 First Meeting:
Transcript of June 22, Part 1
1
1
2
3 Meeting
4 of the
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6
7
ADVISORY COMMISSION ON ELECTRONIC COMMERCE
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9 VOLUME I
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held on
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JANUARY 22, 1999
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at
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THE COLLEGE OF WILLIAM & MARY
18 COMMONWEALTH AUDITORIUM
WILLIAMSBURG, VIRGINIA
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21
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23 COOK & WILEY, INC.
Registered Professional Reporters
24 Post Office Box 14582
Richmond, Virginia 23221
25 (804) 359-1984
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1 MEMBERS:
2 The Honorable James S. Gilmore, Chairman
Governor, Commonwealth of Virginia
3 State Capitol, Third Floor
RIChmond, Virginia 23219
4
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
9
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
15
Ms. Delna Jones
16 Commissioner, Washington County
Administrative Offices
17 155 North First Avenue, Suite MS22
Hillsboro, Oregon 97124
18
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
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24
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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
7
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
12
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
23
Mr. Theodore Waitt
24 Chairman and CEO, Gateway, Inc.
610 Gateway Drive
25 South Sioux City, South Dakota 57049
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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
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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
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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
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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
15 www.virginiadiner.com.
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.
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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 Amazon.com 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
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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 Amazon.com. 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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.
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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
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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.
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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 Amazon.com 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
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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
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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.
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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,
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
7
8 (Recess taken.)
9
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.
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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 gr |
