatory taxes.  We

        22        ought not to be taxing access.  We ought to be

        23        building it.

        24             However, those who choose to do

        25        transactions over the Internet should be treated

                               COOK & WILEY, INC.


         1        with equality.  I think that point has been

         2        made.  Taxation should not depend on how people

         3        buy.

         4             I would also like to deal with what I feel

         5        are three realities of our work:  The first is

         6        that we must, as has been stated, limit our

         7        scope.  If we attempt to revamp the entire sales

         8        tax system in this country, that is a task

         9        beyond our capacity.

        10             However, we can undertake, at least in the

        11        area of remote sales, a radical simplification

        12        that is an absolute must if eCommerce is going

        13        to be a vital engine that is required for the

        14        21st century.

        15             Time is our enemy.  There is time in the

        16        life of every problem when it's big enough, you

        17        can see it, but small enough, you can still

        18        solve it.  I believe that's precisely where we

        19        are right now.

        20             We have to deal with this problem now.  If

        21        we wait three years or five years, the course

        22        will be set, and we will be left to deal with

        23        the consequences that will shape themselves.

        24             Lastly, I would like to point out that

        25        given we are going to have to look at specific

                               COOK & WILEY, INC.


         1        problems, we need to give them context but

         2        realize we're not going to come up with the

         3        perfect solution.

         4             We should move forward looking for progress

         5        as opposed to perpetually deferred perfection.

         6             Thank you.

         7             GOVERNOR GILMORE:  Thank you very much,

         8        Mike.

         9             While we have heard an opening lecture from

        10        John Sidgmore, I assume you also want John to

        11        present his three minutes on the views and

        12        issues before the Commission.

        13             So John Sidgmore, the Vice Chairman and

        14        Chief Operating Officer of MCI Worldcom.

        15             MR. SIDGMORE:  Thank you.

        16             I am open-minded with respect to most of

        17        these important issues.  I have to say, I'm a

        18        pretty big fan of the Internet.  I don't think

        19        anyone on earth wants it to succeed more than I

        20        do.

        21             Having said that, I really believe the

        22        Internet and Internet commerce is going to

        23        proliferate without artificial help from the

        24        government.  I think it's actually way too late

        25        to stop us.

                               COOK & WILEY, INC.


         1             Tax systems are not and tax advantages are

         2        actually not what is allowing the Internet to

         3        grow.  I do think it was wise to implement the

         4        moratorium.  It gives us time to think.

         5             We have a new technology that is really

         6        going to change the world.  I think we need to

         7        think about that new technology before we

         8        implement new laws and taxes and things like

         9        that that have a negative potential.

        10             I don't know the foreseeable long-term

        11        effects of taxing one form of commerce rather

        12        than the others, to be honest.  There are a

        13        myriad of problems to overcome if we do want to

        14        collect taxes for the Internet or for Internet

        15        transactions.  There are ways to get through

        16        many of the issues, both systemic and technical.

        17             Massive changes, I think, are going to be

        18        required to current state and local government,

        19        if we want to do it, to eliminate the

        20        complications that are possible to overcome.

        21        Whether or not we want to enact sales taxes at

        22        all is an entirely different debate.

        23             I do think Internet commerce additionally

        24        expands the economy.  I don't think this is a

        25        Saracen game.  I don't think it only subtracts

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         1        from Main Street commerce.  I don't believe it

         2        is reasonable to tax mail order business over

         3        Main Street transactions or Internet

         4        transactions.

         5             I am not proposing any new taxes or new

         6        additional tax revenue from the Internet.  I

         7        certainly do not support any tax on the basic

         8        access to the new technology for everyone.

         9             I do think we need to examine all of the

        10        pieces together.  If we really want to make this

        11        work, we could probably come up with ways to do

        12        it economically and otherwise.

        13             Thank you.

        14             GOVERNOR GILMORE:  John, thank you very

        15        much.

        16             The next member of the Commission is

        17        Mr. Joseph Guttentag.  He's the Senior Advisor

        18        in the office of tax policy for the United

        19        States Treasury, and he is the delegate on this

        20        Commission for the Secretary of Treasury.

        21             Mr. Guttentag?

        22             MR. GUTTENTAG:  Thank you, Mr. Chairman.

        23             I bring you greetings from Secretary Rubin

        24        and Deputy Secretary Summers, as well as best

        25        wishes for every success with our important

                               COOK & WILEY, INC.


         1        assignments.

         2             Five years ago the Treasury began a review

         3        of relevant tax laws impacting the new

         4        technologies, including the Internet.  We

         5        focused on their international application to

         6        determine the tax law impact on this burgeoning

         7        industry.

         8             The first result was a 1996 Treasury paper

         9        discussing some of the more significant

        10        electronic commerce tax issues and establishing

        11        some basic principles.

        12             We learned early on that discriminatory

        13        taxation or even the fear of discriminatoiry

        14        taxation has the potential to slow significantly

        15        the growth of the Internet and electronic

        16        commerce.

        17             It is the position of the Treasury

        18        Department that tax neutrality and

        19        nondiscrimination should be the fundamental

        20        principle guiding the development of tax policy

        21        with respect to electronic commerce,

        22        domestically and internationally, nationally and

        23        locally.

        24             We are also cognizant of the legitimate

        25        revenue concerns of the states and localities.

                               COOK & WILEY, INC.


         1        We must not allow the Internet to become a tax

         2        haven that drains the revenues from the

         3        government's need to provide the services its

         4        citizen demand, such as the education of our

         5        children and the safety of our neighborhoods.

         6             As the President stated, the Act takes into

         7        account the rights of consumers, the needs of

         8        businesses, and the overall effect of taxation

         9        on the development of Internet commerce.

        10             At the Treasury we see our role as helping

        11        the Commission and all interested parties

        12        achieve the objectives of the Act.

        13             We keep in mind that, as the President has

        14        stated, we must be committed to listening to the

        15        concerns of the governors, the mayors, and other

        16        officials of businesses, and to achieve a

        17        consensus that will establish rules that are

        18        nondiscriminatory and will provide appropriate

        19        revenue as our communities need to meet vital

        20        public purposes.

        21             We should forge a consensus within this

        22        Commission for neutral taxation of the Internet,

        23        electronic commerce, and economically similar

        24        transactions.

        25             In the international area with our trading

                               COOK & WILEY, INC.


         1        partners in the business community, we are

         2        helping to develop an international consensus

         3        based on the concepts of neutrality and

         4        nondiscrimination through the Organization for

         5        Economic Cooperation and Development.

         6             I can assure you, as Chairman of the Fiscal

         7        Committee of the OECD, that the electronic

         8        commerce project is receiving the highest

         9        priority.

        10             In general, the approach has been that the

        11        basic principles of our international tax rules

        12        remain sound and well-suited to deal with new

        13        transactions with some tweaking and with some

        14        agreed new interpretative guidelines.

        15             Mr. Chairman, I suggest that this

        16        Commission may also, in addition to working on

        17        state and local tax, consider reviewing and

        18        endorsing the work and the work plans of the

        19        OECD in this area.

        20             Thank you, Mr. Chairman.

        21             GOVERNOR GILMORE:  Joe, thank you very

        22        much.

        23             Next member of the Commission is an

        24        independent consultant for the Association of

        25        Interactive Medium.  That is Stanley Sokul.

                               COOK & WILEY, INC.


         1             Stan?

         2             MR. SOKUL:  Thank you, Governor.

         3             First, let me briefly introduce the trade

         4        association I represent here, the Association

         5        for Interactive Medium, A-I-M, or AIM.

         6             AIM consists of the men and women all

         7        across the country doing business on the

         8        Internet.  AIM is a reflection of Internet

         9        commerce.  Its members include some big

        10        companies, but its heart and soul are small

        11        businesses, mom and pop Internet operations.

        12             AIM members are part of the innovation and

        13        dynamics of the web so often discussed by

        14        economic analysts.  That dynamics and energy

        15        does not exist in the abstract but exists

        16        because of people, regular folks, in urban

        17        areas, suburban areas, and rural areas, who

        18        think they have a good idea and trying to make a

        19        living for themselves and their families.

        20             As AIM members struggle every day in the

        21        Internet economy, they understand that the

        22        issues before us come down to power, how the

        23        power of government is going to be applied to

        24        the Internet and thus to them.

        25             In that regard, AIM believes governments

                               COOK & WILEY, INC.


         1        have no inherent right or duty to tax an

         2        activity just because it occurs.

         3             This is particularly true when states and

         4        cities seek to impose tax obligations on people

         5        and businesses outside of their borders.

         6             When AIM members are told in the name of

         7        fairness that they must collect taxes for all 50

         8        states and maybe for thousands of counties and

         9        cities because local merchants collect taxes for

        10        one, they have trouble seeing the equities.

        11             AIM wants to see this Commission do its

        12        mission.  The Commission was given instructions

        13        on what to study, but the caliber of

        14        appointments strongly signals that Congressional

        15        leadership expect a high caliber report.

        16             Our mission is not to produce a restatement

        17        of conventional wisdom and current thinking.

        18        We're not here as tax collectors for the current

        19        tax regimes.  We are called upon to produce a

        20        visionary report that helps Congress deal with

        21        the changing world.

        22             It's appropriate that our first meeting is

        23        in the Colonial setting of Williamsburg.  The 13

        24        colonies' first attempt at government collapsed

        25        because the states parochial revenue motives led

                               COOK & WILEY, INC.


         1        to the imposition of state import duties on

         2        interstate commerce.

         3             The states' present desire to gain national

         4        taxing authority is the modern day equivalent.

         5        We should not impose an Articles of

         6        Confederation framework on our 21st century

         7        economy.

         8             AIM knows that our Constitution limits the

         9        rights of states on interstate commerce to

        10        important regions, and the American people

        11        expect more from us than a report recommending

        12        that the states be allowed to place

        13        unprecedented affirmative burdens on interstate

        14        Internet commerce.  Congress expects more from

        15        us as well.

        16             On behalf of AIM, I'm excited to help work

        17        toward meeting these expectations.

        18             GOVERNOR GILMORE:   Stan, thank you very

        19        much.

        20             The next speaker of the Commission is the

        21        Chairman and the CEO of Gateway, Incorporated,

        22        Mr. Ted Waitt.

        23             Ted?

        24             MR. WAITT:  Thanks, Governor.  It's a real

        25        honor to be here today and be part of this

                               COOK & WILEY, INC.


         1        Commission.  I think there have been some great

         2        points already made by a lot of my fellow

         3        Commissioners.

         4             Gateway is in somewhat of a unique position

         5        out in the industry today.  Our heritage has

         6        been selling products over the phone.  We were

         7        the first company to really sell a PC over the

         8        Internet.  We have a catalog operation.  We have

         9        web merchants.  We're also a retailer because we

        10        build stores.   We're also an Internet access

        11        provider.

        12             We're somewhat in a unique position.  We

        13        really come to this Commission with an open

        14        mind.

        15             The current environment for sales tax

        16        really doesn't even deal with mail order sales

        17        properly, much less the environment for the

        18        Internet.

        19             We're dealing with some pretty complex

        20        issues.  No matter what we do here, it needs to

        21        be simple.  It needs to be very clear.  It needs

        22        to be uniform and provide a level playing field.

        23             The Internet and eCommerce, as John talked

        24        about earlier, is going to grow.  It does not

        25        need advantages to grow dramatically.  But also

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         1        it can't be held back by any government

         2        innovation.

         3             We're dealing with some complex issues.

         4        Hopefully, we can work together with an open

         5        mind to come up with some very common-sense

         6        solutions to these larger issues.  I'm happy to

         7        be here.

         8             Thank you.

         9             GOVERNOR GILMORE:  Ted, thank you very

        10        much.

        11             The last member of the Commission to make a

        12        presentation is the General Counsel of the

        13        United States Trade Representatives, the

        14        delegate for Ambassador Charlene Barshefsky.

        15             In my recent travels to South America, I

        16        noticed and was informed that people from across

        17        the world are watching very closely the tax

        18        position that this Commission recommends and

        19        that Congress ultimately adopts, and may very

        20        well adjust themselves accordingly.

        21             On that position, it may be, that over-

        22        dependency on this Commission, there can be no

        23        stronger or more important voice in this

        24        discussion than the General Counsel of the

        25        United States Trade Representative, Foreign

                               COOK & WILEY, INC.


         1        Ambassador Charlene Barshefsky.

         2             That gentleman today is the General

         3        Counsel, Mr. Robert Novick.

         4             Mr. Novick?

         5             MR. NOVICK:  :  Thank you, Governor.  Thank

         6        you and your staff for convening this first

         7        meeting.  It's already been a great success.

         8             The issue we're here to address is complex.

         9        The Internet is an emerging technology whose use in

        10        the future is hard to predict.  The ultimate

        11        goal of our work is clear.

        12             The President stated it succinctly when he

        13        signed this law.  He said, "We cannot allow

        14        30,000 state and local jurisdictions to stifle the

        15        Internet, nor can we allow the erosion of the

        16        revenue that state and local governments need to

        17        fight crime and invest in education.  Achieving

        18        that goal is our challenge, and succeeding will yeild

        19        real rewards at home and abroad."

        20             The domestic tax policy work of the

        21        Commission has important parallels for

        22        internationally.  Governor Gilmore is quite

        23        right.  Foreign governments will be watching the

        24        progress of this Commission closely.

        25             They, of course, seek electronic commerce

                               COOK & WILEY, INC.


         1        that yields the most benefits for their nations.

         2        Many are also concerned about the possible

         3        effects of electronic commerce on their revenue.

         4             Our ability to make progress in the months

         5        ahead thus has very real consequences for

         6        America's interests worldwide.

         7             As an agency whose responsibility is solely

         8        in trade, USTR is not directly

         9        involved in tax policy.  However, the taxes the

        10        Commission will address have significant

        11        implications for our ability to address the

        12        international aspects of electronic commerce.

        13             In particular, the President has directed

        14        the USTR to secure a permanent

        15        moratorium on the imposition of tariffs on

        16        electronic commerce.

        17             Ambassador Barshefsky succeeded in May of

        18        '98 in winning an agreement among more than 130

        19        members of the World Trade Organization to

        20        impose an interim standstill on the imposition

        21        of tariffs.  Today, therefore, in trade terms 

        22        the Internet is pristine.

        23             No member of the WTO considers electronic

        24        commerce imports subject to customs duties.

        25        This duty-free treatment should include

                               COOK & WILEY, INC.


         1        electronic transactions on the Internet.

         2             We are now working to make that interim

         3        standstill permanent as we look forward to

         4        hosting the third WTO meeting this November in

         5        Seattle.

         6             If this Commission can work towards a

         7        consensus in a transparent and constructive

         8        fashion, we will reduce the temptation by other

         9        countries to display their revenue concerns in

        10        the form of tariffs.

        11             I would be remiss in mentioning the WTO

        12        meeting if I didn't acknowledge the work of

        13        Governor Locke and his office in helping us plan

        14        this unique and most significant trade event in

        15        the 20th century.

        16             In closing, the world community is looking

        17        for the United States' leadership on electronic

        18        commerce issues.  This Commission offers a

        19        unique opportunity and serious responsibility.

        20             As Governor Gilmore accurately stated in

        21        one of his letters to each of the Commissioners,

        22        our success will be measured about how well we

        23        are able to strike a balance between the

        24        legitimate interests of Federal, state and local

        25        governments with the concerns of the merchants

                               COOK & WILEY, INC.


         1        and entrepreneurs in the business community.

         2             I couldn't agree more and look forward to

         3        working with each of the distinguished members

         4        of this Commission in a process that strikes

         5        that proper balance.

         6             Thank you, Governor.

         7             GOVERNOR GILMORE:  Thank you very much.

         8             Ladies and Gentlemen, we are on time.  But

         9        at the same time, I think we can also see from

        10        the breadth of the 17 presentations that there

        11        is a great diversity of opinion on this panel

        12        and a great diversity of point of view, a very

        13        difficult task, it seems to me, to achieve

        14        consensus.

        15             It may be that Congress gets the benefit of

        16        the views of the members of this Commission in a

        17        final report, or perhaps as the months go on and

        18        we listen to our presentations, a more

        19        consistent approach will emerge.

        20             I don't think there is any obligation that

        21        that occurs, but I think that we should

        22        hopefully try to reach towards bringing together

        23        people's ideas to the greatest extent that we

        24        can.

        25             We will begin our first presentation with a

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         1        member of the panel who is going to make that

         2        first presentation.  The agenda calls for us to

         3        make a 15-minute break.  I can use one.  I

         4        certainly believe we all could.

         5             Let's come back in 15 minutes.  Thank you

         6        very much.


         8             (Recess taken.)


        10             GOVERNOR GILMORE:  The meeting will now

        11        come to order.  It's now time to hear from some

        12        of the invited speakers.

        13             Yesterday we had some housekeeping

        14        discussions.  We will have some more of that a

        15        little later on this afternoon.  But we have

        16        some speakers who are set to go.

        17             If we stay with these speakers, I believe

        18        we can get a general idea of a wide ranging

        19        number of issues and facts and education

        20        involved with those, so that we can continue to

        21        work in beginning to draw together our ideas.

        22             I have deliberately selected these speakers

        23        in order for us to each be on the same page

        24        regarding these kinds of issues.  We have a

        25        variety of presentations.

                               COOK & WILEY, INC.


         1             The members of the Commission come at this

         2        with a broad range of knowledge and information.

         3        These speakers will begin to give us some common

         4        ground from which to work as we go from there to

         5        the different points of view we have on these

         6        issues.

         7             The first issue that we're addressing is

         8        the implications of electronic commerce for U.

         9        S. domestic economy and U. S. international

        10        competitiveness.

        11             Now, the first speaker on this issue is

        12        Andrew Pincus, the General Counsel for the U. S.

        13        Department of Commerce.  His presentation is on

        14        "The Emerging Digital Economy."

        15             This is a report produced by the department

        16        last year, but I understand that you have a new

        17        version of it, Andy, as well.  We want to thank

        18        you very much for giving us your presentation

        19        now.  Thank you.  Please proceed.

        20             MR. PINCUS:  Thank you.

        21             As you mentioned, Governor, last year, in

        22        an effort to catalog and examine what was

        23        happening to our economy, Secretary Daley issued

        24        the Commerce Department's first report on "The

        25        Emerging Digital Economy."

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         1             Later today we will be issuing our second

         2        report.  We have put a copy on each of the

         3        Commissioners' desks.  It's embargoed until

         4        the end of the day today when it's coming out

         5        formally.

         6             It contains an update of the issues that

         7        you asked us to address, trying to measure this

         8        phenomenon and a little bit of the discussion of

         9        its impact on various aspects of our domestic

        10        economy and international competitiveness.

        11             I thought what I would try to do today is

        12        try to summarize some of those developments

        13        quickly and then be available to answer

        14        questions or discuss any issues in depth.

        15             I'm going to try to address five issues

        16        quickly:  First, what is eCommerce that we're

        17        all talking about?  Is there a definition we can

        18        all use to have a common ground?

        19             Second, a little bit of discussion of facts

        20        and figures on the use of the Internet and how

        21        it's growing.

        22             Third, measuring the digital economy, what

        23        we at the Commerce Department have been doing to

        24        try to address the measure in question, which

        25        has been raised more often lately.

                               COOK & WILEY, INC.


         1             Then the impact on our domestic economy.

         2        What does this mean for growth and what does it

         3        mean?

         4             Several of the Commissioners said in their

         5        three-minute statements, clearly technology in

         6        general, eCommerce in particular, is having a

         7        tremendous impact on our growth.

         8             And finally, the discussion on how

         9        eCommerce impacts on our global competitiveness,

        10        which, as everyone has mentioned, this is a

        11        global marketplace, and increasingly companies

        12        of the United States will be competing not just

        13        with their fellow domestic competitors but with

        14        companies around the world.

        15             Let me start by talking about what is

        16        eCommerce.  Our colleagues in USTR last year in

        17        Geneva, in advocating a standstill on tariffs on

        18        the Internet, arrived at a definition we think

        19        is a good one.

        20             ECommerce involves both products that are

        21        bought and paid for over the Internet but

        22        delivered physically, as well as the increasing

        23        number of products that are delivered as

        24        digitalized information.

        25             We really have those two categories to deal

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         1        with now.  Obviously, paying for goods and

         2        having them physically delivered is very large.

         3        But as John discussed in his presentation, as

         4        bandwidths grow, we will see increasing delivery

         5        of digitalized products.

         6             We look at that as the universe of things

         7        we're dealing with when we're talking about

         8        eCommerce.

         9             Next, some facts and figures on Internet

        10        access, which is clearly a key measure for

        11        different countries in how they are able to

        12        access and participate in this medium.

        13             As you can see, the United States is on the

        14        lead in percentage of population with Internet

        15        access.  You can see the distribution goes down

        16        from Canada, Australia, and jumps down to

        17        Europe.  This is a percentage of population.

        18             The next chart cuts the numbers a little

        19        differently in terms of total people with

        20        Internet access and, divided by region, shows

        21        how U. S. and Canada is really tremendous in the

        22        lead over the rest of the world with Internet

        23        access, which means not only is our public more

        24        familiar with this new medium, more able to use

        25        it, but entrepreneurs are able to think about

                               COOK & WILEY, INC.


         1        creating new kinds of services and goods that

         2        can use the Internet.

         3             Access is growing tremendously, as everyone

         4        has mentioned.  A few numbers increased.  Access

         5        is up 55 percent from '98 to '99.  New address

         6        registrations are up 137 percent.  Hosts are up

         7        46 percent.

         8             One thing that is interesting about these

         9        numbers is other countries are beginning to

        10        catch up.  We have had a tremendous lead for a

        11        long period of time, but other countries are

        12        beginning to grow faster in Internet access

        13        usage and beginning to catch up to us, which is

        14        only natural as technology becomes more

        15        disseminated around the world.

        16             The next issue, measuring digital economy.

        17        Measurement is difficult now because there

        18        really is no authoritative source of numbers.

        19        We have got private estimates of Internet access

        20        and size that vary from each other.

        21             We have got private estimates of sales and

        22        use that vary because everybody uses different

        23        sample sizes, different definitions, different

        24        methodologies.

        25             I think, although the absolute numbers may

                               COOK & WILEY, INC.


         1        differ, there is no debate that, as John showed

         2        in his presentation, it doesn't matter what you

         3        label the chart, everything is going up like

         4        that.  I think that is something that no one is

         5        debating.

         6             One of the things we're trying to do in the

         7        Commerce Department is begin to adopt our

         8        national accounts to collect this kind of data,

         9        because, as with everything else, we have a

        10        collection of statistical measures that were

        11        really developed for a different kind of economy

        12        and don't take account of the new economy we're

        13        developing.

        14             So we had a conference earlier this year to

        15        collect expert opinion on how to begin to

        16        measure the digital economy, how to adopt our

        17        GDP numbers and other numbers so that we can

        18        capture all this economic activity.

        19             Because most people believe, even though

        20        our GDP numbers and other measures show

        21        tremendous growth, they are underestimating the

        22        growth of economy because we're not fully

        23        capturing this data.

        24             We have announced we're going to begin to

        25        separately collect in our retail sales those

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         1        results.  Unfortunately, because of the lag

         2        time, this will not be published until early

         3        2001.

         4             What Secretary Daley has directed

         5        our data collection people to do is to look at

         6        all the data collection efforts, to work with

         7        the people that we collect data from, to look at

         8        new, quicker on-line methods of collecting data

         9        and broader data collection methods so that we

        10        can have better data measurements of this

        11        phenomenon.

        12             What we have done in this report, and this

        13        is what we did last year, is to collect from the

        14        private sector measures of eCommerce.

        15             This chart is business-to-consumer

        16        eCommerce.  As you can see, it starts out with

        17        some very small numbers in '97 but really jumps

        18        up projected growth to anywhere from 15 times to

        19        35 times as large in 2002.

        20             I should say one thing about these

        21        estimates.  They have all proven to be too low

        22        when the actual evidence comes to pass.  In

        23        early 1998 there was an estimate that on-line

        24        consumer commerce would be about 7 billion

        25        dollars by 2000.  Actually, that 7 billion

                               COOK & WILEY, INC.


         1        dollars was exceeded last year.

         2             I think, again, if there is anything we

         3        know about these numbers, even though they

         4        project a tremendous growth, they are probably

         5        underestimating the growth trend of this

         6        element.

         7             Most eCommerce still is business to

         8        business.  Business to --  I'm sorry, this is

         9        total retail trade.

        10             Business-to-consumer eCommerce is still a

        11        very small percentage of the U. S. retail trade,

        12        less than 1 percent, but the information that we

        13        have seen indicates that that percentage is

        14        growing.

        15             In other words, business-to-consumer

        16        e-commerce is growing at a greater rate than total

        17        retail trade.  So the percentage of retail sales

        18        that is on eCommerce will grow as we move up and

        19        will exceed that eCommerce growth line.

        20             As I was saying, however, in terms of gross

        21        eCommerce, business-to business is way ahead of

        22        business-to-consumer just because businesses

        23        have been much quicker to put their operations

        24        on line.

        25             And so I think this chart makes it very

                               COOK & WILEY, INC.


         1        clear that business-to-business is still a very,

         2        very large chunk of the commerce that happens on

         3        the Internet right now, and it's projected to

         4        continue to be in the foreseeable future.

         5             As I said, take these estimates with a

         6        grain of salt, because they will probably be

         7        surpassed.

         8             I thought it might be worth just mentioning

         9        a couple of examples of things we documented in

        10        the report, just to talk about the huge growth

        11        that some of these eCommerce businesses have

        12        shown.

        13             Travelocity, which is a travel agent site,

        14        you can see the numbers there, 156 percent

        15        increase in sales.  On-line brokerages is again

        16        a tremendous increase in the first quarter of

        17        this year.  And Quicken Mortgage, the first

        18        quarter number of '99 is almost equal to double the

        19        numbers of '98.  I think that documents

        20        the growth rate, respectively.

        21             It's been mentioned before, I think it's

        22        worth noting again quickly, the reason why

        23        eCommerce has revolutionized the way we do

        24        business is because it provides consumers with

        25        more choices, lower prices, and more

                               COOK & WILEY, INC.


         1        competition, and much faster service.  That's

         2        what people like.

         3             Switching gears a bit to talk about the

         4        impact of eCommerce on the domestic economy, one

         5        of the things we found in our last report was

         6        the tremendous contribution that the IT

         7        producing industries are making to our economic

         8        growth.

         9             We found, again, that if you look at '95 to

        10        '98, they contributed more than one-third of our

        11        total economic growth, which is already a

        12        phenomenal number.

        13             The other interesting thing is the

        14        declining prices is not only a big segment in

        15        our growth but contributing to keep the

        16        inflation down.  The declining prices brings

        17        overall inflation down by .7 percent.

        18             Because of its big contribution to our

        19        domestic economy and also because we lead the

        20        world in IT, you can see in that last bullet

        21        that the share of our economy is going to

        22        continue to increase in 1999 from IT industries.

        23             This is just a graphic representation of

        24        the growing importance of these industries to

        25        our economy.

                               COOK & WILEY, INC.


         1             The President in 1997, when he issued the

         2        framework for electronic commerce, identified

         3        the issues that have to be addressed in order

         4        for electronic commerce to grow.  I think it is

         5        worth just taking a minute.

         6             We're dealing here principally with

         7        taxation.  But just to put it in context, there

         8        are a number of other policy issues that are

         9        being grappled with by the Executive

        10        Branch, on the Hill, and the states and

        11        internationally in various forum questions about

        12        ensuring privacy on the Internet.

        13             How do I know if I shop at a site my

        14        information will be protected and not just sold

        15        to the highest bidder?  Consumer protection.

        16             How can I be sure that a site is safe to

        17        shop on if I'm a consumer and I buy something,

        18        after I send them my credit card and never get

        19        the good I ordered and have no remedy because

        20        they are in cyberspace and not a store I could

        21        go back to and bang on the door and demand my

        22        money back?

        23             There's not a store at the end of my

        24        transaction that I can take my goods back to.

                               COOK & WILEY, INC.


         1             Authentication.  If I engage in a contract

         2        with someone, how can I be sure that the person

         3        on the other end of the e-mail is the person

         4        whose name is typed on the contract?  How can I

         5        identify that?

         6             Security.  How can I be sure that bad

         7        people don't get my credit card number and other

         8        information and use it for bad purposes?

         9             A lot of these issues are reflected in the

        10        legal framework of contract law. Intellectual

        11        property protection, very important on the

        12        Internet. And issues we're dealing with here,

        13        taxation.

        14             As John mentioned in his presentation,

        15        critical to realizing the potential of the

        16        Internet is making sure that everybody has the

        17        bandwidth to get these tremendous new services

        18        that are being developed delivered to them, and

        19        not being the inexperienced one in a hotel room

        20        waiting to download and see their e-mail and

        21        taking a long time.

        22             How can we be sure that every American has

        23        access to a higher performance of the structure

        24        and an infrastructure where they are competing

        25        to make sure that we have a full measure of

                               COOK & WILEY, INC.


         1        competition to stimulate choice and low prices?

         2             That's something the Commerce Department

         3        and the rest of the administration has spent a

         4        lot of time on right now.

         5             On the international front, as Bob

         6        mentioned in his presentation and several others

         7        did as well, one of the unique aspects of the

         8        Internet that it's global.  All of the issues I

         9        just mentioned we're grappling with domestically

        10        have effects internationally.

        11             If we realize one of the great potentials,

        12        which is, for someone in Virginia who has a

        13        great idea of a service to sell or good to sell,

        14        wishes to sell on the Internet, not only to sell

        15        it to Virginia but the rest of the world, we

        16        have to make sure we have a legal system, tariff

        17        system, tax system that allows that kind of

        18        commerce to take place.

        19             As Bob mentioned, the tariff issue is very

        20        important.  We're very concerned that other

        21        countries adopt rules that don't discriminate

        22        against people in the United States, and, as Joe

        23        Guttentag mentioned, the jurisdiction and tax

        24        aspects arise as well.

        25             This report and all of the information

                               COOK & WILEY, INC.


         1        about the three Federal government participants

         2        in this Commission will be available on our web

         3        site,

         4             If people who are watching us on-line have

         5        questions or comments they want to convey to us,

         6        there is a place on that site to log in and

         7        send us the questions, and we'll answer them.

         8             GOVERNOR GILMORE:  Thank you.  I appreciate

         9        this very much.  I hope everyone has taken some

        10        notes.  We want to have some extensive questions

        11        and answers.

        12             Since both of the presenters are on the

        13        same topic or similar topics, I would like to

        14        ask the next presenter to go forward, and then

        15        we'll have a block of time at the end for the

        16        questions of the panel, if that's all right with

        17        you.

        18             Our next presenter is Peter Merrill of

        19        PricewaterhouseCoopers in Washington, D. C.

        20        Mr. Merrill is going to give us a perspective of

        21        multinational corporations doing business using

        22        eCommerce, value added taxes abroad -- and I

        23        fully admit I don't understand -- and how U. S.

        24        corporations are impacted with taxes and

        25        tariffs.

                               COOK & WILEY, INC.


         1             So Mr. Merrill, thank you very much.

         2             MR. MERRILL:  Thank you, Mr. Chairman, and

         3        members of the Commission.  My name is Peter

         4        Merrill.  I'm a partner with

         5        PricewaterhouseCoopers in Washington, D. C.

         6             Though I'm not speaking to you today on

         7        behalf of any organization, I have for the last

         8        three years worked with the Electronic Commerce

         9        Tax Study Group, a group of 15 U. S. companies

        10        interested in the international tax aspects of

        11        electronic commerce.

        12             Three of the study group's papers

        13        expressing its views on these matters to the

        14        Organization for Economic Cooperation and

        15        Development, the OECD, have been provided to you

        16        by the Commission staff.

        17             The issues that the Commission has been

        18        chartered to address are not new, nor are they

        19        easy to resolve.

        20             We're reminded today as we sit here in

        21        historic Williamsburg that our country's war of

        22        independence was fought, in part, over England's

        23        jurisdiction to tax remote sales in the

        24        colonies.

        25             While I do not have any simple solutions to

                               COOK & WILEY, INC.


         1        offer the Commission, I will make my remarks

         2        today to provide some perspective on the size

         3        and the nature of the tax issues raised by

         4        eCommerce and suggest some principles to guide

         5        the Commission's recommendations.

         6             The topics that I have been asked to

         7        address are similar to Mr. Pincus', so I will go

         8        over some of those quite quickly.

         9             The first, what is eCommerce?  I think it

        10        is useful to distinguish the kind of eCommerce

        11        that has been prevalent in the business

        12        community for over two decades.

        13             This is the type of commerce that takes

        14        place over value-added networks, bands,

        15        proprietary networks, also referred to as

        16        electronic data interchange.

        17             Every time you use a credit card or debit

        18        card, you are engaged in electronic commerce.

        19        Every time you use an ATM machine, you're

        20        engaged in electronic commerce.

        21             That technology is quite old.  It involves

        22        computer applications where transactions are

        23        conducted electronically across business

        24        boundaries.

        25             A narrower definition of electronic

                               COOK & WILEY, INC.


         1        commerce, I think the one that this Commission

         2        is focusing on, might be called I Commerce,

         3        Internet Commerce.

         4             Internet, as distinguisheded from

         5        electronic data interchange, EDI, takes place

         6        over an open network using open protocols.  This

         7        allows the type of commerce that we're seeing

         8        today by households.  This is business to

         9        consumer, often called B to C.

        10             So the business to consumer, the commerce

        11        over the Internet, is scarcely four years old,

        12        whereas the broader definition of eCommerce has

        13        been going on for two decades.

        14             There are many interesting and exciting

        15        types of this business-to-consumer commerce that

        16        are taking place because of the open network

        17        Internet format.

        18             Retail, obviously, is the closest analog to

        19        bricks and mortar, but many, if not most, of the

        20        types of goods and services being provided over

        21        the Internet are, in fact, intangibles, services

        22        rather than goods.

        23             And so many of the kinds of sites we see

        24        today, people conducting auctions over the

        25        Internet, buying cars over the Internet, buying

                               COOK & WILEY, INC.


         1        airline tickets, so on and so forth, are types

         2        of services where state taxes, for example,

         3        don't apply typically, and in many cases the

         4        consumer is not actually paying anything to get

         5        the service.

         6             The service is being provided in exchange

         7        for advertising revenues.  So, obviously, the

         8        service provider is not charging anything for

         9        the services using their site.  No sales tax is

        10        actually implicated.

        11             The history of eCommerce is a little bit

        12        hard to read.  It began, as was mentioned by

        13        John in his presentation, 30 years ago.  It was

        14        the Defense Department that was concerned about

        15        having a secure network in the event of nuclear

        16        attack.  This was a cold war development.

        17             And so it was government money initially

        18        that created the concepts which then, as I said,

        19        only four years ago, with the development of the

        20        browser, has allowed commerce, business-to-

        21        consumer-type commerce, to take off.

        22             If you look at eCommerce, I believe you

        23        will conclude that it is really more a way of

        24        doing business, a way of communicating, than it

        25        is truly a sector of the economy.

                               COOK & WILEY, INC.


         1             As Andy Grove has said, in five years there

         2        won't be any Internet companies because they

         3        will all be Internet companies, otherwise they

         4        will die.

         5             So this type of technology, like the

         6        telephone before it, like the telegraph before

         7        it, is something that every company in America

         8        will need to adopt in order to be more

         9        efficient.

        10             Now, clearly, business-to-consumer commerce

        11        is getting all the headlines.  The stock market

        12        capitalizations, as was pointed out earlier by

        13        John, are just phenomenal.

        14             But the business-to-business segment is

        15        where all the dollars are.  That was pointed out

        16        earlier in Andrew's presentation.

        17             Business-to-business transactions -- this

        18        is just over the Internet, I'm excluding now the

        19        ATM interchange, ATM electronic transfers, and

        20        so forth -- just over the Internet, the open

        21        network, 85 percent or more of the transactions

        22        in 1999 are business-to-business.

        23             This is significant, because typically

        24        sales taxes don't apply to business-to-business

        25        transactions.

                               COOK & WILEY, INC.


         1             Moreover, the business-to-business segment

         2        is projected by Forrester to grow much faster

         3        than the business-to-consumer segment.

         4             Why?  Because many of these type of

         5        business-to-business transactions, procurements,

         6        supply chain, inventory management, so forth,

         7        are moving from these private networks, which

         8        are very expensive, to the open network.

         9             Electronic data interchange, EDI, is moving

        10        from the proprietary network to the Internet and

        11        producing a huge growth of business-to-business

        12        transactions over the Internet.

        13             This slide, from Forrester data, shows the

        14        percentage of all of the Internet commerce that

        15        is business to business versus percentage that

        16        is business to consumer.

        17             You can see that the business-to-consumer

        18        percentage is actually projected to drop from

        19        about 18 percent down to 8 percent, where the

        20        real growth is in the business-to-business

        21        applications.

        22             So eCommerce, if we define it as

        23        business-to-consumer space, is actually quite a

        24        small share of the total Internet commerce.

        25        It's actually a tiny share of direct market

                               COOK & WILEY, INC.


         1        sales.

         2             Internet sales to consumers are less than 3

         3        percent of all the direct market sales to

         4        consumers.  This is data that comes from the

         5        Direct Marketing Association.  It includes sales

         6        that take place by catalogs, by telephone

         7        marketers, by television, by radio, by

         8        newspaper, by magazine.

         9             These are all forms of remote commerce that

        10        have been around for a long time.  The Internet

        11        is about 3 percent of that today.

        12             If we look at sales over the Internet

        13        relative to all personal consumption

        14        expenditures in the United States, that is about

        15        4/10 of 1 percent.

        16             This chart simply compares the amount of

        17        business-to-consumer sales over the Internet

        18        with the total direct market sales to consumers.

        19             So we can see that in 1998 Forrester says

        20        about 8 billion of Internet sales was to

        21        consumers.  That compares to over 600 billion

        22        dollars of remote sales through mail order,

        23        telephone order, catalogs, and so forth.

        24             If you look into the future, you will see

        25        that the Internet grows, but it is still a very

                               COOK & WILEY, INC.


         1        tiny percentage of all remote sales.

         2             So if this Commission is concerned about

         3        the taxation of remote sales and wishes to do

         4        something about it, it should keep in mind that

         5        the Internet is a very, very tiny percentage of

         6        all the remote sales.

         7             On the income tax side --  So far we have

         8        been talking about sales tax.  On the income tax

         9        side, although there are still tremendous market

        10        capitalizations --

        11             I did an experiment.  I took 15 household

        12        named sites, Internet merchants, and took their

        13        revenue for 1998 or the most recent year for

        14        which they had published financial statements.

        15        They reported 5 billion dollars of revenue.

        16        Yet, their reported net income was actually

        17        negative .4 billion.

        18             So right now there is not a whole lot of

        19        income on the net.  So you have to put into

        20        perspective the fact that while the sales are

        21        huge, the amount of income that is being

        22        generated today is still quite small.

        23             Now, international revenues potentially

        24        will be significant.  These are some sites that

        25        are getting somewhere between 25 to 35 percent

                               COOK & WILEY, INC.


         1        of their sales internationally.  Overall, this

         2        is still a very small percentage.

         3             Estimates are typically under 100 million

         4        for eCommerce exports from the United States.

         5        Clearly, this will be a promising area of growth

         6        for the United States doing eCommerce

         7        internationally.

         8             Currently, the United States is very

         9        dominant in electronic commerce.  It accounts

        10        for about 80 percent, according to Forrester

        11        estimates, of all electronic commerce in the

        12        world.  However, this is projected to decline to

        13        about 60 percent in 2003.

        14             There are various high and low estimates,

        15        but they all show the U. S. dominance will

        16        decline.  This is something that other

        17        countries, presumably, need to keep in mind.

        18             Right now it looks like the United States

        19        has sort of all of the action there is in

        20        Internet commerce, but this will change as

        21        penetration of Internet service providers,

        22        telephone access, and so forth, spreads around

        23        the world.  And we saw some numbers from Andrew

        24        earlier that show this is spreading more

        25        locally.

                               COOK & WILEY, INC.


         1             ECommerce is certainly contributing to

         2        U. S. productivity.  One estimate from the OECD

         3        is just in the business consumer model of the

         4        costs being taken out of the marketing

         5        distribution by the use of this technology.

         6             Estimates, for example, of airline tickets

         7        being able to be sold over the Internet for $1

         8        instead of $8, reducing inventory because we

         9        have much greater ability to control our costs.

        10             These are estimated to increase U. S. GEP

        11        growth by about 1/2 to 2/3 of 1 percent.  So

        12        instead of growing at 2 1/2 percent a year, the

        13        U. S. economy might grow at 3 percent as a

        14        result of these technologies.  This is an

        15        important element.

        16             There are many other costs that are being

        17        taken out of the supply chain procurement side

        18        that are not accounted for here.  There are some

        19        tax policy implications from these facts and

        20        figures.

        21             I think, first, some have advocated a very

        22        radical tax reform and used eCommerce as a

        23        pretext to advocate that.

        24             I think we can see that, one, remote sales

        25        has been with us for 100 years, certainly since

                               COOK & WILEY, INC.


         1        the Sears & Roebuck catalog, and the Internet is

         2        a tiny share of all the remote sales that exist

         3        today.  This is definitely not a new issue.

         4             Second of all, the tax system has coped

         5        fairly well with fairly radical changes in

         6        communication technologies in the past, which

         7        comes from the 1869 tax court case in which it

         8        had to resolve whether a telegraph signature

         9        was, in fact, equivalent to pen and ink for

        10        legal purposes.

        11             So these kinds of issues have been

        12        addressed in the past and will continue to be

        13        addressed.

        14             Revenue losses certainly from the state and

        15        local government today are very small.  I think

        16        you have a paper in your package from Austan

        17        Goolsbee who estimates that sales revenues that

        18        will be lost potentially might be 1/4 of 1

        19        percent of all sales tax revenues in 1998.

        20             It would be even less if, in fact, these

        21        Internet sales are, in fact, displacing mail

        22        orders rather than replacing Main Street sales.

        23        This, I would view, is a high estimate, and

        24        we'll talk about that later.

        25             It is, however, the case that our current

                               COOK & WILEY, INC.


         1        tax system does have a number of anomalies and

         2        weaknesses and have become outdated in a number

         3        of respects, and should, in fact, be reviewed

         4        and updated as necessary.

         5             Certainly, the Federal and state

         6        telecommunications taxes, as has been mentioned

         7        by a number of the Commissioners, they are

         8        certainly out of date, particularly as we look

         9        at deregulation and convergence of different

        10        technologies that are taking place today in

        11        communications.

        12             Second, the current tax system is, indeed,

        13        far too complex.  We have over 30,000 tax

        14        jurisdictions, really making a tremendous

        15        imbalance for small and medium enterprises

        16        trying to do business over the Internet.

        17             A recent VAT case, Forecia, really

        18        highlights the nonneutrality that is taking

        19        place under sales tax regimes abroad.

        20             In Forecia we saw a company that produces

        21        information on exchange rates.  It sells a

        22        newsletter physically.  It will mail it to you.

        23        It can also sell it to you by fax or over the

        24        web.  You can buy it either way.

        25             You buy a hard copy, the VAT rate is 0.  If

                               COOK & WILEY, INC.


         1        you buy it through a fax or over the Internet,

         2        you're subject to the standard rate of VAT.  I

         3        believe it's approximately 17 1/2 percent.

         4             The judge had to conclude that the law

         5        provided differential taxation based on the

         6        method of delivery.  They said they had no

         7        choice.  That's what the law says.  They said

         8        this is the wrong answer.

         9             I think clearly we need to have neutrality,

        10        and tax laws need to be reviewed that

        11        distinguish between different methods of

        12        delivery.  And certainly, jurisdictions need to

        13        coordinate to make sure we don't get double

        14        taxation.

        15             So I think there is a positive side.  I

        16        call it old issues with new and tremendous

        17        opportunities.  I think there are tremendous

        18        opportunities to simplify tax administration,

        19        what has been called tax service, by the OECD.

        20             There are, certainly, many opportunities to

        21        use the technology to simplify tax

        22        administration, tax filing, tax payment,

        23        distribution of tax information, and even use of

        24        software to calculate tax liabilities in its

        25        many jurisdictions.

                               COOK & WILEY, INC.


         1             Some of the tax administrators that we have

         2        talked to in the OECD from other countries are

         3        very concerned with the growth of the Internet

         4        electronic commerce, there will be more

         5        electronic records.

         6             They have been concerned that electronic

         7        records can be deleted without a trace, altered

         8        in ways that are harmful to tax authorities.

         9             We have found in a report that is included

        10        in your package, a report that we submitted to

        11        the OECD written by PricewaterhouseCoopers,

        12        that, in fact, electronic records, the

        13        experience at least to private auditors, are

        14        actually more secure and more reliable than

        15        old-fashioned paper records.

        16             We believe we have convinced the OECD of

        17        that, and, in fact, the OECD has formed a panel

        18        to work with private auditors to understand the

        19        techniques of information risk management and

        20        information security and auditing of electronic

        21        records.

        22             We believe that tax authorities, certainly,

        23        should not hold back this new technology and

        24        protect the old ways of doing business, because

        25        that would only harm the productivity growth

                               COOK & WILEY, INC.


         1        that can be attained from the use of Internet

         2        commerce.

         3             We also believe that other tax authorities

         4        ought to recognize U. S. dominance in the sector

         5        is declining, and they do not need to impose

         6        various types of extra territorial tax on

         7        U. S. economies.

         8             We believe that neutral application of

         9        these tax rules is extremely important in the

        10        tax sphere but also in the regulatory sphere.

        11             In concluding, I would suggest to the

        12        Commission four principles.  A number of the

        13        Commissioners have already mentioned the first

        14        two of the principles I wish to discuss:

        15        Neutrality, simplicity, free trade, and

        16        technological efficiency or technological

        17        neutrality.

        18             Neutrality.  ECommerce, Internet commerce,

        19        should not be taxed at higher rates than other

        20        forms of doing business.  As a corollary, bit or

        21        special taxes should not be applied to Internet

        22        commerce.

        23             We also believe that electronic commerce

        24        should not be held to a higher and more

        25        expensive standard of compliance than

                               COOK & WILEY, INC.


         1        traditional forms of Commerce.

         2             Obviously, no system of tax administration

         3        is perfect.  We don't get 100 percent compliance

         4        in any media or format that is conducting

         5        business, so we're looking for a rule of reason.

         6             And to the extent that privacy is protected

         7        in traditional commerce, we believe the same

         8        privacy protection should exist with Internet

         9        commerce.

        10             Simplicity.  That has been mentioned by a

        11        number of the Commissioners.  There is obviously

        12        much more difficulty in use of technology to

        13        gain compliance with the tax laws if the tax

        14        laws are very confusing and complex across

        15        jurisdictions with different definitions of what

        16        is taxable, multiple rates, multiple

        17        jurisdictions.

        18             So we really believe that as part of this

        19        effort to consider applying tax more broadly to

        20        electronic commerce in a neutral fashion, that

        21        simplicity go hand in hand with that.

        22             Free trade.  Obviously, this is a global

        23        issue.  Many other countries are looking at this

        24        issue sometimes with greater concern because the

        25        U. S. is the leader.  We believe, that is,

                               COOK & WILEY, INC.


         1        administration believes, eCommerce should not be

         2        subject to duties.  We should maintain that

         3        current situation is the goal of the United

         4        States and reduce duties and barriers to free

         5        trade.

         6             We believe that --  Principals in our

         7        agency believe that Internet exports should be

         8        taxed no more heavily than domestic production.

         9        This will certainly in the short term benefit

        10        the U. S., because we're a major exporter.  We

        11        have a lead export position today.

        12             Technological efficiency.  This simply

        13        means, the needs of tax administrators should

        14        not force technology.  There is a tremendous

        15        interest among vendors to know who their

        16        customers are and the customers to know who

        17        their sellers are.

        18             There are developing techniques of

        19        individual signatures, probably attorneys, so

        20        forth, that will change the way this is

        21        conducted.  There will be a whole variety of

        22        Internet intermediaries that will come into

        23        play.

        24             We believe that technology will allow tax

        25        administrators to effectively collect taxes in a

                               COOK & WILEY, INC.


         1        neutral manner, and they should ride on the back

         2        of this technology, not seek to force the

         3        direction of technology by premature

         4        specifications and compliance laws.

         5             In conclusion, I do not find any support

         6        for what might be called the Chicken Little

         7        claims that the tax system is hemorrhaging.  In

         8        fact, I think all the evidence suggests that the

         9        tax system is not hemorrhaging.

        10             This is something that is perhaps a future

        11        issue, but there is plenty of time to deal with

        12        it in a sober way.

        13             On the other hand, the healthy development

        14        of eCommerce does not depend on a perpetual tax

        15        moratorium.  I think John Sidgmore expressed

        16        that view as well.

        17             I think the Commission should, in

        18        conclusion, seek neutral taxation of different

        19        methods of conducting business, that the way

        20        that the transaction is completed, the method of

        21        delivery, should not change the tax result.

        22             Certainly, simplification, that has to go

        23        hand in hand with this because there are many

        24        small players that will now be doing business

        25        across all the 50 states, as well as

                               COOK & WILEY, INC.


         1        internationally, where before it only dealt with

         2        one single tax jurisdiction in the past.

         3             Finally, this technology offers tremendous

         4        ability to simplify the tax administration

         5        process.  The business to tax administrator

         6        communication can be greatly simplified.

         7             Thank you.

         8             GOVERNOR GILMORE:  Mr. Merrill, Mr. Pincus,

         9        thank you-all very much.

        10             We have ample time for questions from the

        11        panel or any discussion that anybody would like

        12        to make.  Are there questions from the panel?

        13             Mr. Andal?

        14             MR. ANDAL:  I have two questions, one of

        15        Mr. Pincus or Mr. Merrill.  You gave us some

        16        insight into what the argument is between the

        17        United States and Europe and the rest of the

        18        world over taxation policies, especially

        19        relating to tariffs.

        20             I tend to agree, as a free trade advocate,

        21        that keeping those tariffs down, especially on

        22        products we're dominant in now, is in the

        23        interests of the U. S. but later on will be in

        24        the interests of Europe and the other countries

        25        with developing interests.

                               COOK & WILEY, INC.


         1             It's remarkable we're talking about both

         2        international tax and state sales tax here.

         3        While America may be advocating reduction of

         4        tariffs, these are products we sell outside of

         5        the United States.

         6             There is a significant part of this panel

         7        and other folks in this country who don't see

         8        the link between that and state-to-state tax.

         9             It seems to me like it would be difficult

        10        for you to go to these international forums

        11        representing our country's advocating for

        12        tariffs when inside America from state to state

        13        we have, in effect, no tariffs on products sold

        14        from state to state.

        15             How do we have an inconsistent practice

        16        state to state versus an international policy,

        17        and what kinds of service would we have?

        18             MR. PINCUS:  Let me make a few comments,

        19        and then Bob Novick, who has the other countries

        20        and knows more about these issues, may want to

        21        chime in.

        22             I guess I would make an observation that

        23        our duty-free proposal that we put forth in

        24        Geneva and was adopted, there was a proposal to

        25        maintain the current practice in the world which

                               COOK & WILEY, INC.


         1        makes electronic transmissions duty free.

         2             That's a different question from each

         3        country's internal taxation regimes, which

         4        relates to, as Barry mentioned, in Europe

         5        especially, VAT model sales taxes were

         6        considerable in parts of countries and states

         7        here are revenue-based depending on revenue

         8        taxes.

         9             You have a question whether a sale

        10        completed in a different medium should be

        11        treated differently for tax purposes.  It's

        12        actually two different kinds of things.

        13             I might add, and Bob will probably say more

        14        to this, one of the concerns in the world about

        15        maintaining and making permanent our tariff-free

        16        proposal is that countries are concerned, if

        17        that also were to mean tax free and that they

        18        couldn't collect their VAT taxes, there would be

        19        considerable, considerable opposition to that

        20        proposal.

        21             Countries are waiting to see as part of

        22        this Commission -- in meetings I have been in,

        23        they have talked about a VAT drain on revenues.

        24        If they can't prevent that from happening and

        25        reorganize their domestic VAT systems to ensure

                               COOK & WILEY, INC.


         1        the revenue base stays the same, they are

         2        prepared to think seriously about putting

         3        tariffs in effect so they don't see a big

         4        revenue drop.

         5             MR. MERRILL:  I think it's important to

         6        distinguish between tariffs and internal taxes.

         7        Tariffs are inherently discriminatory.  They are

         8        taxes imposed on an import into the country that

         9        are not imposed on the domestic production in

        10        that country.  So they fundamentally fail the

        11        principle of national treatment, and they are

        12        discriminatory.

        13             It is possible to impose sales taxes in a

        14        neutral fashion so that cross order sales are

        15        subject to the same tax as domestic sales.

        16        That's the general principle that is used in the

        17        value-added tax countries.

        18             I think the concern is that if states or

        19        any other jurisdiction were to seek to impose

        20        discriminatory internal taxes -- we see that a

        21        bit in the Forecia case potentially where U. S.

        22        digital products are sent into Europe,

        23        particularly those products like books and so

        24        forth that get low rates under the VAT

        25        systems -- if those are taxed as services

                               COOK & WILEY, INC.


         1        subject to the full rate, then there would, in

         2        fact, be discriminatory local taxation.  It

         3        would not be national treatment, in effect.  The

         4        local tax would act like a tariff.

         5             So I think our main concern was to make

         6        sure that states and other jurisdictions don't

         7        impose discriminatory forms of taxes that act

         8        like tariffs.

         9             MR. ANDAL:  I would like to pursue that

        10        further, but there is no time.

        11             Mr. Merrill, on the issue of what the size

        12        of potential revenue is, I agree with what was

        13        put forward.  I want to question a piece of it.

        14             It is not true in California that

        15        business-to-business transactions are taxed --

        16        If a business buys a product from an

        17        out-of-state business, we do tax.  It's called a

        18        use tax, a parallel tax.  That has been very

        19        effective for our tax in leveling the playing

        20        field between the Main Street businesses and

        21        others.  Obviously, the tax collection moves

        22        from retailer to customer.

        23             Business-to-business transactions, we

        24        argue, get most of that because most of

        25        businesses on the purchasing end are subject to

                               COOK & WILEY, INC.


         1        audit for all kinds of tax purposes within

         2        California.  Once we conduct an audit, we apply

         3        the use tax and most of that is paid.

         4             The question of how much of electronic

         5        commerce is pursued in business-to-business is a

         6        huge question.  If it's 89 percent, it's likely

         7        to stay that way.

         8             We don't really have a problem.  We're

         9        collecting that tax as it is, and it's not going

        10        to harm us in any way.  I think that is showing

        11        up in our revenue statistics.

        12             I'm looking for your insight on whether or

        13        not you think that's likely to continue, that

        14        percentage.

        15             The second question --

        16             It doesn't look like we're real ready to

        17        pursue that, in any event.

        18             On this question of Internet sales versus

        19        direct mail sales.  Direct mail has been around

        20        a long time.  I'm wondering whether or not

        21        Internet sales actually are eating away at those

        22        sales.  Instead of having to send your catalog

        23        order in the mail, you click on it.  So it's a

        24        very similar activity.

        25             I'm interested in both of your thoughts on

                               COOK & WILEY, INC.


         1        this.

         2             MR. MERRILL:  I have not seen any careful

         3        analysis of the extent to which Internet sales

         4        are displacing mail order sales.  It certainly

         5        stands to reason that there should be a certain

         6        significant amount of displacement.

         7             In fact, there are many cases where

         8        companies have both a web site and a catalog,

         9        and the customer can choose which method to do

        10        business.

        11             Sometimes they are on the Internet and they

        12        see something they want, and instead of putting

        13        their credit card over the net, they just call

        14        up and order it over the telephone.

        15             Sometimes they are looking in the catalog

        16        and they see the web site, they say "Gee,

        17        instead of sending by check or calling up, I'll

        18        use the Internet."

        19             So to me, they are very close substitute

        20        ways of doing business, the catalog model and

        21        Internet model.

        22             I would imagine there is, in fact, while

        23        we're seeing tremendous growth of Internet

        24        sales, I would imagine that some of it is simply

        25        expansion of the market.

                               COOK & WILEY, INC.


         1             I know in my own household, the volume of

         2        book purchases over one of the well-known web

         3        sites has grown astronomically.  We seem to get

         4        a book every week or two now.  I'm sure those

         5        who have used the Internet consider it a great

         6        thing.  But also, certainly, some of it is

         7        substitutional.

         8             In both cases, there is no revenue loss.

         9        If we're expanding the market, obviously more

        10        sales are taking place.  It's not a revenue

        11        loss.  If we're taking it out of mail order,

        12        which in many cases it is not subject to tax,

        13        there is no loss of tax there.

        14             MR. PINCUS:  I'm not aware of any numbers

        15        on the cannibalization question, as Mr. Merrill

        16        said.

        17             Although, I think John's presentation with

        18        reference to what the financial markets are

        19        betting on on a number of these sites, some of

        20        which are services, many of which are tangible

        21        goods, people believe the total pie is going to

        22        be a lot bigger than those companies that are

        23        going to be participating.

        24             I guess I have the same reaction to your

        25        first comment about business to business or

                               COOK & WILEY, INC.


         1        business to consumer.  It's a question of the

         2        denominator.

         3             If the denominator is growing as fast as

         4        these numbers indicate, even if the number is

         5        low, it is growing pretty substantially, 35

         6        times over a 5-year period.  Clearly, at some

         7        point that gets to be a substantial amount of

         8        money.

         9             GOVERNOR GILMORE:  Question?  You wish to

        10        come back to them at a later time?

        11             MR. ANDAL:  I think one follow-up.  On the

        12        question of cannibalization, if we're going to

        13        argue the pie is getting bigger, and we're

        14        talking about the rate of equals, and rather

        15        than starting with a fixed pie, would argue that

        16        the state and local government revenues may be

        17        affected in that they won't have a substantial

        18        increase in the new pie, the new pieces of the

        19        pie and not a revenue decline from their

        20        existing bench marks, do you agree or disagree

        21        with that?

        22             MR. PINCUS:  I think I disagree.  The pie

        23        that I was talking about was on-line sales.  The

        24        bets that are being placed in the financial

        25        markets are bets on companies that are going to

                               COOK & WILEY, INC.


         1        be in the on-line business.

         2             I think the bet is that that pie is not

         3        just going to be taking current mail order and

         4        plopping some or all of it into the on-line

         5        sales category but a pretty dramatic growth of

         6        on-line sales.

         7             If on-line sales are, per se, off limits to

         8        state and local taxation, then I guess the next

         9        question is:  How much of those are coming not

        10        from direct marketing catalog sales but how much

        11        are coming from Main Street sales, as

        12        Mr. Merrill is going to instead of

        13        going down to the local book store and buying

        14        them?  I think that is clearly an important

        15        question.

        16             But a related question is, the fact is that

        17        as the economy grows, this part of it is

        18        reflected in increased burdens on the services

        19        that the state and local governments have to

        20        perform.

        21             One question would be:  Why do those

        22        necessarily have to be off limits in some way?

        23             GOVERNOR GILMORE:  Mr. Sokul, you had a

        24        question?

        25             MR. SOKUL:  Yes, I do.  I would just like

                               COOK & WILEY, INC.


         1        the comments on the question, to what extent

         2        Internet economy has a ripple effect or

         3        spillover into the rest of the economy.

         4             I ask that because I think it's pretty

         5        clear there is a split among some members on a

         6        sales tax, use tax, collection issue, and the

         7        concern among the cities and states and counties

         8        they will lose more money as more sales go out

         9        of state.

        10             The more fundamental question seems to me,

        11        and maybe one you can work on building a

        12        consensus on, is will the states and cities and

        13        counties, in light of the Internet, Internet

        14        economy, have sufficient revenue to meet their

        15        needs?  That's the most fundamental question.

        16             If the Internet sellers are driving a

        17        spillover of the traditional economy, the old

        18        economy, that is causing the current state

        19        surpluses and local surpluses, I think that's an

        20        important factor that we should know, and if you

        21        don't have comments, we should invest in getting

        22        an answer.

        23             GOVERNOR GILMORE:  Do you have any comment

        24        on Mr. Sokul's statement or inquiry or

        25        wonderment?

                               COOK & WILEY, INC.


         1             MR. PINCUS:  I think clearly, as I said in

         2        the presentation, the Internet economy, at least

         3        as reflected in the IT elements of it, are

         4        having an impact on the growth of our economy as

         5        a whole.

         6             I think the question seems to me that

         7        you're posing, I don't have the answer to, is

         8        how much of that economic activity falls within

         9        the current tax paradigms.

        10             And, therefore, as I said, as the economy

        11        grows, it seems to be a logical thing, the

        12        services that have to be provided are growing.

        13             I think we certainly know, as someone

        14        pointed out, the challenge of preparing young

        15        people to be workers in the economy puts an

        16        economic burden on our educational system,

        17        because, clearly, technology is the key to jobs

        18        in the future, and we may not have the key to do

        19        that.

        20             MR. SOKUL:  I'm not sure that is the role

        21        of the Commission.

        22             MR. PINCUS:  If that economy also imposes

        23        new or different burdens on the government in

        24        question, the question is:  Are the revenues

        25        there to perform those functions.

                               COOK & WILEY, INC.


         1             GOVERNOR GILMORE:  Mr. Armstrong?

         2             MR. ARMSTRONG:  Mr. Merrill, I didn't

         3        disagree with anything you said, except there

         4        was one thing, that the Internet is an

         5        interaction between two computers.

         6             I would suggest that you maybe agree that

         7        the Internet is part of a digital communications

         8        revolution, with the Internet protocol, that

         9        devices, in fact, would be transparent over time

        10        and potentially the telephone wired or wireless

        11        or even the TV set might be an active

        12        participant in this network.

        13             And maybe the reason that's important is

        14        how we measure access activity and the impact

        15        alone it would have in trying to figure out tax

        16        policies.  We may want to understand that.

        17             GOVERNOR GILMORE:  Any response?

        18             MR. MERRILL:  I certainly concur.  I

        19        mentioned the convergence of technologies taking

        20        place as one of the things that obviously is

        21        creating some need to take another look at a

        22        telecommunications tax in this country.

        23             GOVERNOR NORQUIST:  Pat Buchanan doesn't

        24        quite understand this, but tariffs are taxes.

        25        And the question of whether they are

                               COOK & WILEY, INC.


         1        discriminatory, a tariff at the American border

         2        raises the prices for goods not only for

         3        Japanese steel, because they are a tax, but from

         4        a consumer standpoint, it raises the cost of all

         5        steel, even domestic-related steel.

         6             A tariff doesn't discriminate.  It hurts

         7        all consumers.  It hurts consumers of Japanese

         8        steel by having a tax to the government on the

         9        steel economy and hurts the consumers of

        10        domestic steel by having a higher price than the

        11        market would allow that the steel manufacturers

        12        walk away with.  The consumer loses in both

        13        cases, doesn't see any discrimination, just sees

        14        higher prices.

        15             I want to commend our current

        16        administration and some of the people on this

        17        panel for their leadership in trying to keep

        18        tariffs down, because that keeps prices for

        19        consumers down and taxes down.

        20             I hope we can also look at domestic

        21        tariffs, domestic taxes, and try to keep those

        22        down, as they are a dead weight cost on

        23        commerce.  We need to keep it to a minimum.

        24             GOVERNOR GILMORE:  Mayor Kirk?

        25             MAYOR KIRK:  Very briefly, Mr. Chairman.  I

                               COOK & WILEY, INC.


         1        want to respond to one issue, the impact of

         2        education.  We don't have time to address all

         3        the issues of the American educational system.

         4             We're here to address the impact of taxes

         5        on this industry and come up with solutions that

         6        would be best neutral and not impede progress.

         7             Just from talking with different members

         8        and listening to them, I think most of us

         9        understand whether a good is taxed or not

        10        shouldn't depend on where you saw it.  It

        11        shouldn't in also talking with the industry

        12        leaders.

        13             I do have a real concern.  I don't know how

        14        to address it.  I think the greatest threat of

        15        this incredible industry is not whether somebody

        16        pays sales tax, it's whether they can go to work

        17        for them.

        18             I think it's a national imperative, the

        19        policy of mayors aside, that we spend a lot of

        20        our time and efforts on education.  This is an

        21        important issue to us.  It's a fundamental lack

        22        of preparedness for people not going to work in

        23        this industry.  We can't have an industry that

        24        is this dynamic continue to improve without all

        25        of our talents.  Look at India and Asia and

                               COOK & WILEY, INC.


         1        others.

         2             All you have to do is go to a graduation

         3        ceremony of any American University in the Ph.D.

         4        engineering, math, and physics department and

         5        look at the number of students that happen not

         6        to be American.  I think you would be scared to

         7        death.

         8             I understand that is an element that we can

         9        address, that we need to nationally focus on,

        10        how to prepare young people to come out of

        11        school with more than a little, modest amount of

        12        interest in math and sciences.  I think that's

        13        the greatest growth of this industry.

        14             GOVERNOR GILMORE:  I think we have time for

        15        one more question, and then we're going to do

        16        some other presentation.  There will be a time

        17        at the conclusion of that presentation for more

        18        discussion before we break for lunch.  I do want

        19        to try to keep us fairly close.

        20             MR. POTTRUCK:  Thank you, Mr. Chairman.  I

        21        just wanted to respond to the statistics we saw

        22        earlier that might suggest that this is a small

        23        issue.

        24             I know that the Internet today is a

        25        relatively small piece of our eCommerce, but if

                               COOK & WILEY, INC.


         1        we had looked at the brokerage industry a few

         2        years ago, it would have looked very similar to

         3        the very small percentage of our on-line

         4        business that was 15 or 20 percent of our

         5        business, and it's 80 percent today.  It's a

         6        business that has more than doubled over that

         7        period of time.

         8             It's a much larger percentage of a much

         9        larger pie, and it's hard for any of us to

        10        imagine how fast this thing grows.

        11             The fact it's such a small slice today, we

        12        shouldn't presume that it won't be a dominant

        13        slice within a very short amount of time.  So

        14        the significance of what we're doing here is not

        15        trivial by any means, either now or --  It's

        16        important right now.

        17             Thank you.

        18             GOVERNOR GILMORE:  There will certainly be

        19        other questions.  I'm wondering if we end up

        20        depriving the presenters of any opportunity to

        21        make any presentation.

        22             Do we have other questions that cannot wait

        23        until the end of the other presentations?  If we

        24        do, I'm trying to give a lot of latitude.  We

        25        will have another Q and A and more opportunities

                               COOK & WILEY, INC.


         1        here within the next 45 minutes.

         2             Thank you very much.  We appreciate this.

         3             We're now ready to hear presentations on

         4        the implications of electronic commerce for

         5        global economy and international tax and tariff

         6        issues.

         7             One is a member of this panel, Joseph

         8        Guttentag, a Senior Tax Advisor for Tax Policy,

         9        U. S. Department of Treasury.  Mr. Guttentag

        10        will discuss international taxes and policy and

        11        implications.

        12             And then, of course, we also have a

        13        representative following him immediately from

        14        the office of the U. S. Trade Representative.

        15             First, Mr. Guttentag.

        16             MR. GUTTENTAG:  Thank you, Mr. Chairman.  I

        17        feel I'm interrupting a most important and

        18        useful discussion.  I know we're going to

        19        continue.  It's really an honor to be before

        20        this distinguished group to discuss

        21        international taxation of electronic commerce.

        22             In his recent book "The Lexus and the Olive

        23        Tree," Tom Friedman describes the need to relate

        24        new technologies to traditional issues which

        25        will remain with us as we go into the next

                               COOK & WILEY, INC.


         1        millennium.

         2             For this purpose he compares a state of the

         3        art automobile factory in Japan with the

         4        century's old olive tree in the Middle East.

         5             Well, if I had written a book like this, I

         6        might have called it "The Internet and

         7        Bethlehem."  We remember from our Bible, in the

         8        Gospel according to St. Luke, that almost 2,000

         9        years ago Joseph and Mary went to Bethlehem, and

        10        their purpose in going there was to pay their

        11        taxes to the Roman tax collector.

        12             So we do have a long tradition of tax

        13        collection.  I actually have been working on tax issues 

        14        for about 50 years.  And my premise here is that

        15        it's essential that our worldwide tax systems

        16        must be preserved and integrated with our new

        17        technologies while we are enjoying the benefits

        18        which they provide.

        19             The international tax issues, which I will

        20        briefly describe, are difficult, no question

        21        about that.  Through foresight, hard work, and

        22        with the full cooperation of the affected public

        23        and industries, the administration has these

        24        issues well at hand.

        25             By this I mean, the major issues have been

                               COOK & WILEY, INC.


         1        identified and either resolved or a process for

         2        resolution has been established.

         3             Almost four years ago, Treasury identified

         4        many of the important international tax issues

         5        raised by the Internet and new technologies and

         6        began a process for their resolution.

         7             Some we can deal with unilaterally, but it

         8        was clear that multilateral cooperation was

         9        required.

        10             There was an early coalescence by the

        11        affected industries and the governments around

        12        the Organization for Economic Cooperation and

        13        Development, the OECD, as the forum best suited

        14        to consider these tax issues, as well as several

        15        other issues raised by these new developments.

        16             We recognize clearly that all of the

        17        problems have not been solved, and that

        18        significant difficult work remains to be done.

        19             However, we have in place within the OECD

        20        the conditions upon which the tax framework can

        21        be constructed based upon agreed basic

        22        principles, such as neutrality, efficiency,

        23        certainty, simplicity, fairness, and

        24        flexibility.

        25             I should note two other points upon which

                               COOK & WILEY, INC.


         1        the OECD was able to achieve agreement, namely,

         2        that existing tax principles can and should be

         3        applied to electronic commerce, and that there

         4        should be no new discriminatory taxation of

         5        electronic commerce.

         6             Only by adhering to the principle of

         7        neutrality can we assure that electronic

         8        commerce achieves its proper share of global

         9        economic activity and that the conditions

        10        essential to maintaining global economic health

        11        are preserved.

        12             I will describe some of the actions taken

        13        by the OECD at the conclusion of my remarks.

        14        Let me turn to the specific issues and how we're

        15        addressing them.

        16             While globalization and the new borderless

        17        world creates challenges for our tax

        18        administrators, the new technologies also

        19        provide the opportunity for the use of new tools

        20        to assist both taxpayer and tax administrators.

        21             As you will note, as I begin to discuss the

        22        tax issues that each raises, many of the issues

        23        are not new or profound but have been around as

        24        long as we have had taxes.

        25             The issues can be divided, albeit with some

                               COOK & WILEY, INC.


         1        overlap, into three categories, that is, our

         2        income or direct taxes, the consumption or

         3        indirect taxes, which include sales taxes, and

         4        tax administrative issues.

         5             With respect to direct taxes, in order to

         6        understand these issues, it is necessary, I'm

         7        afraid, to give a brief summary of the way in

8 which the U. S. taxes income from cross 

         9        border activities and most of the other OECD

        10        countries have a similar system.

        11             We impose a tax on the worldwide income of

        12        our citizens and residents and corporations

        13        incorporated in the U. S.  We give a credit for

        14        foreign income taxes imposed on income earned

        15        abroad.

        16             Foreigners who earn income in the United

        17        States are taxed limited by our tax treaties.

        18        We have such treaties with over 50 countries,

        19        including our major trading partners and all 28

        20        of the other OECD countries.

        21             Passive type income is taxed with

        22        relatively low rates, depending upon how it's

        23        characterized: royalties, services, interest,

        24        and so forth.

        25             Business income is taxed only if the

                               COOK & WILEY, INC.


         1        taxpayer has a permanent establishment in the

         2        United States, generally a physical presence.

         3             Many of the countries with which we do not

         4        have tax treaties are tax havens, which impose an

         5        increasingly difficult problem for tax

         6        administrators as a result of new technologies.

         7             In part, for this reason, the OECD has also

         8        initiated a project to deal with tax havens and

         9        other forms of harmful tax competition, and the

        10        U. S. is a most active participant.  We are

        11        going to closely monitor the relationship of tax

        12        havens to electronic commerce.

        13             While I mentioned several technical terms

        14        which create the issues which we have to deal

        15        with, permanent establishment, source of income,

        16        characterization of income, these are long-

        17        standing concepts which we must integrate with

        18        eCommerce.

        19             But let me turn now to indirect taxes,

        20        consumption tax. The ones we're most

        21        familiar with here in the U. S., the state and

        22        local taxes and use taxes.

        23             The issues with which our subnational

        24        governments and this Commission are dealing with

        25        in this context are reflected overseas, as other

                               COOK & WILEY, INC.


         1        speakers have mentioned, in the European Union,

         2        as well as individual countries, many of which

         3        apply similar taxes but at the national level.

         4             For example, the value-added tax of VAT is

         5        applied to most OECD member countries.  A common

         6        VAT is in place in all 15 member states of the

         7        European Union.

         8             Unlike with respect to income taxes, there

         9        is no international network of agreements or

        10        treaties that coordinate the imposition or

        11        collection of indirect taxes, such as VAT and

        12        sales tax.

        13             Thus, there is a greater potential for

        14        instances of multiple taxation or no taxation as

        15        a result of inconsistent rules regarding issues

        16        such as sourcing, crediting, and the stage of

        17        imposition.

        18             Possibly for this reason, there appears to

        19        be general agreement that consumption tax

        20        issues, including VAT and sales taxes, need to

        21        be given priority, and the OECD and the EU are

        22        doing so.

        23             As Mr. Andal just noted a few minutes ago,

        24        a major concern is with the business-to-consumer

        25        sales as opposed to the business-to-business

                               COOK & WILEY, INC.


         1        sales.

         2             Based on the focus on consumption and

         3        sales taxes, it is not accidental that the

         4        creation of this Commission was triggered by

         5        issues raised by state and local sales taxes.

         6             The primary issues to be addressed with

         7        respect to these taxes are jurisdiction to tax

         8        and classification of digitalized products.

         9             The issues, which I have just described,

        10        will affect our determination of who gets to tax

        11        what and in what amount.  There are also issues

        12        regarding how any tax due is to be collected.

        13             These issues are important with respect to

        14        the application of foreign indirect taxes,

        15        such as the VAT, with respect to the export of

        16        U. S. goods and services, and to the imposition

        17        of state and local taxes on imported goods and

        18        services.

        19             Accordingly, our state and local tax

        20        jurisdictions must deal with goods and services

        21        brought into the state, both from other states

        22        as well as from foreign countries.

        23             Before turning to how the OECD is dealing

        24        with these issues, let me raise a third area --

        25        third principle area, that is, tax

                               COOK & WILEY, INC.


         1        administration.  What are the principle tax

         2        administration issues?

         3             First, intermediation.  In general,

         4        tax compliance in the United States is

         5        facilitated by identifying key taxing points in

         6        a transaction that maybe arise from tax, for

         7        example, a transfer of funds through a financial

         8        institution.

         9             Electronic commerce now, and likely more in

        10        the future, may eliminate the need for

        11        intermediating institutions.  Elimination of

        12        these traditional checkpoints, however, may make

        13        tax administration increasingly difficult.

        14             The second issue is lack of verifiable

        15        identity and location.  Transactions occurring

        16        through a web site cannot necessarily be

        17        associated with a specific taxpayer, nor can the

        18        taxpayer's actual geographic location be easily

        19        ascertained.

        20             Moreover, while web sites and e-mail

        21        addresses may be associated with specific

        22        individuals, the relationship of those addresses

        23        to the physical world is not fixed.

        24             Thus, even if a tax authority can track

        25        activities or income to a web site or e-mail

                               COOK & WILEY, INC.


         1        address, they may, nevertheless, not be able to

         2        identify the persons or person behind the

         3        electronic front.

         4            Next we address message content. 

         5        Messages on the Internet, especially secure or

         6        encrypted transmissions, which are necessary,

         7        create opportunities for untraceable transfer of

         8        assets and other activities that will hinder

         9        audits of taxable activities.

        10             We have mentioned electronic money.  The

        11        development of e-money that is value expressed

        12        in digital form that parties agree to honor and

        13        accept makes it easier to transfer unreported

        14        funds.  The Internet makes substantially easier

        15        and more secure the opening of anonymous bank

        16        accounts abroad.

        17             These are, in brief, the primary

        18        international tax issues raised by electronic

        19        commerce.

        20             What are we doing about them?  Let me first

21 reiterate our guiding principles.
        22        Any taxation of the Internet and electronic

        23        commerce should be clear, consistent, neutral,

        24        and nondiscriminatory.

        25             By not imposing new discriminatory taxes on

                               COOK & WILEY, INC.


         1        the Internet, we will facilitate the growth and

         2        use of the Internet, which can result in a

         3        growing economy and greater revenues from

         4        existing taxes.

         5             Neutrality and nondiscrimination must be

         6        the fundamental principles that guide the tax

         7        rules with respect to electronic commerce.

         8             Tax rules must be consistent across

         9        jurisdictions so as to minimize the possibility

        10        of multiple or no taxations.  The rules need to

        11        be transparent and easy to administer.

        12             We must reach a global consensus on these

        13        principles underlying electronic commerce.  In

        14        the absence of global consensus, inappropriate

        15        and stifling taxation may result.

        16             The OECD is and has been, and should

        17        continue to be, the international forum in which

18 we seek to reach this global consensus in which we work 

19 together on developing reasonable and uniform international 

20 tax rules.

        20             The agreements within the OECD's Committee

        21        on Fiscal Affairs on the broad framework

        22        conditions and principles that I mentioned

        23        should underlie the taxation of electronic

        24        commerce, and that has been a substantial

        25        achievement already by the OECD.

                               COOK & WILEY, INC.


         1             Perhaps the most significant point of

         2        agreement was that taxation should seek to be

         3        neutral and equitable among forums of electronic

         4        commerce and between conventional and electronic

         5        forms of commerce.

         6             Also important is the agreement that

         7        existing tax rules can be applied to electronic

         8        commerce.

         9             The OECD commitment to consult actively

        10        with the business community will help ensure

        11        that the formulation of tax rules will be based

        12        on full knowledge of their effects and will help

        13        revenue authorities in their efforts to ensure

        14        that business decisions are based on economic

        15        rather than tax considerations.

        16             We are also involving many nonmembers of

        17        the OECD, as we recognize this has to be a

        18        global consensus.  We have formed small groups of

        19        representatives from the private sector, OECD

        20        governments, and non-OECD governments, to consider

        21        these pressing issues.

        22             We believe that the OECD project incorporates a

        23        representative group of the major stakeholders

        24        in the taxation of electronic commerce.

        25             Several of the business representatives

                               COOK & WILEY, INC.


         1        with us today are participating themselves in

         2        this project.

         3             The technical advisory groups created by

         4        the Committee on Fiscal Affairs will report

         5        within the next two years to our subsidiary bodies

         6        and then finally to the OECD, itself.  You can

         7        follow the work of the OECD in this regard

         8        through its web site.

         9             The OECD recognizes the need for worldwide

        10        acceptance of the principles established in

        11        order to obtain the necessary certainty as to

        12        the avoidance of double taxation.

        13             The OECD is the forum to continue work on

        14        international tax issues, Mr. Chairman.  I will

        15        reiterate my previous suggestion that the

        16        Commission encourage the OECD to continue and

        17        finalize its important work in this area.

        18             Although the VAT system differs from our

        19        state and local tax system, we can use the work

        20        being done within the OECD to inform our own

        21        deliberations.

        22             And we should be aware that the OECD, the

        23        European community, and others will be looking

        24        closely at our work as they do theirs.

        25             Perhaps, as a first step, the Commission

                               COOK & WILEY, INC.


         1        should consider adopting guiding basic

         2        principles as were adopted by the OECD to help

         3        us move forward in the time that is left to us.

         4             We have all benefited from a robust economy

         5        during the past several years.  Our present tax

         6        systems at the national, state, and local levels

         7        have enabled us to reduce or eliminate budget

         8        deficits throughout the nation.

         9             We should have the best tax system possible

        10        at all levels of our government.  Decisions

        11        should be made in the usual democratic fashion.

        12        We should choose taxes and administrative

        13        systems which are best suited to raise the

        14        necessary revenue in the fairest way possible.

        15             We must ensure that this be done in a way

        16        which creates the minimal administrative

        17        problems.

        18             This is not an easy charge.  We must not,

        19        however, permit new technologies to drive us to

        20        less desirable tax systems.

        21             I hope this brief explanation of how we are

        22        handling our international tax issues will help

        23        inform us as we tackle state and local tax

        24        issues.

        25             Thank you, Mr. Chairman.

                               COOK & WILEY, INC.


         1             GOVERNOR GILMORE:  Thank you,

         2        Mr. Guttentag.

         3             Mr. Abelson, can we give you about 20

         4        minutes or so?

         5             MR. NOVICK:  May I please introduce our

         6        esteemed colleague?  Don Abelson is currently

         7        the Assistant United States Trade Representative

         8        for industry.

         9             He has devoted most of his attention to

        10        advancing the administration's eCommerce agenda,

        11        and, in particular, Ambassador Barshefsky's

        12        efforts to enforce duty-free cyberspace.

        13             He leaves the UTS next week.  It's our

        14        loss.  He will stay in the government where he

        15        has been for 22 years as he moves to the FCC to

        16        head that international division.

        17             I thought it would be useful for everyone

        18        to know what role he has played and why he is

        19        here today.

        20             GOVERNOR GILMORE:  Mr. Novick, thank you.

        21             Mr. Donald Abelson of the United States,

        22        Office of the U. S. Trade Representative.

        23             MR. ABELSON:  Thank you, Mr. Chairman.

        24             What I will be talking about with members

        25        of the Commission is the administration's duty-

                               COOK & WILEY, INC.


         1        free cyberspace initiative.  This is an

         2        initiative which we started when the Clinton

         3        administration released its electronic commerce

         4        report in July of 1997.

         5             We found at that time trade negotiators

         6        like myself were faced with a very interesting

         7        fact, that is, electronic commerce is in many

         8        ways free from trade barriers, and it certainly

         9        is in this area that is not subject to customs

        10        duties, when, in fact, trade negotiators have

        11        been trying for years to create that kind of

        12        environment.

        13             We have found the environment of electronic

        14        commerce is one that government regulation is

        15        minimal, and that no one company dominates, and

        16        thus there is vigorous competition, innovation,

        17        and entrepreneurs.

        18             The question faced by trade negotiators is

        19        how to preserve the dynamic qualities of this

        20        new marketplace, which, as Ambassador Barshefsky

        21        of the United States Trade Representative says,

        22        is a pristine environment in trade terms.

        23             Now, in tackling this question, we looked

        24        at the issue of custom duties, which, unlike

        25        that of international taxes, the subject of your

                               COOK & WILEY, INC.


         1        discussions in the next year, are duties or

         2        tariffs that are imposed at the border.

         3             It is absolutely true that they are

         4        considered by economists as being taxes.  And

         5        one of the problems we have had is that both the

         6        word "tax" and "tariff" start with "T."

         7             And so, as we begin a discussion about

         8        duty-free cyberspace, I want to make sure that

         9        you are aware there is no confusion between the

        10        two "T" words.  I don't use either "T" word.  I

        11        use the word "custom duty."

        12             Once again, these are measures imposed at

        13        borders.  They are not measures imposed once the

        14        good or service has arrived at its point of

        15        destination.

        16             The issue of custom duties, of course, is

        17        one that has dominated trade negotiations over

        18        the past half a century.  And it is clear, just

        19        take a look at the text of the general agreement

        20        on tariffs and trade, or, as we call it, the

        21        GATT, G-A-T-T, which is one of the founding

        22        documents of this new World Trade Organization

        23        that was created some years ago.

        24             The reason that we focus on customs duties

        25        is that they have been traditionally used by

                               COOK & WILEY, INC.


         1        countries as a way of protecting domestic

         2        industries and thereby distorting trade.

         3             Through customs duties, countries have

         4        imposed differential burdens at the border which

         5        have the effect of disadvantaging imports in the

         6        countries to which they are sent.

         7             Now, it has been U. S. policy for over 50

         8        years, working inside the GATT originally, to

         9        try to progressively lower these duties and to

        10        eliminate other trade distortions, because we

        11        are convinced that these reductions in duties

        12        and in other barriers will benefit consumers

        13        through cheaper goods.

        14             It will benefit businesses because they

        15        will be able to more freely operate in the

        16        marketplace, and it benefits our overall

        17        economy.

        18             The growth of world trade and of consumer

        19        welfare over the past five decades has

        20        demonstrated the wisdom of this approach.

        21             Given the trade-distorting effects of

        22        custom duties in the conventional world, in the

        23        real world, it was only logical, then, to focus

        24        on distortions that might be brought into the

        25        virtual world and to prevent that, to prevent

                               COOK & WILEY, INC.


         1        the extension of these distortions into the

         2        electronic world.

         3             Thus, in May 1998, as you have heard

         4        reference, guided by the wisdom of Ambassador

         5        Barshefsky, 132 members of the World Trade

         6        Organization agreed in a ministerial declaration

         7        that they would not impose custom duties on

         8        electronic transmissions.

         9             In fact, what they recognized is, not a

        10        single one of those countries currently imposes

        11        a customs duty on an electronic transmission.

        12             This commitment to not impose custom duties

        13        is one that we hope to make permanent, or to

        14        extend and make permanent when the ministerial

        15        meeting of the World Trade Organization is held

        16        in Seattle in December.

        17             What does customs duty-free cyberspace

        18        initiative really mean practically?  Let me tell

        19        you two things it does not mean.

        20             It does not mean that when you order a

        21        camera from Germany over the net and it is

        22        physically delivered, that the camera comes into

        23        the United States duty free.  It does not mean

        24        that.

        25             If the camera is physically delivered to

                               COOK & WILEY, INC.


         1        the United States, it crosses the border.

         2        Whatever duty is appropriate for a camera would

         3        be applied.

         4             Nor does it mean that items ordered

         5        electronically are exempt from internal taxes.

         6        In fact, that, of course, is the issue that you

         7        as a Commission will be debating over the next

         8        period of time.

         9             So these two facts should be very clear.

        10             What we are talking about, therefore, is a

        11        very narrow area of cyberspace trade, and that

        12        is where there are electronic transmissions

        13        which are coming in from overseas and are not

        14        subject to customs border duties.  That is

        15        basically what we mean when we say duty-free

        16        cyberspace.

        17             It's very interesting to note, as I did,

        18        that no country currently imposes a custom duty

        19        on electronic transmissions.

        20             Let me give you an example of how this can

        21        be.  In the United States we have a schedule of

        22        our tariffs.  It is a long document.  It is

        23        several hundreds of pages.

        24             And in this document, which is the entire

        25        compendium of U. S. custom duties, tariffs,

                               COOK & WILEY, INC.


         1        there is not a single entry that says electronic

         2        transmissions and gives you a duty rate.

         3        Because these items, these things, are not

         4        tariffed.

         5             In fact, in a head note to the U. S. tariff

         6        schedule, it is specifically written that

         7        telephonic transmissions are free from duty,

         8        interestingly enough, in that same category as

         9        dead flowers and corpses.

        10             What we are seeking at this point is for

        11        other members of the World Trade Organization to

        12        similarly adopt an approach to maintain this

        13        environment, this cyberspace duty free.

        14             Now, obviously, imposing custom duties on

        15        electronic transmissions would add costs to the

        16        final product, would restrict trade, and apart

        17        from the direct financial burden on the

        18        transmission, itself, is the cost of instituting

        19        a mechanism to collect such duties and the

        20        administrative costs of complying with such an

        21        approach.

        22             When we approached our colleagues in Geneva

        23        about this initiative, it was a year ago.  One

        24        of the facts that convinced them that they

        25        didn't want to go in the direction of imposing

                               COOK & WILEY, INC.


         1        custom duties was the problem of how you would

         2        actually enforce this measure.

         3             Unlike the area where you are looking, we

         4        are only talking about when transmissions cross

         5        borders, and one can imagine how difficult it

         6        would be to snatch out of the air a satellite

         7        transmission or try to go into a wire or copper

         8        cable or fiber optic cable to get out of it the

         9        transmission.

        10             What kind of Draconian measures would you

        11        have to impose to try to catch those border

        12        transmissions?

        13             In fact, countries have recognized by

        14        signing up to this duty-free cyberspace

        15        initiative that you cannot stop transmissions at

        16        the border, which is perhaps one of its greatest

        17        benefits.

        18             In reality, we also found that there was no

        19        country that was seriously contemplating trying

        20        to impose border measures on these

        21        transmissions, because all countries are

        22        interested in promoting the growth of electronic

        23        commerce.  As we have seen the value of it to

        24        our economy, they want to see the value in their

        25        economies.

                               COOK & WILEY, INC.


         1             Now, as Mr. Pincus did point out, however,

         2        every government is concerned about the issue

         3        that you are addressing.  So when I raise with

         4        my colleagues the idea of extending permanently

         5        this duty-free cyberspace initiative, they raise

         6        with me the issue of internal taxes.  They want

         7        to know how are they going to maintain their

         8        revenues.

         9             Now, obviously, this is the issue you will

        10        be looking at.  How you consider this issue, the

        11        ideas you come up with, will be vitally

        12        important to the success of our initiatives in

        13        Geneva and finally in Seattle.

        14             We need, as the leader in eCommerce, if we

        15        look at all the statistics you have heard about

        16        this morning, to also lead in this area by

        17        providing the world's officials with ideas,

        18        suggestions, vision on how we can go forward in

        19        this area of tax.

        20             While your discussion is not directly

        21        related to the issue of custom duties, because

        22        they are border issues, your discussion is very

        23        much related to the thinking that is going on

        24        behind the officials who are sitting at the

        25        table in trade negotiations.

                               COOK & WILEY, INC.


         1             Because of that, of course, we at the U. S.

         2        Trade Representative's office are very much

         3        involved in your work.

         4             Thank you.

         5             GOVERNOR GILMORE:  Thank you, Mr. Abelson

         6        very much, also, Mr. Guttentag, for your insight

         7        into this as well.

         8             We have time for some questions and

         9        answers.

        10             Before we went to your presentation, I

        11        thought I might have heard one or two additional

        12        comments that wanted to be made.  Was there a

        13        comment from this end of the table that I

        14        overlooked, or a question?

        15             Again, I think Mr. Merrill is nearby.

        16        Mr. Pincus is right here with us.  We can ask

        17        questions in this entire area.

        18             Was there a question on this side of the

        19        room?

        20             Mr. Lebrun?

        21             MR. LEBRUN:  I had a question I think that

        22        relates to what Mr. Abelson just said.  If I

        23        order a computer from overseas, that is a

        24        tangible good.  That, I assume, is subject to

        25        customs duties.

                               COOK & WILEY, INC.


         1             If that same computer comes loaded with all

         2        kinds of software, which is information,

         3        although the disk may be a tangible good, that

         4        is meaningless, of small value, but the

         5        information on it has substantial value, and the

         6        price of the computer I ordered may be increased

         7        because of the fact it has loaded on it, that

         8        information, which is the software, which, to my

         9        understanding, you're telling us is not subject

        10        to the custom duty.

        11             Am I correct on that?  If not, where am I

        12        in error?  And how do you distinguish between

        13        the value of a computer, which is a tangible

        14        good, and the information which is loaded onto

        15        it?

        16             MR. ABELSON:  Let me dispense with the

        17        physical computer, itself, because obviously

        18        there would be a tariff or duty when it came

        19        across the border.

        20             The United States, along with some of its

        21        major trading partners, does not put a duty on

        22        information.  So whether the information,

        23        software, is on a disk or transmitted

        24        electronically, there is no duty collected in

        25        the United States at the border for that

                               COOK & WILEY, INC.


         1        purpose.  You may have domestic taxes on it,

         2        that's your own decision.

         3             We at the Federal level do not duty

         4        information.  That's because of a fundamental

         5        idea, which is, we want to get this information

         6        to flow.  We want it to flow as freely as

         7        possible and, therefore, do not, in fact, try to

         8        distort trade of that product, product being a

         9        general term for things that are traded

        10        internationally.

        11             Not all countries follow this practice.

        12        There is a 1984 decision in the General

        13        Agreement on Tariffs and Trade to do this, but

        14        it is not binding on all countries.

        15             GOVERNOR GILMORE:  Governor?

        16             GOVERNOR LEAVITT:  I thought your

        17        description of the dilemma on internal taxes was

        18        very helpful in defining our task of this

        19        Commission.

        20             As I understood you, if a person from the

        21        United States, a person from Salt Lake City,

        22        bought a camera in Germany, had it shipped to

        23        the United States, the tariff was taken care of

        24        at the border, the citizen in Salt Lake City

        25        would have made an expenditure and would have,

                               COOK & WILEY, INC.


         1        therefore, been subject to a tax because it was

         2        a consumption tax, not a new tax.

         3             The question you're raising is:  What is

         4        the duty of the person in Germany to collect

         5        that tax.  Now there is no duty, and we don't

         6        expect we will resolve that.

         7             The person has an obligation, at least in

         8        our state and I think in 46 other states, to

         9        write a check out for the use tax or sales tax

        10        for whatever that is.

        11             I was fascinated.  There were 50,000

        12        Utahans who wrote a check on their state tax

        13        return for $510,000.  So there are 51,000 honest

        14        Utahans, but they were only $10 apiece.

        15             I guess my point is, are we really talking

        16        about not any new tax or any new tariff?  We're

        17        talking about coordinating a duty to collect a

        18        simplified system.  I think it's a very

        19        important concept for us to think about.

        20             GOVERNOR GILMORE:  Other questions?

        21             MR. ANDAL:  I'm very interested in the

        22        issues that you are facing on the international

        23        scale and issues that we're trying to sort out

        24        among the states.

        25             I think most states at least are already in

                               COOK & WILEY, INC.


         1        a position where we don't tax electronically-

         2        delivered sales products.

         3             In fact, I think about half of all the

         4        Internet Commerce sales fall into two

         5        categories: stock trades and airline ticket

         6        sales, neither of which are taxed in most

         7        states.

         8             So we're left with this question of tax

         9        neutrality.  Some of us argue that a use tax

        10        paired with a sales tax becomes a tax neutral

        11        system.  Obviously, the use tax has collection

        12        problems that a sales tax does not.

        13             Some people --  Utah is a state full of

        14        honest people.

        15             GOVERNOR LEAVITT:  At least 51,000.

        16             MR. ANDAL:  And we have people who pay use

        17        tax voluntarily every day in Colorado as well.

        18             The question, though, is whether or not

        19        we're going to impose some kind of a collection

        20        duty on companies located in other states.

        21             I would like you to apply that difficulty

        22        to other countries.  For instance, we really

        23        don't expect, do we, to have Utah collecting

        24        consumption taxes for Norway, or Belgium

        25        collecting sales tax for California, do we?  How

                               COOK & WILEY, INC.


         1        do you guys chase down that round ball?

         2             If you play this sort of argument all the

         3        way out to the end, you're going to have these

         4        relationships, because in America we don't have

         5        a national sales tax.  We have less than 50

         6        state sales taxes.

         7             If you want to have that kind of

         8        government-to-government cooperation in

         9        identifying tax obligations and tax sellers,

        10        it's going to be Utah to other countries,

        11        California to other countries.

        12             I'm wondering if you integrated that

        13        question into your pitch to these other

        14        countries regarding international tax policies.

        15             MR. GUTTENTAG:  Well, these are the kinds

        16        of issues, Mr. Andal, I mentioned that we are

        17        struggling with at this time.

        18             Let me add to the issues you raised some of

        19        the thoughts that we have in looking at them and

        20        that are being dealt with in the European

        21        environment.

        22             One that I point out, you appear to be

        23        enforcing these strictly business-to-business

        24        sales.  If the law applies in that area, why

        25        should it not apply to business-to-retail sales?

                               COOK & WILEY, INC.


1 Of course, those are both equally applicable
2 parts of your law.

         3             MR. ANDAL:  I don't mean to interrupt.

         4        Business to business versus individual, the tax

         5        obligations are the same.

         6             Now, the extent to which we go to collect

         7        as a governmental entity is different, based

         8        upon the old Willie Sutton rule.

         9             So it's true that business-to-business

        10        transactions are more often audited where use

        11        tax becomes more apparent, whereas with

        12        individuals it's not necessary for the states to

        13        pursue it.

        14             MR. GUTTENTAG:  I understand that.  There

        15        are other concepts, one of fairness among

        16        taxpayers, and taxpayers should be treated

        17        fairly.

        18             If a taxpayer is subject to tax, we should

        19        be looking at the issue of why that taxpayer is

        20        not paying taxes.  There are also economic

        21        aspects of the trade aspect.

        22             If we do nothing here, to what extent will

        23        we be suggesting to consumers in California that

        24        "The place to buy your goods is Norway," and to

        25        consumers in Norway, that "The place to buy your

                               COOK & WILEY, INC.


         1        goods is California"?  How would we deal with

         2        that issue?

         3             One of the things being considered in the EU. Is whether to base this tax at theplace of consumption. 

         7             It could be placed at the base of origin of

         8        the sale, so that Norway would collect the tax

         9        on sales made in the U. S., and California would

        10        collect the tax based on sales being made out of

        11        California.

        12             There are various alternative ways to do

        13        it, but I think the principles which I suggested

        14        of fairness to taxpayers must be considered.

        15             We also want to consider the level of tax.

        16        If we don't need any more revenue -- let's

        17        suppose we have enough revenue from the Main

        18        Street sale, so we don't need any more revenue

        19        from electronic commerce -- one way to do it is

        20        not to tax electronic commerce.

        21             Another way to do it is to collect the tax

        22        on electronic commerce and lower the tax rate

        23        for everyone, so that the tax one pays, whether

        24        it be an electronic commerce or Main Street

        25        purchase, will be the same but at a lower rate,

                               COOK & WILEY, INC.


         1        and that would benefit consumers, those

         2        consumers who would prefer for some reason to

         3        buy on Main Street.

         4             These are issues, obviously, that I hope

         5        that, Mr. Chairman, we're going to be addressing

         6        in more detail and I think we will be discussing

         7        after lunch.

         8             GOVERNOR GILMORE:  Indeed we shall.  We

         9        still have some time.

        10             MS. JONES:  I'm interested, do you have any

        11        information or statistics as to the compliance

        12        that would be increased in the revenue stream,

        13        that would be increased if, in fact, the tax

        14        that is currently considered a use tax were

        15        collected rather at the position where the item

        16        is generated instead of where it is consumed?

        17             MR. GUTTENTAG:  I don't have that data,

        18        Ms. Jones.  That is some of the data we're

        19        hoping to collect, and I think the Commission

        20        should be looking at that data.  I think some of

        21        that data is available.

        22             We can look at how we monitor that

        23        commerce, the taxation that is lost, and

        24        multiply it times the sales tax rates.  I think

        25        we can come up with figures.

                               COOK & WILEY, INC.


         1             As was mentioned previously, we should be

         2        looking not only at what we are losing today, we

         3        should be looking at what we are losing in the

         4        future.

         5             Please keep in mind that I'm very concerned

         6        about the administrative problems.  I'm very

         7        concerned about imposing burdens on people

         8        outside of the states collecting the tax, as

         9        well as foreign countries.

        10             MS. JONES:  Because electronic sales are

        11        not really brand new, we have been doing it in

        12        other ways, as has been indicated, and we have

        13        had catalog sales and so forth, so we do have

        14        some history in relationship to foreign trade

        15        being done in terms of other methods like

        16        telephones or fax or whatever.

        17             Do we now have the same system imposed

        18        there?  In other words, are foreign partners

        19        participating the same way now that we have

        20        electronic commerce?

        21             MR. GUTTENTAG:  No.  What is happening now,

        22        as I view it, is this explosion is not only an

        23        issue resulting from the new technologies.  We

        24        have always had catalogs, and people could buy

        25        from catalogs all over the world.

                               COOK & WILEY, INC.


         1             Why is this now a problem?  It's not only

         2        the new technologies.  There are several other

         3        factors.

         4             First is the work that has been done by our

         5        USTR in coordination with the other 132

         6        countries in the WTO to reduce or eliminate

         7        tariffs.  Those are now not a real obstacle with

         8        respect to most goods traveling across borders.

         9             Furthermore, we have reduced and eliminated

        10        to a large extent restrictions on flow of funds

        11        around the world, capital controls, exchange

        12        controls, and so forth, so that funds can be

        13        transferred very easily.

        14             All of those factors have so encouraged

        15        across-the-border transactions and have been so

        16        valuable to the economy as a whole.

        17             Now, tax authorities who used to rely a

        18        great deal on customs inspectors, on exchange

        19        controls for enforcing their tax laws, those

        20        areas of enforcement now are disappearing

        21        rapidly.

        22             Really, we are looking into the future

        23        here.  We're looking into the future as to this

        24        explosion that is happening.  I think we can no

        25        longer compare it to Sears & Roebuck catalog

                               COOK & WILEY, INC.


         1        orders, at least that's what I understand from

         2        the experts.

         3             MR. ABELSON:  I would also note that

         4        services are distinct from digital goods that

         5        are delivered electronically.  Services have

         6        never been tariffed under any foreign or U. S.

         7        regime.

         8             Increasingly, of course, services are

         9        forming a mass part of what is being done on the

        10        Internet or electronic commerce.  They enter the

        11        United States and always have duty free.

        12             The ubiquitous nature of the net and the

        13        instantaneous nature of it, and the fact that it

        14        is more possible now to buy services, transact

        15        with service providers overseas, is one factor

        16        you have to consider as well.

        17             GOVERNOR GILMORE:  Let me ask you a

        18        question, if I could, before I go back to the

        19        panel, because I'm trying to work some of this

        20        out in my own mind, too.

        21             If we're dealing with international trade

        22        and goods, you have a seller of, say, a camera,

        23        which we used the example in Germany, and they

        24        sell a good to someone in Utah, and you want

        25        that to be taxed, then you have a choice, I

                               COOK & WILEY, INC.


         1        suppose.  One is to have the tax collected by

         2        the seller, who is in Germany.

         3             I mean, the state can agree or disagree

         4        with a piece of this.  I'm trying to work it

         5        out.

         6             I don't think we have any control or ever

         7        have any control over the seller in Germany.  So

         8        we impose a tax at the place where it was

         9        purchased, say, in Utah.  Some are paying that.

        10        Some aren't paying that.

        11             Unless, of course, we get a handle on

        12        transactions somehow electronically through the

        13        Internet, a third-party collector of the tax, or

        14        something like that.

        15             Does anyone know whether that's

        16        technologically possible?  If it is

        17        technologically possible, could someone from a

        18        foreign country simply offer an alternative

        19        means of transaction, not a credit card, maybe

        20        some other form of purchase, which would allow a

        21        purchaser to escape the consequences of the

        22        transaction?

        23             That is a complicated question.  I think it

        24        goes to the heart of some of the things we're

        25        trying to address here, which is what is

                               COOK & WILEY, INC.


         1        possible.

         2             First, I will ask if the panel members have

         3        an opinion.  We can turn it over to the

         4        Commission and go back to the questions.

         5             MR. GUTTENTAG:  In Europe, for example, the

         6        customs inspectors who used to collect the

         7        custom duty now serve a very important function

         8        with respect to imported goods with respect to

         9        collection of their value-added tax.

        10             So when that camera comes in, if the camera

        11        were going from the U. S. to Germany, when that

        12        camera got into Germany, the customs inspector

        13        would collect the value-added tax before it was

        14        delivered to the customer, or make sure the tax

        15        was collected in some way.

        16             That, theoretically, could be done also in

        17        the U. S. with respect to physical goods that

        18        come into the U. S.

        19             The biggest problem in the European Union

        20        that we would face in the United States is with

        21        respect to what is now an infinitesimal amount

        22        of goods or services, depending upon how you

        23        look at it, which actually are digitalized and

        24        come in on the computer.

        25             Our problem is when the German seller is

                               COOK & WILEY, INC.


         1        selling a software program to someone in Utah,

         2        assuming Utah would subject that program to a

         3        tax, that program then goes from the computer in

         4        Germany to the computer in Utah, and no one,

         5        possibly, except the two of them, know about it.

         6             Various proposals have been made using, for

         7        example, the payment mechanism.  Generally,

         8        there is a payment mechanism very often through

         9        credit cards, and some have made the suggestion

        10        that the way to collect the tax is through the

        11        payment system.

        12             GOVERNOR GILMORE:  So we are already clear,

        13        we're not taxing computer-to-computer service?

        14        So we're really focusing our attention on common

        15        goods that perhaps would be going?

        16             If the purchaser in Germany purchased an

        17        American camera and it goes to Germany, you're

        18        saying the customs individual, customs agent,

        19        will intercept that and charge that tax.

        20             Is that not discriminatory?  Doesn't that

        21        amount to a tariff?

        22             MR. GUTTENTAG:  The tax is the same tax

        23        that would be applied if the German purchased a

        24        German-made camera or a British-made camera.

        25             MR. ABELSON:  One of the things you're

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         1        struggling with is the borderless nature of this

         2        environment.  I go back to my comments, which

         3        remember, were, you can't stop these

         4        transmissions at the border.  It's not possible.

         5        You may be able to get at them once they land.

         6             So let's get rid of the camera, because the

         7        camera is the real world.  It's today's trade.

         8        Nothing is different in that example of the

         9        camera from 20 years ago.

        10             You could have gotten on the phone, called

        11        a company in Germany and said "Send me a

        12        camera."  That's not new.

        13             What is new is when you can digitalize a

        14        product, turn it into ones and zeroes, and send

        15        it over some means of transmission, satellite,

        16        wire, or wireless or whatever.

        17             In that instance, it's not just computer to

        18        computer, because it may end up being business

        19        to consumer.  That's the example of software.

        20        There is no border there.  It goes from one

        21        server to a hard drive.  And in that instance,

        22        there is no customs duty assessed anywhere in

        23        the world.

        24             Now, you get into the issues you're looking

        25        at.  What do we do in that case?  Maybe

                               COOK & WILEY, INC.


         1        self-declaration of the consumer.  "I purchased

         2        this software.  The sales tax is blank."  That's

         3        one way to do it.  There may be other ways to do

         4        it.  That's what you're essentially addressing.

         5             Let me show you the example of Argentina.

         6        The Argentines are concerned about this.  What

         7        they have said is, it's the obligation of all

         8        importers to declare the incoming transmission.

         9             Now, they don't want this for custom duties

        10        purpose.  They want this for tax purposes.  They

        11        all want someone to say, such as the

        12        self-declaration on the U. S. state income tax

        13        forms, "I purchased this good.  Here is the

        14        tax."

        15             You can't stop it at the border.  I would

        16        advise you not to look at that.

        17             GOVERNOR GILMORE:  You can't stop at the

        18        border.

        19             GOVERNOR LEAVITT:  It seems that these kind

        20        of problems that transcend political boundaries

        21        are not unique to eCommerce, environmental

        22        problems.

        23             I'm guessing you dealt with the same

        24        problem with negotiating a plan to clean up the

        25        Grand Canyon, which involved U. S. states and

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         1        Mexico.

         2             The Mexican government found that a lot of

         3        the pollution that comes over the Grand Canyon

         4        comes from Mexico and has absolutely no control

         5        over that.

         6             There ultimately had to be some kind of

         7        voluntary agreement that was arrived at.  Part

         8        of the negotiation was economic, not

         9        environmental.

        10             So I'm assuming that when we get into

        11        solving these problems that transcend political

        12        boundaries, we are going to have to find ways to

        13        make them in the voluntary self-interests of the

        14        jurisdictions to comply, and over time we'll see

        15        those kinds of solutions.

        16             Norway will be interested in having an

        17        agreement with the United States because of the

        18        economic interests to do so.

        19             What is your assessment?

        20             MR. GUTTENTAG:  Certainly people are

        21        talking about such agreements.  As I mentioned,

        22        we have a very broad network of agreements

        23        dealing with direct taxes, income taxes, but

        24        there are no such agreements presently existing

        25        with respect to these value-added taxes.

                               COOK & WILEY, INC.


         1             Certainly that is something that needs to

         2        be considered, obviously, internationally, and

         3        that's why -- one of the reasons we're working

         4        in the OECD with all types of alternatives.

         5             There have been no proposals.  I want to make it

         6        clear, the Treasury has not proposed an

         7        international agreement to collect taxes or

         8        assist foreign countries in collecting taxes.

         9        We're looking at all the proposals now.

        10             I do think, Mr. Chairman, that some of the

        11        issues -- some of the questions which have been

        12        raised, I think we're going to find a great deal

        13        of expertise with respect to those issues in our

        14        afternoon panel.

        15             GOVERNOR GILMORE:  Very good.  We are

        16        closing in on lunchtime, or actually a few

        17        minutes past, not many.  We still have time for

        18        one or two more.  There are at least three on

        19        the panel.

        20             Let's go to Mr. Sokul and come back here.

        21             MR. SOKUL:  I had a question for

        22        Mr. Abelson.

        23             First, I just wanted to say that I have

        24        read an article before coming down here about

        25        how French custom inspectors were now collecting

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         1        VAT tax or opening packages in the French post

         2        office when they come through the mail.  That's

         3        how they are determining whether it's taxable or

         4        not.

         5             One of the things we need to discuss, in my

         6        opinion, is for our country, how much of an

         7        enforcement structure will the American people

         8        accept?  That's a highly invasive enforcement

         9        mechanism.  I just throw that out for thought.

        10             My question to Mr. Abelson is:  At the

        11        conclusion of your remarks, you discussed how

        12        the administration and Ambassador Barshefsky has

        13        made a decision that the moratorium should be

        14        made permanent.

        15             And you drew an analogy to our discussion

        16        by saying countries are coming to you and saying

        17        "But what about our revenue basis, and what

        18        about our revenues?"

        19             You didn't give an answer.  I would like to

        20        ask you what your answer is to that question.  I

        21        assume it's not "Okay, let's hold our noses and

        22        walk the plank together," it's more on the lines

        23        "What will rise will float."

        24             MR. ABELSON:  Since October of 1998, the

        25        answer I have given to these officials is "Watch

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         1        us.  Watch what we do in the United States,

         2        because we're going to solve the problem."

         3             So I turn to you, 17 men and women, and say

         4        "Help solve this problem so that we can get this

         5        extension permanent."

         6             You don't need any examples about

         7        international trade.  The United States is

         8        enough of a microcosm, whether it's the 50

         9        states and the other jurisdictions or the local

        10        governments.

        11             If you can come up with an idea of how to

        12        work this problem in a voluntary, cooperative

        13        way, as the Governor mentioned, than we can take

        14        that and show it to the rest of the world and

        15        say "This is how we have solved it.  Check this

        16        out."

        17             GOVERNOR GILMORE:  Mr. Pottruck?

        18             MR. POTTRUCK:  Thank you, Mr. Chairman.

        19             This is actually directed to Mr. Guttentag

        20        and Mr. Pincus as representatives of our

        21        administration.

        22             In July of 1997, the President and Vice

        23        President stated that the administration was

        24        concerned about moves by state and local

        25        governments to target electronic commerce with

                               COOK & WILEY, INC.


         1        taxation.

         2             They said then there should be neutrality

         3        between conventional and electronic commerce,

         4        and no new taxes should be applied to electronic

         5        commerce.

         6             My question is:  Does the administration

         7        plan to come forward during our deliberations

         8        and put some proposals on the table for us to

         9        consider?

        10             Are there active working groups within the

        11        administration that will forward a specific

        12        recommendation, ideas, or proposals that may

        13        facilitate the work of our Commission?

        14             MR. GUTTENTAG:  The administration's

15 position, which you described, and the policy set 

        16        forth in the International Tax Freedom Act,

        17        was to a moratorium on certain types of

        18        taxation, and created this Commission.

        19             As I explained, the Treasury role on this

        20        Commission we view as one of attempting to bring

        21        together the affected parties.

        22             What we are dealing here in this area, and I

        23        believe that's what you were referring to, is

        24        the subnational taxes.  In that area we are not

        25        going to make proposals, other than to try to

                               COOK & WILEY, INC.


         1        facilitate agreements between the various

         2        parties as represented here on the Commission.

         3             We believe these are issues which should be

         4        decided by the parties involved, state and local

         5        governments and the taxpayers involved.

         6             If you're referring to Federal taxes, of

         7        course the Act also referred to Federal taxes.

         8        We will, of course, review them.  We would

         9        review all types of taxes, including excise

        10        taxes, to determine whether they need any

        11        adjustments to reflect these new technologies

        12        and the convergence which has been described.

        13             That would include, I think, both the tax

        14        systems and the regulatory system, itself.

        15             GOVERNOR GILMORE:  Another response?

        16             Governor Harris?

        17             GOVERNOR HARRIS:  Yes.  I have a question

        18        for Mr. Abelson.  It relates to the borderless

        19        nature of the Internet transactions over the

        20        Internet.

        21             My question is directed to what type of

        22        legal framework are these transactions in the

        23        taxes, the custom duties, et cetera, enforced

        24        within?  That's unclear to me.

        25             You mentioned earlier, for example, that

                               COOK & WILEY, INC.


         1        there is U. S. policy not to tax or to apply a

         2        customs duty to software.

         3             But, for example, if you had a computer

         4        worth $1500, just the computer, and the same

         5        computer with software was worth $2,000, and

         6        someone in the United States purchased that

         7        computer with the software from Germany, for

         8        example, the customs duty would be on the

         9        $2,000; is that correct?

        10             So my question is:  If I were an attorney

        11        and I wanted to argue that you are, in fact,

        12        applying a use duty to software in this case,

        13        within what legal framework would that issue be

        14        resolved, and how do you see those issues being

        15        resolved in the future?

        16             MR. ABELSON:  Unfortunately, I'm going to

        17        have difficulty in answering your question,

        18        partly because I'm not an attorney, and partly

        19        because the issue is very difficult.

        20             We don't, as I mentioned before, put a

        21        customs duty on the value of information.  So I

        22        question, but I would need to check with my

        23        officials in customs law, whether it's U. S.

        24        domestic customs law or the international

        25        procedure, whether or not the computer would

                               COOK & WILEY, INC.


         1        actually be valued for custom purposes at more

         2        than $1500.

         3             The issue is not the value of the computer

         4        in the marketplace.  It is the value for customs

         5        purposes.  There the value may be $1500 whether

         6        loaded fully or not, in which case there is no

         7        discrimination.

         8             You have gotten yourself into a very, very

         9        unique area of international and domestic law,

        10        and that is customs law.

        11             What we're doing is saying -- that's why I

        12        was emphasizing the customs duty aspect of our

        13        approach -- is that for customs purposes, I

        14        should have added "and customs purposes only."

        15        These transmissions are not duty.  It is a very,

        16        very unique area of trade.

        17             Now, the concept that we have created which

        18        we think is so important is the borderless

        19        nature of these transactions.  You don't stop

        20        them at the border.  Once they land, they are in

        21        a jurisdiction, going to something you were

        22        implying.

        23             What about that?  Once they are in a

        24        jurisdiction, then, in fact, they are subject to

        25        all of the rules of that jurisdiction for tax

                               COOK & WILEY, INC.


         1        purposes, for regulatory purposes, et cetera.

         2             Just because it's borderless does not mean

         3        it's not subject to other rules.

         4             GOVERNOR GILMORE:  Last question,

         5        Mr. Armstrong.

         6             MR. ARMSTRONG:  Mr. Abelson, you and I

         7        participate in a thing called an International

         8        Settlement Regime regarding communications.

         9             Since I think everyone has spoken to the

        10        globalization of the Internet, I think it's a

        11        relevant subject.

        12             You also defined taxes and tariffs as the

        13        two "T"s.  You like to call them duties when

        14        they can apply across the border and said

        15        services are not duty, yet I find that in

        16        conflict with international settlements, if one

        17        would define either duties, taxes, or tariffs as

        18        fees imposed by governments that are not cross

        19        based.

        20             If we accept that, I say we have some real

        21        problems going on in services.

        22             MR. ABELSON:  Perhaps.  But I should

        23        qualify the definition you just read as applying

        24        to only government measures.

        25             The settlement arrangements that you

                               COOK & WILEY, INC.


         1        referred to are between private parties, and

         2        therefore they are not government measures, and

         3        they are not subject to these international

         4        trade rules.  They may look like taxes and

         5        tariffs, but they are not.  They are a business

         6        deal you contracted with your colleagues.

         7             MR. ARMSTRONG:  They are a business deal I

         8        contract with PTTs that are government regulated

         9        and in many cases, as we know, government owned.

        10        What looks like a duck, walks like a duck,

        11        quacks like a duck, I often treat them like a

        12        duck.

        13             GOVERNOR GILMORE:  Well, on that duck note,

        14        we will break for lunch.


        16             (Luncheon recess taken.)










                               COOK & WILEY, INC.

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