 Third Meeting:
Transcript of December 14 1999 ADVISORY COMMISSION ON ELECTRONIC COMMERCE
THIRD MEETING
Westin St. Francis Hotel
San Francisco, California
Tuesday, December 14, 1999
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1 PARTICIPANTS:
2 JAMES S. GILMORE, III
3 JOSEPH H. GUTTENTAG
4 RON KIRK
5 JOHN W. SIDGMORE
6 MICHAEL O. LEAVITT
7 THEODORE WAITT
8 GARY LOCKE
9 DAVID POTTRUCK
10 DELNA JONES
11 RICHARD PARSONS
12 DEAN F. ANDAL
13 PAUL C. HARRIS, SR.
14 GROVER NORQUIST
15 GENE L. LEBRUN
16 ANDREW PINCUS
17 STAN SOKUL
18 ROBERT NOVICK
19 ANDREW MARSLAND
20 MICHEL AUJEAN
21 FRED SMITH
22 CHRIS WYSOCKI
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1 PARTICIPANTS (CONT'D)
2 ADAM THIERER
3 STACEY L. SPRINKLE
4 KEITH LANDRY
5 JOHN MORABITO
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1 P R O C E E D I N G S
2 (1:05 p.m.)
3 CHAIRMAN GILMORE: Good afternoon,
4 ladies and gentlemen, and welcome to the
5 third meeting of the Advisory Commission on
6 Electronic Commerce. I'm Governor Jim
7 Gilmore of Virginia, the chairman of the
8 Commission, and I would like to call the
9 meeting to order.
10 I would like to remind everyone
11 that this meeting is open to the public and
12 is being Webcast over the Internet and can be
13 viewed on our Web site. I also want to
14 welcome C-SPAN and all C-SPAN viewers who are
15 here with us today watching these proceedings
16 in the third meeting of the Advisory
17 Commission.
18 Our Web site where this is being
19 cast is www.ecommercecommission.org --
20 www.ecommercecommission.org.
21 Now, I want everybody to know that
22 this is my second day in California.
5
1 Yesterday I was in Santa Monica, where I was
2 chairing the National Advisory Commission on
3 Terrorism and Weapons of Mass Destruction.
4 So I thought it was a good tune-up for
5 chairing this meeting here today, although I
6 think that we can expect a pretty friendly
7 exchange and a lot of information from all of
8 us.
9 One good thing is that the
10 Commissioners, I think, at this point have
11 had an opportunity to get to know each other
12 a little bit and work together. So I'm
13 confident that we're going to have a very
14 productive meeting and discussion.
15 Now, just a bit of the history for
16 those who are tuning in for the first time.
17 This is the third meeting of the Advisory
18 Commission on Electronic Commerce. The
19 Commission was established by Congress to
20 study the array of taxes on the Internet in
21 electronic commerce.
22 In two prior meetings, the
6
1 Commission has covered an awful lot of
2 ground. We discussed many of the tax issues,
3 from international taxes and tariffs on
4 electronic commerce, to telephone taxes, and
5 the sales tax. In the process, we've heard
6 testimony from more than 30 organizations and
7 experts.
8 In the last meeting in New York, I
9 was encouraged by the Commission's ability to
10 come to a consensus on some of the policy
11 recommendations. We agreed that there should
12 be no international taxes or tariffs on
13 electronic commerce conducted over the
14 Internet, although that anticipates some of
15 the discussions that we are going to have
16 today on this issue.
17 From discussions with other
18 Commissioners at the meeting, it's my sense
19 that there may be some other areas of
20 consensus as well that we will be able to
21 reach. Like closing, for example, the
22 digital divide, reducing regressive telephone
7
1 taxes, eliminating taxes on Internet access.
2 These may be places where consensus can
3 emerge, while the application of sales taxes,
4 to the sale of goods and services over the
5 Internet, continues to present some
6 disagreement.
7 I'm hopeful that our conversations
8 here in San Francisco will help us to define
9 further areas of consensus and refine areas
10 where we might disagree.
11 As we continue to move towards our
12 requirement, to submit recommendations to
13 Congress by the end of April 2000, we have
14 two more meetings, this one and a final
15 meeting in Dallas on March 20th and 21st.
16 My intention is to follow the work
17 plan crafted by Mr. Pottruck, David Pottruck
18 of Charles Schwab, and to accommodate the
19 presentations of the proposals that have been
20 submitted to the Commission pursuant to
21 Governor Mike Leavitt of Utah's motion, that
22 he made in New York, which was adopted.
8
1 Let me point out to everyone who is
2 on the Commission that as we have established
3 the agenda, we have accommodated each
4 Commissioner's requests for the agenda,
5 leaving nothing behind. We've incorporated
6 all recommendations and requests into the
7 agenda.
8 So with that objective, let me walk
9 through the agenda for today and tomorrow for
10 the members of the Commission so we can get a
11 road map of where we are going. First, we
12 explore the issues of international taxes and
13 tariffs and the impact of taxes or tariffs on
14 transactions facilitated by the Internet on
15 U.S. companies' global competitiveness.
16 Following that discussion, the bulk
17 of the meeting for today and tomorrow will
18 focus on presentations of the proposals which
19 members of the public have submitted to the
20 Commission and discussion among the
21 Commissioners. Toward the end of the day
22 tomorrow, we will spend a considerable amount
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1 of time discussing the proposals we have
2 heard and the information that will be
3 contained and the question of whether or not
4 there's anything we wish to alter as a result
5 of the information we're receiving today and
6 tomorrow. And we will review the policy
7 options outlined in the issues and options
8 paper drafted by the report drafting
9 subcommittee.
10 It is not my intention to call for
11 votes on those policy options at this
12 meeting, although there may be some sense of
13 consensus, either for or against some issues
14 that emerge from our deliberations. But on
15 closer questions, it's not my plan to call
16 for votes on these policy options. But the
17 work plan does call for us to have an open
18 discussion on those options and all of those
19 issues that all of you have in the issues and
20 policy paper.
21 We also will take up several
22 resolutions offered by Commissioner Norquist,
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1 and then close tomorrow's meeting by
2 addressing some of the administrative matters
3 as well. Without objection, the agenda will
4 be adopted and then we will proceed.
5 First, then, I would like to
6 introduce our first group of speakers. The
7 first group begins with Mr. Andrew Marsland, I
8 believe -- is that correct, Mr. Marsland? --
9 of the OECD, the Organization of Economic
10 Cooperation and Development; Mr. Michel
11 Aujean of the European Union; and Mr. Fred
12 Smith of the Competitive Enterprise
13 Institute.
14 Now, following these presentations,
15 I will call on two members of the Commission:
16 Commissioner Robert Novick, to update the
17 Commission on the activities of the World
18 Trade Organization, pursuant to the agenda,
19 and Commissioner Joe Guttentag, to update us
20 on the U.S. involvement in the EU and the
21 Organization of Economic Cooperation and
22 Development. At the conclusion of the panel
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1 presentations, so everyone has their
2 opportunity to do that, then we will have
3 questions from the Commissioners.
4 Gentlemen, each of you has been
5 designated 10 minutes. If you could help us
6 with that and keep your comments in that
7 amount of time, it would be appreciated,
8 because we do have a fairly tight timetable
9 for the next two days.
10 Mr. Marsland, please begin. Thank
11 you.
12 MR. MARSLAND: Thank you, Mr.
13 Chairman.
14 Mr. Chairman and members of the
15 Advisory Commission, on behalf of the
16 Secretaries of the OECD, I'd like to thank
17 you for this opportunity to appear before you
18 today and to inform you about the work at the
19 OECD in relation to taxation questions
20 touching on electronic commerce.
21 The OECD's work in this field is
22 just one part of a comprehensive program
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1 aimed more generally at encouraging the
2 positive developments of the information
3 society and of E-commerce. The program
4 includes work to foster a stable and
5 predictable regulatory environment, to
6 promote the enhancement of the information
7 infrastructure and access to the
8 infrastructure, and to address constructively
9 such issues as consumer protection privacy.
10 In terms of taxation, the OECD is
11 fulfilling a well-established role in
12 relation to the international taxation issues
13 by helping to coordinate the examination of
14 these issues. Recognizing that electronic
15 commerce is a global issue, the OECD has very
16 deliberately sought to involve both business
17 and non-OECD member economies in a
18 comprehensive dialogue.
19 The input of business is recognized
20 as especially important. Whatever
21 governments decide to do, it must take
22 account of the realities of the business
13
1 world and must ensure that taxation
2 provisions operate in such a way as to
3 minimize the compliance burden on business.
4 Equally, the involvement of nonmember
5 counties in Latin America, in Asia and in
6 Eastern Europe is a vital part of identifying
7 and pursuing options which are as far as
8 possible capable of global amplification.
9 The overall objective lies in
10 achieving a fiscal climate within which
11 E-commerce can flourish, but which at the
12 same time protects the revenue base.
13 It's important to point out that
14 OECD does not make laws in relation to
15 international taxation matters. Rather, it
16 provides a forum and mechanism for debate and
17 helps when necessary to establish certain
18 norms.
19 An important example of such a norm
20 is the OECD model tax convention, which
21 serves as a basis for a very large number of
22 bilateral tax treaties dealing with the
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1 taxation of the income and capital. Against
2 this background, then, the international
3 community selected the OECD to take the lead
4 in the examination of taxation implications
5 of electronic commerce in the international
6 context, and to work towards international
7 consensus on what should be done, either to
8 adapt existing tax norms or to develop new
9 ones. Of course, in the field of indirect
10 taxation, the European Commission plays an
11 important role in Europe and, therefore, the
12 OECD is working closely with the Commission
13 on this.
14 All 29 OECD countries are actually
15 involved in this process. As I mentioned,
16 nonmember countries, and in particular,
17 businesses are being drawn into it. In
18 practice, this is managed through the
19 establishment of five technical advisory
20 groups looking at issues from technology to
21 the practical detail of how consumption tax
22 systems will be applied in practice. Each of
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1 the groups has 20 or so members with a
2 majority from the business community.
3 The core starting point of the
4 OECD's work in this area lies in the taxation
5 framework conditions, which were endorsed by
6 OECD Ministers and in Ottawa in October '98.
7 These key principles already represent, in
8 effect, an important international consensus
9 which has gained acceptance beyond OECD
10 states. For example, they were welcomed by
11 APEC finance ministers in May of this year
12 and have been noted with interest by a number
13 of regional organizations.
14 The framework conditions include a
15 number of key conclusions, including -- and
16 importantly -- that the same principles that
17 governments apply to the taxation of
18 conventional commerce should equally apply to
19 E-commerce: Namely, neutrality, and that
20 taxation should seek to be neutral and
21 equitable between forms of E-commerce and
22 between E-commerce and conventional commerce,
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1 so avoiding double taxation and unintentional
2 non-taxation.
3 Efficiency in the compliance cost
4 of business and administration costs to
5 government should be minimized as far as
6 possible. Certainty and simplicity in the
7 tax rules should be clear and simple to
8 understand. Effectiveness and fairness, in
9 that taxation should produce the right amount
10 of tax at the right time and avoidance and
11 evasion should be as far as possible
12 minimized.
13 And, finally, flexibility, in that
14 the taxation system should be flexible and
15 dynamic and ready to adapt and keep pace with
16 technological and commercial change. The
17 firmer conditions noted that these principles
18 can be applied through existing tax rules,
19 and that any new or revised administrative
20 measures should be directed towards the
21 application of existing mechanisms and should
22 not be intended to impose a discriminatory
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1 tax treatment on electronic commerce.
2 The conditions also noted that the
3 technologies underlying electronic commerce
4 offer significant opportunities for improved
5 taxpayer service which government should
6 actively pursue. And finally, that the
7 process of putting flesh on these principles
8 should involve intensified dialogue with
9 business, with non-business taxpayer groups,
10 and with non-OECD countries.
11 It's worth stressing the important
12 distinction between tariffs and taxes.
13 Internationally, there's world consensus
14 amongst developed countries that tariffs
15 should not apply to electronic commerce
16 services, and it reflects in large part the
17 status quo. The taxes whether direct or
18 indirect are an entirely different matter.
19 In effect, tariff-free does not equal
20 tax-free.
21 The work program at the OECD has
22 three broad components in relation to
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1 consumption taxes, -- sorry,
2 international direct tax rules, and tax
3 administration. The first thing in respect
4 to consumption taxes, it's worth noting that
5 28 out of 29 member countries of the OECD
6 operate a national consumption tax system,
7 such as a evaluated tax or a goods and
8 services tax.
9 Such systems are generally
10 comprehensive in scope, applying in principle
11 to all goods and services, subject to certain
12 release that are usually very narrowly --
13 narrowly defined. Consumption taxes account
14 for a significant part of the revenue yield
15 in these OECD countries. In this context,
16 the OECD that work in consumption taxes is
17 examining how the principles agreed to at
18 Ottawa, the framework conditions for the
19 treatment of international transactions, can
20 be translated into practice.
21 The principles in relation to
22 consumption tax were that rules for
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1 consumption taxation of cross-border
2 transactions shall result in taxation and the
3 jurisdiction where consumption takes place,
4 thus avoiding double taxation and
5 unintentional non-taxation. For the supply
6 of digital products should not be treated as
7 the supplies of goods for consumption tax
8 purposes. For the cross-border,
9 business-to-business transactions of
10 intangible services, self-assessment
11 collection mechanisms or direct-payment
12 mechanisms are a viable means of safe
13 guarding revenues.
14 And finally, the countries should
15 ensure that appropriate systems are in place
16 to collect tax on the importation of physical
17 goods, and that such systems should support
18 efficient delivery of goods to consumers.
19 As a basic principle, then,
20 electronic commerce transactions already fall
21 to be taxed under consumption tax systems in
22 common with their conventional commerce
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1 counterparts.
2 So what is at issue, really,
3 especially for international transactions, is
4 whether the rules provide for the desired
5 outcome -- that is, taxation in the place of
6 consumption -- and then how should such rules
7 apply in practice. This is the main focus of
8 the OECD work at the debate going on at the
9 OECD.
10 The choice of consumption principle
11 already works quite readily in many instances
12 for international transactions. For example,
13 imported goods are subject to -- generally to
14 consumption taxes when they enter a country.
15 But of course the picture gets less clear
16 when you look at services. Following through
17 the logic of taxation in place of
18 consumption, online transactions of digitized
19 products should be subject to consumption
20 taxes in the country of the customer. But
21 the challenge lies in identifying clear and
22 practical arrangements to make that happen.
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1 Most business-to-business
2 transactions can be probably be administered
3 under a self-assessment system. It's the
4 sales to private consumers, especially of
5 digitized products, that present a particular
6 challenge. And it's in this field that the
7 primary, although not exclusive, focus of the
8 OECD work in consumption taxes is focusing.
9 Currently this work is examining
10 how the principle of taxation at place of
11 consumption should operate in practice. How
12 will consumption in the case of a private
13 consumer be established? And how will that
14 be determined in the real time, online
15 environment?
16 Linked to that set of questions is
17 how tax that is due should be calculated and
18 paid over. In terms of direct taxes, the
19 work is looking at the extent to which
20 E-commerce can impact some on existing
21 principles of international direct taxation.
22 These principles are widely accepted and are
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1 reflected in large part in the extensive
2 network of bilateral tax conventions.
3 One important issue in this area is
4 the application of E-commerce -- the existing
5 principles for taxing business profits which
6 are based on the concept of permanent
7 establishment. The OECD recently issued a
8 document that it seeks to clarify how the
9 existing definition of permanent
10 establishment applies to E-commerce. In
11 outline, the document suggests that a Web
12 site alone cannot constitute a permanent
13 establishment, and that situations in which
14 the server at a fixed location could
15 constitute a permanent establishment are
16 quite limited.
17 Comments have been invited on the
18 documents, and we hope to finalize it next
19 year. But that only addresses an issue of
20 narrow legal interpretation. Far more
21 important is the work that the OECD is doing
22 through the relevant technical advisory
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1 groups examining the application of existing
2 tax treaty rules, including both of
3 determining where business profits ship --
4 when business profits should be taxed in a
5 country and how much of them should
6 be taxed.
7 Finally, on tax administration, the
8 OECD's work is looking at how tax systems can
9 be made to work better, harnessing the new
10 technology opportunities. For example, how
11 best can the information needs of revenue
12 authorities be integrated with normal
13 business practices, especially in the
14 electronic systems, so that governments'
15 needs on that with the minimum compliance
16 demands?
17 To what extent, for example, can a
18 minimum common framework of tax-related
19 record requirements be identified which is
20 consistent ideally with commercial systems?
21 Equally, how can the new technologies
22 available to governments best be used to ease
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1 compliance with business? There's obviously
2 a host of possibilities here, from electronic
3 filing, online information, interactive
4 systems, which many countries are already
5 exploring. So here the OECD is looking
6 towards the sharing of experience and of best
7 practice.
8 In terms of the timetable for this
9 work, the post-Ottawa agenda was framed
10 around a two-year period. So technical
11 advisory groups with business, for example,
12 each have a two-year mandate. Through 2000,
13 the aim will be to intensify dialogue with
14 business and nonmember economies, to expose
15 more ideas and options for public comment,
16 and so to move towards international
17 consensus.
18 CHAIRMAN GILMORE: Mr. Marsland, I'll
19 have to ask you to wrap up.
20 MR. MARSLAND: Okay. So in
21 summary, our work is directed at establishing
22 an international consensus on the application
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1 of taxation norms and practices which will
2 serve the interests of governments, business,
3 and consumers, particularly in terms of
4 certainty, consistency, and simplicity; doing
5 that through a comprehensive dialogue with
6 the aim ultimately of delivering an
7 international fiscal environment which
8 fosters the develop of growth and growth of
9 electronic commerce, and at the same time
10 safeguards the revenue yields of governments.
11 Thank you.
12 CHAIRMAN GILMORE: Thank you, Mr.
13 Marsland. And there'll be a few moments also
14 for some questions and answers at the end
15 where you may which to elaborate on some of
16 this. Thank you for your presentation.
17 Mr. Aujean?
18 MR. AUJEAN: Thank you, Mr. Chairman
19 and members of the Advisory Commission.
20 Thank you for the invitation to talk today.
21 I'm Michel Aujean, director of tax
22 policy of the European Commission in
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1 Brussels, and my responsibilities are with
2 initiating and negotiating common tax
3 legislation in the EU and monitoring its
4 implementation in the member states.
5 The EU has, with their European
6 Commission, the sole responsibility of
7 initiating the legal measures which are
8 needed for the efficient and free-functioning
9 of what we call our single markets. Such
10 proposals for tax legislation must pass
11 though a legislative process involving the
12 representative of our member states, and may
13 be a long process, given that taxation area
14 is always submitted to the principles of
15 unanimity of member states.
16 Nevertheless, we have a
17 well-established common legal framework for
18 both customs and indirect taxation in the EU.
19 Let me explain how it works today. First of
20 all, we have the customs union, which has
21 been in place for many years and which is
22 characterized by a common external frontier,
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1 a single harmonized tariff system, and no
2 internal borders within the EU.
3 Then we have a common legal phase
4 for VAT and excise duties. I will talk
5 mainly of the Value Added Tax, of course.
6 The Value Added Tax covers the definition of
7 what constitutes a taxable base and the
8 approximated range of tax rates which member
9 states are allowed to apply. In essence, it
10 provides for the taxation of all goods and
11 services supplied for consumption within the
12 territory of the EU.
13 Therefore, for us, E-commerce
14 doesn't give rise to any particular questions
15 of principle as the mode of delivery of a
16 supply for consumption, or the means by which
17 the parties communicate is simply not an
18 issue.
19 Let me talk about the EU VAT in
20 practice in the EU. First of all, it's clear
21 that in spite of being a consumption tax, VAT
22 is a tax for which businesses are responsible
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1 for charging and collecting the tax. How
2 does it work in practice? Let me take goods
3 first.
4 For goods coming from outside the
5 EU, we collect VAT at the point of import,
6 subject for certain allowance for low-value
7 imports -- around $20 -- which are and can be
8 exempted. And then the goods circulate
9 freely within the EU without further
10 formalities.
11 Within the community and between
12 member states, we have a special arrangement
13 for what we could call in comparison with the
14 US situation "interstate commerce." With
15 this in mind, we have a very straightforward
16 system by which, irrespective of the way the
17 order is placed, whether through a Web site
18 or through mail order, we have always
19 application of VAT taking place in the EU,
20 either through the country of origin, where
21 the seller is established for sales under a
22 certain threshold -- around 100,000 Euros, or
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1 dollars, if you prefer -- today's right --
2 with a very simple system for start of
3 businesses, because they are not required to
4 tax in the country of destination up to this
5 threshold.
6 When the threshold is passed, then
7 the seller must register in the country of
8 destination, in the member state of
9 destination, within the EU. So that at the
10 end of day, whatever the kind of sale is
11 made, each sale is taxed at origin or
12 destination, whatsoever. So interstate
13 commerce within the EU, with private
14 consumer, is not an issue, whatever the
15 format of the order.
16 VAT also applies to services. VAT
17 applies to all services without regard to the
18 manner of their delivery. So once again, in
19 general terms within the EU, we don't have a
20 specific problem in applying the VAT to
21 E-commerce. We certainly need to update our
22 system for services, and there we must come
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1 to other area, the export and import of
2 services.
3 Concerning the export of services,
4 it's clear that the EU system was based on a
5 concept of the '60s or '70s, by which to be
6 able to control the taxable person, the place
7 of taxation, the place where taxation had to
8 be applied was a place of registration or
9 establishment of the seller. Which means
10 that today, exports, for most of them, of this
11 new services of electronic commerce are taxed
12 within the EU at present.
13 We need to revise this legislation.
14 We need to change this legislation to be
15 adapted to the new place of consumption:
16 principles of taxation, and that will be the
17 subject of a legal proposal, to exempt the
18 supply of services through the net.
19 Conversely, we need to think of our
20 scheme for import of services into the EU.
21 And, as I said before, we apply VAT to goods
22 and services, which means that services are
31
1 the way we deal with digitized products.
2 They are considered to be services. That is
3 one of the two categories that we have for
4 applying VAT.
5 Concerning imports of services, two
6 schemes must be envisioned. First of all,
7 business-to-business. Most of the services
8 dealing with business-to-businesses must see
9 revision of the way we have been dealing with
10 these, because the principle of taxation of
11 the place of establishment of the supplier
12 means that today services imported within the
13 EU are often not taxed. And there we will
14 rely on the principle of the reverse charge
15 mechanism for business-to-business
16 operations. This is a very simple,
17 straightforward way of dealing with these
18 services.
19 Converting our legislation into
20 this area will allow to us effectively deal
21 with that question. That we certainly need
22 other adaptations lies the possibility for
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1 third-country traders to have access to the
2 identification database, allowing to know
3 who their customer is, to know in terms of
4 taxable status. That will be allowed by
5 having access through the Internet to the
6 identification status, tax status of
7 customers.
8 Concerning business-to-consumer,
9 which is today an extremely limited segment
10 of the trade taking place on E-commerce, we
11 need to revise our legislation to make sure
12 that we will be able effectively to collect
13 taxes on E-commerce -- online E-commerce with
14 private final consumers. That part of our
15 legislation will be revised in order to allow
16 effective taxation to take place, which will
17 mean means of effectively registering in a
18 single place of registration for all the EU
19 for third-country traders. This is very
20 important step forward which we have to take
21 in proposing legislation, to make sure that
22 effectively through a single place of
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1 legislation, third-country traders may offer
2 and supply services within the EU without too
3 burdensome administrative or bureaucratic
4 activities.
5 As you heard from Andrew, we are
6 pursuing this issue in line with the Ottawa
7 principles and in close connection with what the
8 OECD is developing on inside. The European
9 Commission is in charge of making sure that
10 the VAT legislation of all its 15 member
11 states can be changed and adapted to the need
12 of this economy. And E-commerce is a major
13 challenge, but opportunity as well for
14 development of the E-commerce activity within
15 the EU from the other member states and from
16 a general point of view, making sure that we
17 have developed all the elements necessary to
18 this effect.
19 We have been launching a series of
20 initiatives in this respect, dealing with the
21 possibility notably of initiating electronic
22 invoicing for VAT delivered -- products
34
1 delivered online, and for developing the
2 possibility of electronic return to take
3 place with a single place of registration
4 which should be enforced in the community.
5 We are looking at present all the
6 questions of implementation. We know that we
7 must remove or ameliorate a number of aspects
8 of the existing VAT system. We know that we
9 have to take care of rapidly changing the
10 system for business-to-business and
11 business-to-consumer in a way which is simple
12 to effectuate, simple to understand and
13 sustain for the operators. The message we
14 heard from our business community is quite
15 clear. They need certainty. They need
16 certainty as to which kind of general system
17 is to be applied. The system of taxation
18 according to the principle of the country of
19 consumption will certainly be the best way
20 forward for applying VAT in the future.
21 Thank you.
22 CHAIRMAN GILMORE: Thank you,
35
1 Mr. Aujean. And again, we will have some
2 time for some questions and answers in a
3 short while.
4 Mr. Smith, I understand you were
5 kind enough to come to New York to offer a
6 presentation and we didn't get to you because
7 of the hurricane. So I want to thank you
8 very much for coming back and being with us
9 again. We appreciate it.
10 Oh, by the way, you're familiar
11 with these assists to you down here, the ones
12 that show you the amount of time that you
13 have remaining and so on, that are before
14 you. Green means you're on your way, wrap up
15 means wrap up, and when red flashes up, it
16 means it's over.
17 Isn't there a television right in
18 front of you there? It's not on that screen?
19 So much for the E-commerce, okay? We won't
20 be paying sales tax on that television, okay?
21 All right.
22 Thank you, Mr. Smith, and my
36
1 apologies to Mr. Aujean and Mr. Marsland.
2 Please proceed.
3 MR. SMITH: Thank you very much.
4 I'm glad to be here, Governor and members of
5 the Commission.
6 I was recently at the World Trade
7 Organization where reluctantly we did, in
8 fact, extend for at least temporarily, the
9 no-tariff on E-commerce. CI has also
10 recently completed a financial privacy
11 conference where we dealt with some of the
12 difficulties of reconciling U.S. concepts
13 with European concepts, particularly in the
14 area of individual privacy. And in earlier
15 career, I almost made it to OECD as a excise
16 tax expert, so it's kind of an interesting
17 world.
18 We've heard a lot about -- it's
19 there now. We've heard a lot about how the
20 Internet is one of the most promising
21 technologies ever to come forth. And indeed,
22 if anything, that's understated. You know,
37
1 it eliminates space and time, and by doing
2 so, it lowers transaction costs. It makes it
3 possible for the world to be a much smaller
4 place. That is, it makes it possible unless
5 we kill off that promise by too quickly
6 rushing in to tax, to regulate this promise
7 out of existence. The United States has a
8 major lead here. We should be careful before
9 we blow it.
10 It also offers promise in a way
11 that was never seen before to the world's
12 poorest people. Unlike earlier revolutions,
13 this gives us an opportunity to have a
14 low-capital form of creative wealth creation
15 in India and the countries of the world. And
16 the unanimity promised by this technology
17 makes it possible for pariah groups around
18 the world -- minority groups often at risk in
19 their own countries -- to create wealth
20 without the risk we see here -- we see in the
21 world today.
22 My major point, and the reason I
38
1 think that this Commission should focus very
2 carefully before it rushes in to extend taxes
3 across the country, across the globe, is that
4 the concept of taxing people to whom you're
5 not politically accountable violates one of
6 the basic principles of good government, the
7 no-taxation-without-representation concept.
8 People need to be accountable to
9 the people they lay burdens on, whether those
10 burdens be tax burdens or those burdens be
11 regulatory burdens. When you can extend the
12 tax reach to people who do not have the
13 chance to vote you out of office, it is far
14 too tempting, and I think it's far too
15 politically attractive, but it's wrong.
16 Also, I think -- and this is
17 relevant on this panel -- U.S. markets are,
18 in world terms, very consumer-friendly.
19 European markets are considerably less so.
20 In Europe, discounting, advertising between
21 nations and other nation -- if you're a
22 Wal-Mart, you can't say our prices are better
39
1 and they're not as high quality as we are.
2 Hours of services are highly restricted. The
3 Internet, by eliminating time and space, or
4 reducing it, has made it possible to
5 breakdown some of these rigid barriers which
6 are so anti-consumer. Barriers which
7 essentially have restricted the ability,
8 especially of lower-income Europeans and
9 people throughout the world, to benefit in
10 the consumer society that we in America have
11 so long had. That's particularly true in
12 more oppressive regimes outside of Europe and
13 the United States.
14 One example: The Germans have been
15 complaining because amazon.com doesn't keep
16 business hours. You can actually buy after
17 the night closes. Well, that's very good,
18 and Europe should be seeking the competitive
19 forces that the Internet brings, because
20 they've got to modernize their economies if
21 they're going have any role in the 21st
22 century. And we can help, if Internet is not
40
1 blocked.
2 The taxation without representation
3 issue, I think, is a key one. Let me just
4 spend a little time on that. In a democratic
5 society, there are two ways of accounting
6 for -- making the political system
7 accountable: Exit and voice. Both of those
8 are harmed if we expand Internet taxing to
9 out-of-state. It's hard to exit if everybody
10 has the same tax as you do, or you can be
11 reached by the arm of the state, even when
12 you're not subject to that state's
13 jurisdiction.
14 Exit is closed or reduced
15 dramatically, even more so, if we go to
16 worldwide global Internet taxing. And voice,
17 the ability to say, "I thank you very much,
18 but I don't want any more taxes. I think
19 we're overtaxed already," is weakened if the
20 people you're taxing who are requiring to
21 collect taxes for you are not in your own
22 political jurisdiction. All politicians want
41
1 to tax other people. We shouldn't allow them
2 to do it.
3 Moreover, taxing frontier sectors
4 is particularly silly, because this is a
5 field which you've heard over and over again
6 is in flux. Everything is changing. Who's
7 involved, how we go about closing out
8 transactions, how we basically clear the
9 books. I rode out here with an individual,
10 one of the many silicon gurus, and I was
11 explaining what I was going to try to do
12 here. And I said, "Now they tell us that
13 software manufacturers have got a new way
14 that will magically allow us to collect these
15 taxes seamlessly, error-free, and so on."
16 He said, "Yeah, they promised that
17 to me, too, in a dozen other areas." He
18 said, "I'm in a really simple area. All I do
19 is collect monies for telephone
20 communications in various cities around the
21 world. The error rate is 60 percent in that.
22 And this is a simple transaction with both
42
1 sides trying hard to make it work well."
2 Promise -- I mean -- trust --
3 verify, I think some other Americans once
4 said. If we try to capture the dynamism of
5 this industry -- what is, after all, a fairly
6 rigid political net -- we run the risk of
7 losing the dynamism of this world and only
8 capturing a stagnating economy. Applying
9 yesterday's tax policies to today's growth
10 industries is only going to endanger the
11 hopes of a better world which I hope we all
12 believe in.
13 Don't blame the Internet.
14 America's problems are not that too many
15 people are escaping taxes; it's that we're
16 too taxed already. Jack Kemp, one of our
17 senior fellows, tells of the promise of the
18 Internet on the global scale. He tells of a
19 Chinese elderly couple coming in and trying
20 to put their blankets down in Tiananmen
21 Square. There's a crowd there; they can't do
22 it. They wander into a store -- it's an
43
1 Internet store. Two Chinese brilliant kids
2 are putting it together. The kids sort of
3 look at this elderly couple and respectively
4 say, "Well, what do you guys do?"
5 "We sell garlic," they said.
6 "Well, what do you do?"
7 "Well, we sort of sell things
8 internationally."
9 He says, "Well, can we help?"
10 And he said, "Sure."
11 So they put chinesegarlic.com on
12 the Internet, and within a matter of two days
13 these two elderly illiterate Chinese are
14 world businessmen. That's the promise of the
15 Internet. That's the promise that we're
16 threatening by taxing.
17 Privacy. Privacy is one of the
18 greatest values that is at risk in this
19 Internet situation, at home and abroad -- and
20 civil rights, also, I might add. The
21 technologies that are now emerging --
22 anonymous, digital money, encryption -- all
44
1 of those are far too likely to be viewed as
2 risky propositions, making it too easy for
3 people to evade tax liabilities. They're
4 not. They're ways of making it possible to
5 live in a world where government knows what
6 it needs to know and we keep the other things
7 we want to know private.
8 Trusted third-parties is an
9 interesting term, and I don't know what it
10 means. But it clearly suggests that a level
11 of trust that most of us don't have in our
12 sister-in-law and brother-in-law, not much
13 less than government out there.
14 Look, there's a real question
15 here -- and I think we have an example in
16 America, the "know your customer rule." The
17 "know your customer rule" was an idea that,
18 "Hey, people are evading the money-laundering
19 rules of the United States. Let's just
20 require all banks to be sort of enforcement
21 agencies for the agency involved."
22 We put that out and a firestorm of
45
1 opposition occurred. You've never seen a
2 firestorm of opposition that it will
3 occur if you try extend this tax around the
4 world to all the small businesses, to all the
5 people now who feel it's their right to try
6 to get the best deal in a complex world they
7 can.
8 But that's in the United States.
9 Around the world there's much greater
10 problems. We're a society that has a lot of
11 respect for individuals, a lot of respect for
12 the civil rights of citizens. Anonymity
13 promises people in areas where there are
14 minorities -- Chinese, in Indonesia, or
15 blacks in a -- in many racist societies,
16 Indians, in some areas of the world -- the
17 ability to create wealth, to link up with the
18 world's economy, but anonymously. Not
19 letting their governments know how vulnerable
20 they are, how much revenues they could
21 contribute to the state if we knew exactly
22 what their bank accounts were.
46
1 Do we really want to have the
2 United States act as tax collector for the
3 world? There are countries out there that I
4 would be ashamed to be tax collector for.
5 Indeed, I think we ought to think very
6 carefully before we go in that direction.
7 And, incidentally, does government
8 need more taxes? I don't think so. Most of
9 us think that Internet offers a promise of
10 reducing the burden of government and
11 reducing tax burdens, not closing it down.
12 You know when I started in tax policy
13 when I was a young naive economist, and I
14 thought efficiency of tax collection and
15 administrative burdens were all that counted.
16 One of the old guys at the Office of Tax
17 Analysis said, "Fred, you don't understand."
18 He says, "Remember, I've been in this game a
19 long time. A good tax is a bad tax and a bad
20 tax is a good tax."
21 And what he meant by that is, a tax
22 that is good from the economist perspective
47
1 is a tax that is easy to collect and makes
2 the job of the tax collector very, very
3 simple. But it also is a tax that is very
4 easy to collect.
5 Let me tell a little story about a
6 Frenchman of an earlier age. A French
7 Minister, Cobert (phonetic), once stated that
8 the goal of the politician is to pluck the
9 feathers from the goose in such a way that
10 the goose barely squeals. That is
11 essentially the definition of an
12 administratively good tax. It is not the
13 definition of a democratically good tax. A
14 democratically good tax is one that basically
15 has some pain, has some suffering associated
16 and is not hidden, is not buried, and is not
17 collected by people who can vote you out of
18 office. That kind of tax is one that if it's
19 worthwhile, the voters will vote it in, and
20 if it's not worthwhile, it will vote the
21 politicians out. That's the tax we want to
22 see in America.
48
1 We want to make politicians as
2 accountable as they are and more so in the
3 future world.
4 Let me just summarize. Look, we
5 don't need -- see, I've actually timed
6 myself. We don't need new tax revenues. We
7 do not -- it is premature to tax at this
8 time. Some of you read my earlier testimony,
9 and I used the analogy of the wonderful
10 movie, I think, the "Seven Samurai" movie,
11 the movie about the Japanese, sort of cowboy
12 guys, who defend a village from bandits. The
13 beginning of the movie starts off with this
14 bandit tribe riding down and looking at the
15 poor vulnerable village below. And one
16 bandit says, "Let's go down and rob, rape,
17 and pillage the village."
18 And the leader says, "No, that
19 would be wrong."
20 And the guy says, "Why?"
21 He says, "Well, the rice isn't ripe
22 yet. It's not harvested yet."
49
1 Let's at least wait until this
2 industry matures and grows up and freezes
3 before we go out and try to kill it.
4 Thank you very much.
5 CHAIRMAN GILMORE: Thank you, Mr. Smith.
6 Thank you.
7 The next place on our agenda calls
8 for a presentation by Commissioner Novick.
9 If you will indulge me for just a moment,
10 Robert, I'm going to just be sure that
11 everyone -- since C-SPAN is covering this --
12 has an opportunity to know exactly who is on
13 this panel. If you gentlemen would just
14 stand fast for a few moments?
15 If you'll bear with me a minute,
16 Fellow Commissioners, I want to make sure
17 that I get all of your titles exactly right.
18 To my immediate left is Delna Jones. Delna
19 is the county commissioner of Washington
20 County of the State of Oregon.
21 David Pottruck, the president and
22 co-chief executive officer -- I believe,
50
1 David -- of the Charles Schwab Corporation.
2 The next individual is Governor
3 Gary Locke. He is Governor of the State of
4 Washington.
5 The next is Ted Waitt. Ted is the
6 chairman and chief executive officer of
7 Gateway, Incorporated.
8 The next is Governor Mike Leavitt.
9 He is Governor of the State of Utah.
10 The next is John Sidgmore. He is
11 vice chairman of MCI Worldcomm and Chairman
12 of UUNet.
13 The next is Ron Kirk. Ron is the
14 Mayor of the City of Dallas in Texas.
15 The next is Joe Guttentag. Joe is
16 the senior advisor of the Office of Tax
17 Policy of the United States Treasury
18 Department.
19 Beginning on the other side, we
20 begin with our next presenter. Mr. Robert
21 Novick is the general counsel, the Office of
22 the United States Trade Representative of the
51
1 delegate of Embassador Barchefsky.
2 The next is Andrew Pincus. Andrew
3 is the General Counsel of the United States
4 Department of Commerce.
5 The next is Stan Sokul. Stan is
6 the independent consultant for the
7 Association for Interactive Media.
8 The next is Gene Lebrun. Gene is
9 the president from 1997 through '99 of the
10 National Conference of Commissioners on
11 Uniform State Laws.
12 The next is Grover Norquist. He is
13 the president of Americans for Tax Reform.
14 The next is Paul Harris. Paul is a
15 member of the House of Delegates, a member of
16 the state legislature for the Commonwealth of
17 Virginia.
18 The next person seated is directly
19 to my right, and that individual is Dean
20 Andal. He is chairman of the California
21 Board of Equalization.
22 Absent today is C. Michael
52
1 Armstrong. Mike Armstrong is chairman and
2 CEO of AT&T.
3 Also absent today -- but I think
4 only temporarily; I believe he will be
5 joining us in a short while -- is Richard
6 Parsons. He is the president of Time Warner,
7 Incorporated.
8 And the final member is Robert
9 Pittman, who is absent today. He is
10 president and chief operating officer of
11 America Online.
12 This is a very distinguished board,
13 and I hope I haven't left anybody out. I
14 don't think that I have.
15 This is obviously a very
16 distinguished panel, appointed by
17 representatives of the United States
18 Congress. And of course, our task is before
19 us now and will be concluded the first part
20 of this year. But as you can see, this is a
21 distinguished group of people to hear this
22 information from you gentlemen, from the
53
1 others who previously presented, and the
2 others.
3 Now, I would like to ask
4 Commissioner Novick, the General Counsel of
5 the Office of United States Trade
6 Representative, to provide the Commission on
7 an update on the progress of World Trade
8 Organization negotiations.
9 And, remember, the Governor of
10 Washington is here, Robert.
11 MR. NOVICK: Thank you, Governor.
12 I'm pleased to have the opportunity
13 to provide the Commission a brief update on
14 the status of customs, duties, and electronic
15 commerce, particularly in light of our recent
16 discussions at the third WTO ministerial in
17 Seattle.
18 As I indicated in our previous
19 meetings, the administration's primary goal
20 with respect to electronic commerce is to
21 ensure that trade over the Internet can
22 develop unimpeded. With respect to trade
54
1 policy, our most immediate objective is to
2 achieve a duty-free cyberspace. That is,
3 preventing the imposition of tariffs --
4 otherwise known as customs duties -- on
5 electronic transmissions. This goal has been
6 broadly endorsed, including by this
7 Commission at our last meeting.
8 This is an immediate goal for a
9 very important reason. Currently no member
10 of the WTO considers electronic transmissions
11 as import subject to duties for customs'
12 purposes.
13 In addition, the goal has obvious
14 benefits for American firms, consumers and
15 workers. It avoids the costs associated with
16 imposing customs duties on electronic
17 transmissions. For a delivery mechanism
18 based on an open network where borders are
19 meaningless, imposing customs duties at the
20 border would be a crushing burden that would
21 slow the growth of electronic commerce,
22 leaving aside the question of its
55
1 administrability.
2 Our trading partners broadly agree
3 with the administration's objectives. The
4 countries recognized early on that imposing
5 duties on electronic transmissions would only
6 hurt their ability to attract the investment
7 and technology necessary to build their
8 E-commerce infrastructure. As a result,
9 member governments of the WTO agreed in May
10 of 1998 to continue their practice of
11 refraining from imposing customs duties on
12 electronic transmissions.
13 Since that time, we have worked
14 with our trading partners to carry this
15 consensus forward. We have achieved broad
16 consensus with our trading partners that the
17 moratorium should continue, and its formal
18 extension was an important goal at the WTO's
19 third ministerial conference.
20 Given the many complex issues that
21 remained open at the Seattle ministerial, WTO
22 members did not conclude a formal
56
1 declaration, and as such, did not take formal
2 action on the moratorium. There was,
3 however, substantial consensus on the path
4 the trading community should take on
5 E-commerce going forward.
6 WTO members generally agreed on a
7 carefully balanced set of E-commerce
8 principles, a key component of which is the
9 continuation of the moratorium on electronic
10 transmissions. Given the conflicts of
11 interests on the part of our trading partners
12 with respect to E-commerce generally and the
13 moratorium specifically, we fully expect that
14 countries will neither deviate from their
15 current practice nor jeopardize this balance.
16 As you may recall, duty-free
17 cyberspace is only one of several
18 E-commerce-related trade initiatives the
19 administration has been pursuing. At
20 Seattle, we also worked with our trading
21 partners on building consensus on other key
22 U.S. objectives. Those are outlined in my
57
1 written comments.
2 The administration looks forward to
3 formalizing the broad consensus reached in
4 Seattle. It will continue to push both
5 multilaterally and bilaterally for an
6 environment in which E-commerce can flourish.
7 Thank you, and I'm happy to take
8 any questions.
9 CHAIRMAN GILMORE: Thank you, Mr.
10 Novick. And we will, in fact, come back to
11 some questions and answers.
12 Commissioner Guttentag is with us.
13 He represents the United States Treasury
14 Secretary. He has graciously agreed to
15 inform the Commission about the
16 administration's involvement and the
17 Organization for Economic Cooperation and
18 Development.
19 Joe, thank you.
20 MR. GUTTENTAG: Thank you, Mr.
21 Chairman.
22 I propose to limit my presentation
58
1 as much as possible, in line with the
2 Chairman's comments and all. I will make a
3 few brief comments now, and would like to
4 reserve the balance of my time, as may be
5 required, for the conclusion of the
6 discussion of these international issues.
7 You will recall that I presented
8 the administration's views on the
9 international aspects of electronic commerce
10 at the June meeting of the Commission. I
11 then described the work being done by the
12 OECD and urged the Commission to support
13 these efforts. We've had the opportunity
14 today to hear in more detail the work of the
15 Committee on Fiscal Affairs of the OECD, and
16 the issues facing the European Union and the
17 coordination by these two bodies.
18 The international aspects of
19 electronic commerce taxation are, of course,
20 important. The OECD is doing an excellent
21 job in hearing from all of the affected
22 stakeholders, the member countries and
59
1 nonmember countries -- and, of course, the
2 business community. Again, at this meeting,
3 I urge the Commission to support the
4 framework conditions which the OECD's
5 Committee on Fiscal Affairs has adopted and
6 which you have just heard described, as well
7 as to support the Committee's continuing
8 efforts to develop a consensus around
9 desirable norms.
10 As noted, many of the multinational
11 companies represented on the Commission, and
12 otherwise in this room, are participating in
13 the work of the Committee on Fiscal Affairs.
14 I believe that the approach set
15 forth in Mr. Aujean's paper, as to the work of
16 the European Commission with respect to
17 indirect taxes, can greatly help to inform our
18 deliberations. He told us that the EC relies
19 heavily on taxes imposed at the place of
20 consumption, where the recipients of the
21 goods and services and those who pay the tax
22 also receive the benefits resulting from the
60
1 taxes imposed.
2 Additionally, in his paper, you'll
3 notice the proposed reliance on voluntary
4 cooperation and compliance and the desire to
5 minimize sanctions. This approach mirrors, to
6 a significant extent, some principles
7 contained in proposals that we will discuss
8 tomorrow.
9 In addition, we would do well to
10 emulate the basic principles which guide the
11 OECD work: Neutrality, efficiency,
12 certainty, simplicity, fairness, and
13 flexibility. There should be no
14 discriminatory taxation permitted, and we
15 should use our new technologies to simplify
16 and improve the administration of all of our
17 tax system.
18 In the international consumption
19 tax arena, the key ingredient will be
20 cooperation between governments, between
21 governments and vendors. We should rely on
22 existing principles that have governed our
61
1 tax system generally and avoid being forced
2 into adoptions of new taxes or new tax
3 systems.
4 Technology and E-commerce
5 transactions are changing as we speak. We
6 must move now to assure that we will have the
7 needed revenues for our tax jurisdictions and
8 for the benefits they provide. At the same
9 time, we must move cautiously and make sure
10 that we understand the nature and dimensions
11 of any tax problems with respect to
12 international cross-border sales before we
13 move to solve them.
14 We should attempt to use existing
15 approaches to tax compliance, adapted to
16 today's world, and to new problems that arise
17 before heading out into unchartered seas.
18 Thank you, Mr. Chairman.
19 CHAIRMAN GILMORE: Mr. Guttentag, thank
20 you very much. We have now ample time for
21 the members of the panel to discuss any of
22 the international issues raised by any of the
62
1 presenters, and including, of course, our two
2 Commissioners.
3 The floor is now open for any
4 questions, comments, speeches.
5 Dean Andal?
6 MR. ANDAL: Okay. I was delighted
7 to hear what seems like wide agreement that
8 there should be no customs duties, no
9 international tariffs, on
10 digitally-transferred products. But you were
11 careful -- and I'm interested in hearing
12 Mr. Marsland and Mr. Aujean and Mr. Novick's
13 response, that you were careful to
14 distinguish between customs duties and
15 consumption taxes. And it seems like -- and
16 I understand the fundamental difference
17 between those two types of taxes.
18 But it seems like America and
19 Europe are heading in different directions on
20 that score. It looks like existing practice
21 and what you have in mind for the future
22 anticipates Europe having consumption taxes
63
1 on digitally-transferred products and
2 services, whereas most of the 45 states in
3 America who have a sales tax do not tax
4 digitally-transferred goods and services.
5 If that holds and America doesn't
6 change its mind and Europe doesn't change its
7 mind, aren't you going to be faced with
8 compliance problems in Europe as a result of
9 Americans selling digitally-transferred
10 products to Europeans? We don't collect it
11 here. And unless you want to understand the
12 consumer buying habits of every European, you
13 won't be able to collect it there.
14 I'm interested in Mr. Marsland,
15 Mr. Aujean, and Mr. Novick's response to that
16 scenario.
17 MR. MARSLAND: Thank you. I think
18 the key starting point is that the Value
19 Added Tax systems adopted by most OECD
20 countries are a very comprehensive tax basis.
21 They tax essentially everything with a few
22 exceptions -- usually food and items like
64
1 that. So that these tax bases are defined
2 very broadly, and therefore, they seek in
3 terms of neutrality to the tax every aspect
4 of consumption, whether it be delivered
5 digitally or physically. And there are
6 systems in place to deal with physical
7 goods, to capture that tax at the border.
8 There are systems in place to deal with
9 business-to-business transactions, in terms
10 of the self-assessment mechanism.
11 It's clear that the key challenge,
12 if one is to continue to tax those, is to
13 develop a mechanism to capture the sales from
14 businesses to consumers of digitized
15 products. That's the key -- the focus,
16 essentially, of the OECD's work in this area.
17 It's also clear that there are no
18 simple solutions. The OECD is looking at a
19 range of options that might present
20 themselves to deal with that, and no
21 conclusions have been drawn as yet.
22 MR. AUJEAN: Well, I have very
65
1 little to add to this. I mean, it's clear
2 that in the EU we have been used to the
3 individuals charged for business-to-business.
4 And we will continue and extend the scope of
5 this business-to- business scheme.
6 It is very straightforward and it
7 works, and it has produced good results. And
8 it has been recently broadened to deal with
9 telecommunication services. Because, as you
10 may know, we had exactly the same difficulty
11 with telecommunication services. It's now
12 resolved and it works.
13 And the same should also be done
14 with business-to-consumer. That is, we need
15 to change our legislation, and we have been
16 studying carefully the possibilities and the
17 situation, and we consider that it's
18 necessary to establish a level playing field
19 between the EU and the rest of the world in
20 both directions.
21 MR. ANDAL: Would you care to
22 outline briefly some of the alternatives
66
1 you're considering for the problem of
2 business-to-consumer digitized product sales
3 over the Internet?
4 MR. AUJEAN: First of all, it
5 should be clear that, as I said before, this
6 is a very limited segment of existing trade
7 today. And, secondly, even if we agree that
8 the principle of taxation should be
9 implemented as soon as possible, so as to
10 have a level playing field, we still are in
11 the process of discussing and dialoguing with
12 the business community.
13 Along the typical solutions, the
14 solution which is envisaged and on which the
15 working people of the Commission -- which is
16 a valuable Web site -- is that it engraves
17 the principle of registration, and none of
18 the possibilities are explored of electronic
19 registration of traders on the Net,
20 delivering online product to final consumers
21 in the EU.
22 That means an application of the
67
1 common existing VAT legislation through a
2 single place of registration for all trade
3 taking place within EU. This solution is a
4 solution on which we have been working at
5 present. It doesn't preclude the
6 possibilities mentioned -- and none of the
7 mentioned inter-works of this Commission, of
8 third-parties being involved in helping this
9 process. That may be, as well, a very
10 competitive solution which needs to be
11 explored.
12 CHAIRMAN GILMORE: Did anyone else wish
13 to comment on any of that?
14 Robert?
15 MR. NOVICK: I actually think the
16 question is better addressed to my colleague
17 from the Treasury Department, because I
18 didn't hear in either of the comments a
19 suggestion that the European Union is
20 thinking about tariffs on digitized goods.
21 And that certainly is consistent with what I
22 believe the consensus is, and certainly
68
1 consistent with the U.S. practice.
2 So I don't think we're moving in
3 different directions when it comes to
4 treatment of digitized goods at the border,
5 assuming you can even treat them at the
6 border. The question of the consumption tax
7 and registration requirements and other
8 aspects of the European system that they're
9 considering raises a whole set of other
10 issues that may actually implicate trade
11 concerns. But I reserve that until we see
12 what that system is. But with respect to the
13 tax treatment of digitized goods, that's --
14 MR. ANDAL: I'm always thrilled to
15 hear from the entire Clinton administration.
16 So Joe, do you have a view on that?
17 I'm delighted that we've resolved this
18 question of tariffs and customs duties. But
19 that belies a more fundamental question,
20 which is, if we're not taxing digitally
21 transferred products and services in the
22 United States, and they are in Europe, does
69
1 that not create a significant problem for the
2 Internet taxing system around the world?
3 MR. GUTTENTAG: I guess -- well, I
4 can't speak for the entire Clinton
5 Administration. I don't think you want all
6 of them speaking here, Dean. But I --
7 certainly, I agree with my colleagues from
8 the EU and the OECD. First, we are dealing
9 with a relatively small amount of business at
10 this time.
11 Secondly, I think it is up to the
12 jurisdictions involved, the European Union,
13 which has responsibility for Value Added Tax
14 within the -- with their 15-member countries,
15 they have determined that they wish to impose
16 a tax on services, including digitized
17 products.
18 In the U.S., those decisions are
19 made by each one of the states and by local
20 taxing jurisdictions. They should be free to
21 make their decision as to how to tax them.
22 Since the taxes that we're talking
70
1 here are consumption taxes, and we have
2 agreed that those are based on the place of
3 consumption, the fact that in one
4 jurisdiction they're not subject to tax and
5 in the others they are is a matter for the
6 local jurisdiction, it seems to me. It
7 really is not too relevant, Mr. Andal, as to
8 whether we're talking about goods or
9 services. That's a matter for the EU to
10 determine.
11 Once we deal with cross-border
12 issues and collection problems, then it is a
13 matter for us to be able to discuss them and
14 cooperate internationally to agree on the --
15 to try to deal with that in the best ways
16 that we can, with the guidelines that we
17 have. To provide certainty, to minimize the
18 sanctions and to rely to the maximum extent
19 on cooperation.
20 MR. NORQUIST: I had a question, I
21 think, for Mr. Novick.
22 I'm very happy that this Commission
71
1 voted almost unanimously in support of the
2 Clinton administration's negotiating position
3 with WTO and others on not having tariffs on
4 electronic commerce. And I'm glad to hear
5 you say that you think we're coming towards a
6 consensus on it.
7 I was wondering if you could tell
8 us, when you say "getting towards the
9 consensus," I guess I thought we had a lot
10 more consensus on free trade that seemed to
11 show up in Seattle recently.
12 So I'm wondering where the sticking
13 point is where you say it looks like we're
14 getting to consensus. Is there a country or
15 region or industry group that is not
16 cheerfully moving towards a tariff-free
17 electronic commerce internationally?
18 And others, if you want to answer
19 that as well.
20 MR. NOVICK: No, the issue is
21 really the way the WTO third ministerial
22 process worked. And that is to say that the
72
1 going-in assumptions about the ministerial
2 were that we would end up with a declaration
3 which would address the entire range of trade
4 issues, both going forward and certain issues
5 that people wanted resolved in Seattle, of
6 which the electronic commerce consensus was
7 won.
8 There were a range of
9 disagreements, as I think was well
10 publicized, regarding a range of trade
11 issues. Agriculture being among them, for
12 example, that led to the ministerial being
13 suspended, rather than reaching a final
14 declaration, which would have included the
15 consensus on E-commerce. So the issue is
16 really one of process and the time of which
17 the consensus will be formalized.
18 But what was clear during the
19 discussions in Seattle was that there was a
20 broad consensus on these issues. Countries
21 always, for tactical reasons and for
22 negotiating reasons, try to get something for
73
1 agreeing. And since nothing is agreed until
2 everything is agreed, the E-commerce
3 moratorium was not formalized at Seattle.
4 But we would expect that during the course of
5 next year, it will be.
6 So I haven't seen any indication of
7 countries that don't believe that continuing
8 their current practices in their interest, as
9 well as the interest of the technology moving
10 forward.
11 CHAIRMAN GILMORE: Mr. Lebrun?
12 MR. LEBRUN: Mr. Marsland, if I
13 understood you correctly, you said that 28 of
14 the 29 OECD countries have consumption taxes.
15 I assume that those are nationally-imposed
16 and collected taxes, and you don't have the
17 situation in any of those countries, as we do
18 in the United States, where you have 50 or 51
19 jurisdictions that have the authority and the
20 jurisdiction to choose whether or not to
21 impose such consumption taxes. Am I correct
22 on that?
74
1 MR. MARSLAND: You're correct. I
2 was referring to national consumption tax
3 systems. And in answer to the second part of
4 your question, I believe there's only one
5 exception, which would be Canada, which has
6 provincial sales tax systems.
7 MR. LEBRUN: The other countries,
8 the individual sub-governments, if you will,
9 do not have either the jurisdiction or the
10 authority to impose and collect taxes at the
11 local level; would that be correct?
12 MR. MARSLAND: I must admit I'm not
13 an expert. In Canada, the provincial
14 governments have the authority to levy sales
15 taxes. I'm not sure if that's the case in
16 other federal jurisdictions, such as
17 Australia.
18 MR. LEBRUN: If I recall, the
19 Canadian Constitution is just the opposite of
20 our Constitution. In Canada, the reserve
21 power is with the federal government and the
22 provinces have the delegated power; isn't
75
1 that correct?
2 MR. MARSLAND: In Canada, the
3 provinces have the authority to levy direct
4 taxes, which has been interpreted as including sales
5 taxes -- retail sales taxes, and the federal
6 government has the authority to levy any form
7 of taxation.
8 MR. LEBRUN: Thank you,
9 Mr. Chairman.
10 CHAIRMAN GILMORE: Were you driving,
11 Gene, that the other countries of the
12 European Union -- the different provinces,
13 for example of France or Germany, is that
14 what you were inquiring of?
15 MR. LEBRUN: It's my understanding
16 that that's the case. If I go to France -- I
17 just got back from Italy and Turkey and
18 Greece, and the taxes there are nationally,
19 federally-imposed taxes, not Athens or
20 Istanbul or Florence or Milan or something
21 like that.
22 CHAIRMAN GILMORE: So the local units --
76
1 provinces, states, or whatever of the various
2 European states -- do not have the power to
3 impose taxes?
4 MR. LEBRUN: That's my
5 understanding, but I stand to be corrected if
6 these gentlemen tell me otherwise.
7 MR. AUJEAN: Yes, if you will allow
8 me. With the adoption of the EU VAT system
9 in the '60s, it was clearly in the
10 legislation that no other alternative taxes
11 could be imposed -- or sales taxes could be
12 imposed that the EU -- within the EU by
13 member states. So the response is no, there
14 is no other alternative or sales taxes within
15 the EU legislation.
16 CHAIRMAN GILMORE: That was a dramatic
17 surrender of sovereignty by each of the
18 states, isn't that right?
19 MR. AUJEAN: Each of the member
20 states agreed to have this common, general
21 rules for VAT, but kept sovereignty over the
22 rate within certain limitations and conceded
77
1 during this, they agreed not with the
2 abolition of border controls in 1993 within
3 the union, to effectively agree on a minimum
4 set of rules concerning the rates, but kept a
5 very large room for maneuver. And they have
6 different rates in each of the 50 member
7 states.
8 CHAIRMAN GILMORE: You don't mean the
9 VAT's different for each individual state, do
10 you, each individual nation?
11 MR. AUJEAN: Every member state has
12 the right effectively to keep different
13 rates. And this is one of the reasons,
14 certainly, why in some areas they are so keen
15 to have taxation at the level of country of
16 consumption.
17 CHAIRMAN GILMORE: You have taxation on
18 services all through the European Union, is
19 that correct?
20 MR. AUJEAN: Concerning taxation of
21 services, which also was introduced in the
22 late '60s when the VAT system was adopted,
78
1 all services are subject to taxation. There
2 are also rules determining the rate, and also
3 the rules concerning the place of taxation
4 which, as I said before, are based on the
5 principle of taxation as a country of
6 establishment of the trader, which is a great
7 simplification of EU trade until the
8 business-to-business enters the scene, for
9 which we have this reverse charge mechanism
10 in order to simplify the collection of tax in
11 the country of consumption.
12 CHAIRMAN GILMORE: So you have a level
13 playing field between goods and services all
14 throughout the European Union with respect to
15 taxation, is that right?
16 MR. AUJEAN: Yes, absolutely. And
17 the reason for this is that all transactions,
18 be they goods or services, are effectively
19 taxed, even in interstate commerce between
20 business and consumers of different states.
21 CHAIRMAN GILMORE: Let me ask
22 Mr. Marsland and Mr. Aujean a question -- and
79
1 I'll keep my eye open for other Commissioners
2 as well, of course.
3 If a person in France buys an
4 object or a good from America and it is
5 shipped to France, you would rely upon
6 interdicting that good at the border at
7 customs, identifying it, and then charging
8 the VAT tax to the consumer who ordered it;
9 is that correct what I understood you to say?
10 MR. AUJEAN: Yes. If goods are
11 shipped from any country outside the
12 community, they are subjected to formalities
13 at importation within the community. Then
14 they will pay VAT at the place of importation
15 and will be able to move freely within the
16 rule of the community of the 50-member state.
17 CHAIRMAN GILMORE: Well, I'm sure it
18 would.
19 The other question, though, is
20 what's the difference between that and a
21 tariff? A tariff is a duty imposed on a
22 large box of goods that would be
80
1 imported-exported from one country to the
2 other. It affects, of course, the ultimate
3 price, because the tariff is being added to
4 it. It's designed to do that for some
5 reasons. Sometimes it's revenue, other times
6 it's something else. It's an effort to do
7 protectionism.
8 But that would be a tariff. But on
9 this single good purchased by this
10 individual, and by the aggregate millions of
11 individuals, isn't that the same way of
12 imposing a tariff by a VAT tax proposal?
13 You're imposing an additional cost
14 on the good at its point of entry.
15 MR. AUJEAN: No, we are simply --
16 by imposing VAT at importation, we are simply
17 putting all the goods that were produced
18 within the EU or imported on a level playing
19 field. And that has nothing to do whatsoever
20 with any kind of protectionism given the
21 level playing field which results from the
22 application of this taxation at importation.
81
1 All the goods suffer exactly the
2 same rate of taxation, whether they're
3 domestically-produced or imported.
4 CHAIRMAN GILMORE: But the good in
5 America might be cheaper. And the reason is
6 it's not produced subject to a VAT tax at its
7 point of sale. But when it enters one of the
8 nations of the EU, an additional charge is
9 placed on it for the consumer in the EU.
10 Isn't that right?
11 MR. AUJEAN: No, because if the
12 price in the United States is lower, the
13 application of the VAT at importation will
14 bear on the lower price, and consequently
15 will keep this product competitive, vŤs-a-vŤs
16 of domestically-produced goods.
17 CHAIRMAN GILMORE: In the EU.
18 MR. AUJEAN: According to your
19 assumption of a higher price.
20 CHAIRMAN GILMORE: Yes. The last
21 question I have is what do you do about
22 someone in Germany who decides to buy,
82
1 download, a digital product from America? He
2 purchases and downloads an album: "Duke
3 Ellington in Paris," for example, or
4 something like that. He downloads that
5 product. Or for that matter, a pamphlet or a
6 report, that otherwise he would have to go
7 downtown and purchase.
8 How do you tax that under the
9 system?
10 MR. AUJEAN: Under the present
11 system, if this supply is made from another
12 member state or domestically, whatever,
13 within the Union, it is taxed at the place of
14 establishment of the supplier.
15 CHAIRMAN GILMORE: How do you know about
16 it?
17 MR. AUJEAN: It's quite simple, and
18 that's why the system works within the EU
19 this way. Because every supply of service on
20 the net will be invoiced with VAT by the
21 supplier. And the compliance is effectively
22 easy, because the supplier can be controlled
83
1 by the tax authorities of the same member
2 state where he is established.
3 CHAIRMAN GILMORE: What if the supplier
4 is an American company?
5 MR. AUJEAN: Then when the goods or
6 services, more precisely, in our
7 denomination, are brought into the United
8 States at present, given our rules of
9 taxation at the place of establishment, there
10 is no taxation taking place. And this is why
11 we are thinking to changing this rule, as
12 well as reversing the situation for European
13 trade, which today is taxed when exporting
14 services to the U.S.
15 CHAIRMAN GILMORE: Delna Jones?
16 MS. JONES: A couple of questions.
17 First of all, let me see if I'm correct. In
18 your explanation of the difference between a
19 tariff and a tax, it wouldn't matter whether
20 the product came from China, the U.S., or any
21 other country. You would impose a
22 consumption or use tax or sales tax on that
84
1 product at the border, no matter its country
2 of origin; is that correct?
3 MR. AUJEAN: Let me be clear. If
4 this is a good which is effectively a
5 material good imported within the EU, we will
6 apply customs, duties and VAT at importation.
7 The tariffs will be -- the tariff, which is a
8 common, external tariff for the EU -- it will
9 be the same whatever the country of
10 importation within the EU is.
11 And the VAT will be applied at the
12 same time and will be dependant upon the
13 member states of importation.
14 MS. JONES: I know you were
15 attempting to clarify, and I thought that
16 that was what I was doing, but I don't know
17 that I came away with the same clear
18 understanding.
19 Let me pose another question, if I
20 may. Currently your producers of product are
21 being taxed, or suppliers, as I think you
22 used the term. And that tax rate can vary
85
1 among the countries, but they are all under
2 the same system; correct?
3 MR. AUJEAN: Absolutely.
4 MS. JONES: Okay. Do they also
5 have the same system of taxation in
6 relationship to the income produced by those
7 businesses? And do they tax that at a
8 varying rate? Do they have a unifying system
9 of taxation? Or how do they determine the
10 other piece of that taxation?
11 MR. AUJEAN: Concerning income
12 taxation, there is no harmonization at all
13 within the EU. And consequently, income
14 taxation or company taxation is something
15 which is totally left to the will and
16 sovereignty of each member state.
17 MS. JONES: Thank you.
18 CHAIRMAN GILMORE: Mayor Kirk?
19 MAYOR KIRK: Mr. Smith, you looked
20 like you were off the board over there, so,
21 Fred, I want to go back on your analogy of
22 our Chinese garlic sellers. Help me through
86
1 that. And it's obviously you believe in a
2 fairly tax-free, at least, economy and
3 society in that sense. But in the case of
4 the Chinese garlic sellers or my wife or, you
5 know, somebody's wife here. One of us. We
6 cook. We want garlic. We order Chinese
7 garlic. How does that garlic get here? How
8 does that garlic physically get from my
9 Chinese garlic sellers to Dallas, Texas?
10 MR. SMITH: I assume it gets here
11 the same way that other goods would, by
12 Parcel Post or one of the mail systems out
13 there.
14 MAYOR KIRK: But through the mail
15 systems and then carried, presumptively, on a
16 ship or an airplane, and then over streets or
17 roads or whatever?
18 MR. SMITH: It's a physical good.
19 Some of the problems we're dealing with here
20 earlier about informational goods don't
21 involve that.
22 I think it was -- one of the
87
1 points -- I wasn't quite bored. I was trying
2 to understand -- there's a man named Michael
3 Sailor who was just interviewed in Business
4 Week, and he makes this incredible global use
5 of this. He suggests that we're about an
6 eight and a half trillion-dollar economy,
7 about half of which is wasted, he says.
8 People having the wrong train, the wrong
9 operation, the wrong goods, the wrong time.
10 And he thinks we will be able through this
11 Internet system to create about a $4 trillion
12 reduction in the cost.
13 How in the hell are we going to tax
14 that? I don't know.
15 MAYOR KIRK: My point to you is
16 that -- and I agree with you, I think it may
17 grow to a $4 trillion. I hope it grows to a
18 $10 trillion economy. But whatever the
19 point -- I mean, unless at some point far in
20 the future, you and I can't materialize or
21 envision at some point those goods still have
22 to be delivered by some way, usually over
88
1 streets, highways, air transport. And in the
2 general sense, we still have to find some way
3 to build those streets and to pay for those
4 highways and those airports. I mean, you
5 would agree with that.
6 So even you would agree that some
7 level of taxation is necessary to make sure
8 that we have roads and highways just to
9 deliver all of the stuff we're going to buy;
10 is that right?
11 I mean, just -- because in your
12 broader sense -- it's real fun to laugh about
13 no taxes and -- the only thing I would just
14 commend to you, since you're a movie buff --
15 I haven't seen "The Seven Samurai," but since
16 I have a 10- and a 7-year-old, I have seen
17 "The Lion King" 4 or 500 times. And I must
18 admit I liked it the first 100 times I saw
19 it. But you might go -- if you haven't seen
20 it, you ought to see it. There's two
21 wonderful characters in the movie, Timon and
22 Pumba. I know it real well. And they have
89
1 this wonderful, dangerous philosophy that
2 they live by, that to some degree sounds like
3 the same song as these anti-tax advocates.
4 It's called acumba matada (phonetic). We
5 have no problems, no worries, everything's
6 fine. We live in this paradise. We don't
7 give a damn about anybody else.
8 And the message of the story is
9 that that's a pretty great philosophy for
10 fun, but not a good, real way to build a
11 community. And only until you come back and
12 everybody pays their fair share, you can't
13 grow and prosper as a community.
14 So in that sense, I might commend
15 "The Lion King" for you the next time you're
16 sitting on top of your hill thinking where
17 you might want to rape and pillage next.
18 MR. SMITH: What we want to do is
19 probably exchange movies.
20 But you raised a very interesting
21 point, and I think it's a serious one. The
22 question is, obviously there is -- I mean, I
90
1 live in Washington, D.C., and I recognize bad
2 roads can be a problem in any major city.
3 It's obviously a question of how we
4 go about providing the essential services of
5 our communities? And not just cities, of
6 course -- counties and states and national
7 governments.
8 The challenge is whether or not the
9 way we've done it in the past has to be given
10 some kind of sacred status. I think as the
11 administrative costs and the potential risk
12 we face change -- I mean, we used to fine the
13 United States by tariffs. We decided that
14 that wasn't the best way to do it.
15 I mean, the point I'm trying to
16 make is just because it's an owed tax doesn't
17 mean it's a good tax. And I do believe in
18 the area of like some of the services there
19 is the potential of creating some alternative
20 ways, like highway pricing and so on,
21 through -- your city has one of the more
22 innovative toll road systems in America, and
91
1 getting better and better. And you're one of
2 the centers of the Internet commerce in the
3 world. All of which allow us potentially to
4 do a much more creative job, rather than
5 broad taxes, to move us toward taxes which
6 actually -- where the beneficiary actually
7 directly benefits from the thing he's paying
8 for.
9 CHAIRMAN GILMORE: Stan Sokul?
10 MR. SOKUL: Thank you. Plus
11 there's always the gas tax.
12 I have -- I'm not an expert on
13 international tax. I have some -- just a
14 couple of really basic questions here.
15 When a person in France orders a
16 book from, let's say, amazon.com, and you
17 stop the book at the border to collect tax,
18 the VAT tax, who does the collection? Is
19 there a French official at the post office or
20 do you want -- in your ideal world, would
21 Amazon do the collecting of that and remit it
22 to you?
92
1 MR. AUJEAN: First of all, today
2 Amazon is established in Europe, because they
3 found it more economical to effectively run
4 their stock there.
5 MR. SOKUL: Let's talk about
6 Chinese garlic, then.
7 MR. AUJEAN: At the end of the day,
8 their current application would be much more
9 simple, because Amazon will deliver the goods
10 from within the EU, and will just do this
11 under our distance-setting regime, which is
12 extremely simple to apply.
13 But would that be the case,
14 effectively, if the goods were imported from
15 the U.S., it would have to go through the
16 customs procedure to be imported within the
17 EU. And once again, I repeat, then there
18 would be application of the current tariff
19 from book, external tariff of the EU from
20 book, and application of VAT at the point of
21 importation.
22 If the point of importation is,
93
1 let's say, Rotterdam, which is one of our
2 main harbors for such imports, it would be
3 the Dutch VAT rate which would be applied.
4 If the point of import is France, it would be
5 the French VAT rate which would be applied.
6 And that being done, the book will
7 circulate after that without any other burden
8 within the EU.
9 MR. SOKUL: But how is it applied?
10 In other words, the French citizen paid by
11 American Express and on the Amazon web page
12 paid, submitted the information and thought
13 the transaction was over. How do you get the
14 extra tax -- not the extra tax, but the VAT
15 tax applied to that transaction?
16 MR. AUJEAN: Usually quite simply,
17 because there are agreements between the
18 customs administration and most of the
19 Express carriers to have expressed delivery
20 and the VAT -- and the customs apply on the
21 invoicing price provided to the Express
22 carrier who will take care of the --
94
1 MR. SOKUL: So Fed Ex or UPS?
2 MR. AUJEAN: Absolutely.
3 MR. SOKUL: Okay. Not -- well,
4 putting aside from Amazon. Not Amazon, it
5 would be Fed Ex or the common carrier?
6 MR. AUJEAN: Well, it might be
7 Amazon or it might be a third party
8 designated by Amazon who would be in charge
9 of making the duty and respecting the
10 procedure for customs.
11 MR. SOKUL: I guess in our country,
12 where we have states' taxation -- if a
13 citizen from Virginia bought some wine for
14 someone in France, they would have to submit
15 a use tax. You don't expect a French company
16 to figure out which tax might apply in one of
17 the 50 states and collect that for the state
18 of Virginia, do you?
19 MR. AUJEAN: That might be the case
20 in some cases, that the company has
21 effectively, first of all, to know what rate
22 of duty. But moreover, because you talk
95
1 about wine, what rate of excise duties and
2 sales taxes might have to be applied in some
3 jurisdictions.
4 MR. SOKUL: I have one other quick
5 question, which isn't based upon anything
6 that either of you have said today. It's
7 based upon something, as I try to follow
8 what's going on in the OECD or the EU, I read
9 officials saying -- and I don't believe I've
10 read either of you saying this, but it has to
11 do with the notion of harmful tax
12 competition. That you're setting up these
13 systems because everyone has to cooperate,
14 because we can't have harmful tax
15 competition.
16 To whom is harmful tax competition
17 harmful? And what is wrong with it?
18 MR. AUJEAN: Well, I don't really
19 think that this is a subject for today, but
20 I'm totally available to respond to this
21 question.
22 The harmful tax competition project
96
1 is a matter dealing with spatial schemes
2 provided between member states of the union
3 by some tax administration in favor or
4 notably, namely non-resident companies and
5 with some kind of re-fencing of these
6 measures, vis-a-vis of domestic tax bases.
7 And, this was considered to be harmful
8 to the extent that, in fact, it implies real
9 and effective distortion of competition through
10 very low effective level of taxation being
11 reserved to transactions made with only
12 non-residents.
13 So this is a kind of situation in
14 which we have been dealing with in terms of
15 harmful tax competition.
16 MR. ANDAL: Instead of a book from
17 Amazon.com, what if someone in Paris bought
18 the soundtrack to "The Lion King"? And
19 instead of it being delivered in physical
20 form, it was sent from Burbank, California,
21 to Paris in digital form, one computer to
22 another and downloaded by the French
97
1 customer. How would you enforce a VAT tax on
2 that transaction?
3 MR. AUJEAN: Well, it depends on
4 whether the customer is a business or a final
5 consumer.
6 MR. ANDAL: In this case it's an
7 individual.
8 MR. AUJEAN: In the case of an
9 individual --
10 MR. ANDAL: Presuming, of course,
11 that French businesses don't have much need
12 for the soundtrack of "The Lion King."
13 MR. AUJEAN: In that case,
14 effectively this is a case of we are trying
15 to -- this is effectively rather a difficult
16 case for getting a simple system of voluntary
17 compliance.
18 MR. ANDAL: It's taxed now, right?
19 MR. AUJEAN: No. At the present,
20 it will not be taxed, because it does not
21 belong to this category of services for which
22 a place of supply is already within the
98
1 community. It is, for the time being, a kind
2 of supply for which the place of supply is at
3 the place of the establishment of the
4 supplier in the United States, in the case
5 you gave.
6 We should change our legislation in
7 this respect, based on the scheme on
8 voluntary compliance by trader, by making as
9 simple as possible the registration and, as I
10 say, registration should certainly be made in
11 a single place for all the 15 EU member
12 states who ask to be instrumental.
13 MR. ANDAL: In my example, you
14 really only have two places you can assert
15 that tax obligation. You'd be either
16 counting on Walt Disney to voluntarily
17 collect it for you, or you'd be counting on
18 the French customer to identify the sale for
19 you. That's basically your two options, and
20 those are unappealing, I think.
21 MR. AUJEAN: We have at the present
22 explored more options than that, and we are
99
1 studying in more detail two options. One is
2 to request the U.S. supplier to register
3 within the EU through either a direct simple
4 way of electronic registration or through a
5 fiscal representative which you could design
6 within the EU.
7 MR. ANDAL: And that's where I'm
8 getting lost. Who would register?
9 MR. AUJEAN: The supplier of the
10 service.
11 MR. ANDAL: In this case, Walt
12 Disney?
13 MR. AUJEAN: In that case, the U.S.
14 supplier of service.
15 MR. ANDAL: Okay.
16 MR. AUJEAN: Would register in the
17 EU. As it -- you know, this is exactly the
18 situation where today a number of American
19 companies are involved in transactions taking
20 place within the EU as intermediaries in
21 these transactions, and they register and
22 they pay and collect VAT when they are
100
1 implied into this kind of intermediary
2 situation. And we have no major problem of
3 compliance with these companies.
4 CHAIRMAN GILMORE: Okay. I understand.
5 Mr. Smith?
6 MR. SMITH: This, I think, is the
7 nub of what we're wandering around, and the
8 Governor made the point earlier. In a world
9 where everything is physical and lumpy --
10 big, big suppliers and so forth -- and then
11 the kind of world where you have a handful --
12 well, thousands of suppliers in the United
13 States and around the world registering with
14 the OECD or with EU it makes a lot of sense.
15 But when you literally think of the
16 bulk -- the liberating force of the Internet,
17 where literally our wives, our children, our
18 friends can all be suppliers. The idea that
19 they're going to be able to create tax agents
20 in Europe boggles the mind, especially when
21 these things can be encrypted, when they can
22 be -- you know, the difference between I'm on
101
1 the phone with my sister-in-law for an hour;
2 has she downloaded three books or has she
3 just been talking to me? We don't know those
4 kinds of things, and I think we're going to
5 have to move to a different tax system.
6 I can understand why they liked the
7 old tax system, but it seems to be
8 increasingly unlikely in the modern world.
9 MR. ANDAL: Mr. Smith, just one
10 final question. I'm sorry to do so much of
11 this, but it's going to be relevant to what
12 we do later.
13 Mr. Aujean, take my example one
14 step further. And that is if we're going to
15 count on Walt Disney to collect the tax for
16 you, voluntary or otherwise, how does Walt
17 Disney know that their customer's in France?
18 MR. AUJEAN: Quite easily, because
19 he will have received an order with an E-mail
20 address which will indicate elements which
21 conveys the place of taxation to be for
22 delivery within the EU to an E-mail address
102
1 which can be effectively assessed.
2 But these are just examples of the
3 way we are still thinking to this question.
4 And we have not yet reached a final decision
5 nor a final conclusion on this.
6 CHAIRMAN GILMORE: The first hand up was
7 Mr. Pincus' and then Mr. Pottruck.
8 Andrew?
9 MR. PINCUS: Thank you, Governor.
10 I was going to ask a question similar to
11 Commission Andal's, because I guess I differ
12 a little bit from Mr. Smith. It seems to me
13 the multiplicity of sellers is one issue, but
14 if there is a physical good, at least there
15 is a place. But I was going to raise this
16 question of how do you know where the
17 recipient is? Because I don't think actually
18 that there's a way to tell, necessarily,
19 where the E-mail address of the recipient is
20 from. And there are people on this
21 Commission more versed than I in technology.
22 But I know enough to know that there are
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1 enough techniques that you can use to mask
2 where you are and intermediaries that one can
3 go through.
4 And so it's always seemed to me
5 that one of the big issues in this area is
6 determining -- even if you can get over a lot
7 of other hurdles -- where the recipient is.
8 MR. SMITH: One point in that is a
9 point that you encompass, I know a lot. One
10 of the geniuses of the Internet and the
11 electronic information sharing it provides
12 is, for example, the U.S. credit database
13 industry, which by creating a lot of
14 information sharing, makes it possible to
15 democratize credit, and so forth, lower
16 credit costs and so on.
17 If those sharing arrangements are
18 subject to a subpoena from a taxing
19 authority, we're going to chill a lot of
20 voluntary information sharing arrangements.
21 And I think in many ways impoverished our
22 ability to reach down to the less well-served
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1 people in our very societies, because we'll
2 be trying to collect taxes.
3 MR. PINCUS: Well, I just -- I know
4 you want to respond, but I think there are
5 also -- again, with physical goods, one has
6 to give the address to which they're going to
7 be delivered. And therefore, some personal
8 information has to be provided to make the
9 transaction work.
10 With respect to digital delivery of
11 goods, I think there is an issue about how
12 you require the recipient to provide
13 information, and what it is that really is
14 essential for the completing of the
15 transaction.
16 MR. MARSLAND: I think you've
17 touched upon one of the challenges and, you
18 know, the term -- if you want to apply the
19 place of consumption principle, how do you
20 determine that in a practical way?
21 That's one of the issues we're
22 looking at with the technical advisory groups
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1 with business, and I think there are a number
2 of criteria that you look at. The place
3 declared, obviously that's not going to be
4 enough in itself. The credit card
5 information, because there has to be means of
6 payment. Perhaps various other issues, but
7 we're working with the business community to
8 look into those.
9 CHAIRMAN GILMORE: Mr. Pottruck?
10 MR. POTTRUCK: Well, I think that
11 whether you are for or against taxes on the
12 Internet, it's clear that the issue of
13 unknown outcome is this whole issue of how
14 you deal with digital products. Because of
15 the problems of capturing their movement, the
16 question of whether you really know where the
17 buyer is -- and E-mail addresses in
18 cyberspace may or may not be identifiable.
19 And I'm sure we could spend a lot of time
20 giving one example after another of a digital
21 record or a digital book or something else
22 delivered as a reason why we can't solve the
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1 problem.
2 But I would suggest that we still
3 are going to live in a world of lumpy objects
4 for a long time. I continue to like to eat
5 lumpy food, and I can't imagine digital food
6 or living in a digital house.
7 My son plays digital golf, but I
8 prefer those little round balls, which I have
9 to buy somewhere.
10 So I'm just -- I just would like to
11 suggest that as we try to come at this
12 problem, we can easily get hung up with the
13 examples that are almost imponderable at this
14 point, that no one has a solution for, that
15 we will have to continue to examine. But we
16 are going to continue to live in a world of
17 enormous physical objects for a long time.
18 And if we can come up with any approach -- or
19 decide that we should not do, if that's the
20 decision we reach, looking at physical
21 objects -- whatever we decide, I think we
22 should -- I think we'd be well-served to see
107
1 what -- to examine the world of the solvable
2 and try to figure out what can be done or
3 choose that we think the right answer is to
4 continue with the tax moratorium, but not
5 because we can't figure it out, but because
6 we have figured it out and this is the
7 approach we think is best for the economy and
8 the American people, if not the people of the
9 world.
10 CHAIRMAN GILMORE: Governor Leavitt?
11 GOVERNOR LEAVITT: I'd like to just
12 address the panel on the same subject as
13 Mr. Pottruck.
14 It seems evident that this problem
15 of digital -- digitally-transmitted
16 information and product is a sticky and
17 difficult one. You have chosen to have your
18 tax system in the EU be a very broad system.
19 This whole debate seems to me to boil down to
20 a question of whether the sales tax is
21 feasible in the next century.
22 It may not be or it may be in
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1 degrees. One alternative on digital products
2 might be to eliminate sales tax or the VAT
3 tax on matters that are -- that have the
4 physical equivalent. Maybe that we decide
5 that video movies downloaded aren't -- don't
6 have tax, nor does the version that you get
7 at the video store. That a book may not be a
8 sales-taxable item, nor will the
9 digitally-delivered version.
10 Is that entering into your
11 discussions at all? It would be a diversion
12 from your -- from your philosophy of a
13 broad-based tax system. But have you had
14 discussions on that?
15 MR. AUJEAN: That was clearly
16 discussed before the Ottawa meeting within
17 the EU and the European Council -- the
18 European Council of Ministers -- came to a
19 clear decision that first of all no new taxes
20 would apply to electronic commerce, and that,
21 on the contrary, the existing VAT system
22 should be adapted to be able to deal with
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1 these new challenges and opportunities.
2 And that's clearly what we're doing
3 at the present. That being said, it's clear
4 that we have not yet every piece of every
5 solution ready yet.
6 CHAIRMAN GILMORE: Joe Guttentag?
7 MR. GUTTENTAG: Thank you,
8 Mr. Chairman.
9 I certainly agree with
10 Mr. Pottruck. Right now, the volume of sales
11 that we're talking about on these digitized
12 goods, I doubt if they exceed 1 percent of
13 all of the goods that are being bought and
14 sold through electronic commerce. I think
15 all of us would agree that we shouldn't allow
16 those transactions to guide us with respect
17 to the other 99 and some odd percent.
18 My comments -- this is a
19 complicated area. My comments and my
20 discussions with Mr. Andal were based on the
21 EU system, which Mr. Aujean described, which
22 was going to go in place, because changes are
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1 taking place there.
2 We are looking now -- and one of
3 the processes which they've described that's
4 going on at the OECD is the United States is
5 actively participating in this -- in these
6 meetings at the OECD where we have the
7 business community there, we have the
8 experts, we have the technical help, and we
9 have the European Union to discuss what is
10 the best way to deal with these issues,
11 taking into account the factors which have
12 been agreed upon. And certainly the
13 simplicity, the certainty, is important.
14 There's no question as goods flow
15 across the borders and flow internationally
16 that we are going to need more cooperation
17 internationally.
18 We don't want to encourage people,
19 Mr. Chairman, to buy overseas in order to
20 avoid a tax which they would incur if they
21 buy from a local merchant. That doesn't seem
22 to me to be a sound way of proceeding.
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1 Can I suggest, Mr. Chairman, that
2 the papers, because of the time limits here,
3 the papers which were prepared by
4 Mr. Marsland and Mr. Aujean were not
5 completely presented. And I suggest that
6 those papers be included in the record of
7 this meeting, and that also they be -- and
8 maybe Mr. Smith's, too, if he spoke very
9 quickly -- and that they also be invited to
10 further respond to any of the questions that
11 came up and submit those for the record?
12 Thank you, Mr. Chairman.
13 CHAIRMAN GILMORE: Certainly people
14 should be permitted to submit their paperwork
15 and also any responses to questions that come
16 before the panel. I think they will be very
17 helpful to us as we move towards Dallas.
18 And we still have more time here
19 today as well for some additional commentary,
20 as well as questions. But we have people who
21 do want questions.
22 Let's see. Mr. Sokul, then
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1 Mr. Pottruck, and then Mr. Norquist.
2 MR. SOKUL: I have another
3 question. First, just to pick up on
4 something that Mr. Guttentag just said -- and
5 this isn't a question, it's just a comment.
6 Under present rules, as I understand them, if
7 I'm living in Virginia and I buy a good from
8 the European Union or OECD nation that has a
9 VAT, I owe a U.S. or Virginia state use tax,
10 but there's no means of collecting it unless
11 I self-report it. So that good is
12 essentially tax-free.
13 If we establish a major collection
14 system in the United States, which captures
15 those items, is that going to drive U.S.
16 purchases offshore? I don't know, I'm just
17 asking.
18 My specific question is as to
19 privacy, one of the proposals that were
20 submitted to us -- I think it was called the
21 Easy Clear Proposal. I don't -- I know
22 you're not familiar with it. There was a
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1 line in it which caught my attention that
2 said -- and that proposal would allow U.S.
3 businesses -- it was a software package to
4 know what the appropriate VAT so that it
5 could be collected and remitted to VAT
6 states. And it said, you know, the U.S.
7 merchant would buy the software, of course
8 adopt our privacy policy, and then, you know,
9 go into operation.
10 And maybe questions for Mr. Pincus
11 is -- because I know that you're involved in
12 this -- to what extent would a tax collection
13 software internationally versus United
14 States, and what's going on with privacy
15 negotiations, require U.S. businesses to
16 adopt European privacy rules?
17 MR. PINCUS: Well, obviously,
18 nothing right now does. And I think, you
19 know, it would be a question of how this all
20 plays out as we move forward. But, you know,
21 the administration has taken the position
22 consistently that privacy is an important
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1 value. But we believe that in the United
2 States we have a different way of protecting
3 that important value. And it's through a
4 combination of government regulation for very
5 sensitive information, but industry
6 self-regulation in other contexts.
7 And we're proud of the way that
8 that system is developing. So I don't think
9 that we would want to junk it for something
10 else.
11 Our negotiations with Europe?
12 They're still ongoing. I mean, right now we
13 have an agreement that was reached at either
14 the last or the EU/U.S. summit before last
15 with respect to enforcement, while those
16 discussions are ongoing, and that's still in
17 place.
18 CHAIRMAN GILMORE: Mr. Pottruck?
19 MR. POTTRUCK: I have a question.
20 I thought it was interesting to listen to the
21 presentation on the EU VAT tax. If I
22 understood what Mr. Aujean said, originally
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1 the different states had different sales tax
2 or VAT tax structure, and they got together
3 and agreed on a common structural framework,
4 definitions, what's in and what's out, what
5 products are. But each country retains the
6 sovereignty to set the rates. And those
7 rates can be different by product, or it's
8 one rate per country?
9 MR. AUJEAN: No, the rates are
10 fixed according to the following rules.
11 First of all, there is a minimum rate under
12 which no one can go. And moreover, there is
13 the possibility of applying reduced VAT rate
14 to a given release of goods or services which
15 are a low-level reduced rate. And no one
16 could apply a reduced rate to a good or
17 service which is not on this list. At the
18 same time, no one is obliged to apply a
19 reduced rate to these goods. And some member
20 states have a single VAT rate across the
21 board, with no reduced rate, while others
22 have decided to have a minimum reduced rate
116
1 and some goods and services on the list, and
2 a standard VAT rate that will be given to all
3 other goods and services.
4 MR. POTTRUCK: So if I'm
5 understanding what you're saying, there was a
6 set of definitions, and in fact, one rate was
7 applied to everyone, and then the countries
8 had the opportunity to reduce those rates if
9 they wanted to charge something less than the
10 so-called standard EU VAT.
11 Am I hearing that correctly?
12 MR. AUJEAN: Provided the good or
13 the service is on the list agreed together.
14 MR. POTTRUCK: Right. So I realize
15 this was all done in the '60s. This was set
16 up in the '60s. How long did it take -- I
17 mean, we talk about our states, which are at
18 least theoretically part of the same
19 country -- trying to come up with something.
20 So here's a set of foreign countries, totally
21 separate nations coming together to form
22 something like this. Is this part of our
117
1 dialogue in the three meetings we've had and
2 in some of the papers we have, the ability of
3 a bunch of countries to pull this off is
4 something that I think would be of interest
5 to some people here.
6 How many years did this discussion
7 take to actually negotiate and set this up?
8 MR. AUJEAN: From the late '60s,
9 beginning of the '70s, the VAT system was
10 introduced in all member states, but with
11 border controls, which meant that in that
12 case, there was total freedom concerning the
13 rates, because you had to go across border
14 control to import goods from another member
15 state, including for private citizens.
16 Then since 1993, we have abolished
17 border controls. We have put into force this
18 minimum rate regulation, and since then there
19 is a total freedom to purchase everywhere
20 within the EU with this system of rates.
21 So you can say that between '70 and
22 1992, we have elaborated on the system so as
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1 to reach this new situation, which is total
2 freedom of separation within the EU.
3 MR. POTTRUCK: Thank you.
4 CHAIRMAN GILMORE: Mr. Norquist?
5 MR. NORQUIST: What is the minimum
6 rate for the VAT in Europe?
7 MR. AUJEAN: The minimum rate for
8 the reduced rate is 5 percent. And, for
9 example, it's applicable to food stuff. And
10 the standard minimum rate is 15 percent. So
11 we have rather high rates, and they
12 contribute to about 40 percent of the total
13 tax receipts in the community.
14 MR. NORQUIST: Okay. And the rate
15 in France?
16 MR. AUJEAN: The rate in France is
17 5.5 for the reduced rate and 20.6 for the
18 standard rate.
19 MR. NORQUIST: Okay. When you
20 started imposing the VAT country-by-country
21 in Europe, I once did a study in each country
22 after the VAT was imposed. Not only did the
119
1 VAT increase over time, so that each one came
2 in at one rate and increased, but all other
3 taxes increased more rapidly in the 10-year
4 period -- 20-year period after VATs were
5 imposed than in the previous period. So
6 these taxes weren't replacements, they were
7 more money going in and the government used
8 it actually to extract additional revenues.
9 I'm curious as we look at Europe.
10 In the United States we tend not to tax
11 services with consumption taxes and in the
12 future -- it would be a European future, if
13 we were to move in your direction -- we would
14 be taxing services, the sale of stocks, the
15 sale of medical goods or a doctor or buying a
16 house, other products.
17 And we'd end up a minimum rate of
18 15 percent in Europe -- a minimum for
19 standard rate, 20 percent. And in France, we
20 see rates significantly higher.
21 Then there's the question of
22 centralization. Senator Hollings, a Senator
120
1 from South Carolina, has introduced
2 legislation set up at 5 percent, a national
3 sales tax here in the United States. We
4 might all go to Washington and then be
5 attributed by the politicians in Washington
6 out to the states, as I understand Germany
7 does with its money. It comes into the
8 federal government and goes out to the states
9 or to the very areas in France where the
10 government -- the central government collects
11 and controls all the money and then hands it
12 back to local governments.
13 Was this a good idea, to expand the
14 taxation from goods to goods and services?
15 Did Europe find it was helpful to go from
16 lower rates up to higher rates and the
17 centralization that flowed with it? Or do
18 you wish, upon reflection, that you had
19 stopped somewhere on that path? Or do you
20 think this is exactly where you want it to
21 be?
22 MR. AUJEAN: This is a matter of
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1 political choice, which has been made by
2 member states. And what we can see today is
3 that most of the 98 countries in the world
4 who have a VAT system have extended this VAT
5 system to goods and services, because they
6 consider that all economic activity should be
7 subject to a Value Added Tax system, because
8 that was a clear and a straightforward way of
9 collecting receipts.
10 Whether this is a more efficient
11 way of doing it is something which probably
12 very few people could demonstrate one
13 direction or another, and is very open to
14 political judgment.
15 CHAIRMAN GILMORE: Joe Guttentag.
16 MR. GUTTENTAG: Thank you,
17 Mr. Chairman.
18 I just want to first note that with
19 respect to goods and services, certainly a
20 factor is that our economy, which was
21 predominantly goods -- even relatively a few
22 years ago -- is now a majority of services.
122
1 So that if you were not going to tax
2 services, I think you'd have to rethink the
3 entire system.
4 Just as a point of information,
5 Mr. Sokul, let me note that you
6 mentioned someone in Virginia bringing goods
7 into the state of Virginia from Europe. They
8 would not be subject to Value Added Tax in
9 Europe; there would be an exemption from
10 that.
11 How would the tax in Virginia --
12 because there would be a use tax applicable
13 in Virginia. Virginia does have an agreement
14 with the United States Customs Service that
15 when goods are brought into Virginia, the
16 Virginia tax authorities are notified that
17 those goods have been brought in with the
18 name of the Virginia resident, whether
19 business or individual, and the Virginia tax
20 collectors can then send a reminder to that
21 person that there is a Virginia use tax due.
22 Now, other states have similar agreements
123
1 with customs.
2 Now, the extent to which Virginia
3 uses that system and the amount of tax they
4 collect is something, Mr. Chairman, that I'm
5 not familiar with. But obviously, this
6 system has been established and is being
7 used.
8 CHAIRMAN GILMORE: Well, Joe, we don't
9 tax services in Virginia. That is a very
10 significant, I think, point -- particularly
11 as you point out with the shift of sales tax
12 issues shifting more and more to services.
13 You know, that's something that perhaps has
14 to be thought about.
15 Fred Smith?
16 MR. SMITH: I think whether one
17 likes a use tax or not is a separate
18 question. But it is, it seems to me, a
19 constitutionally-acceptable form of tax,
20 because the people you collect the tax from
21 are the people who can vote for you or
22 against you. And generally those taxes
124
1 aren't widely collected.
2 I think I missed a wine bottle when
3 I came back from France the last time myself.
4 But the reasons are is because, I
5 think, the administrative costs would be
6 high. But also I think the political costs
7 would be high. Most people would regard that
8 as a wrong thing to do. I was shopping in
9 France. I had a right to buy that and accept
10 the lower price.
11 So I think the major issue is
12 accountability. If you have someone else
13 collect that tax who is not politically
14 accountable to Governor Gilmore -- or Gilmore
15 is not accountable to -- then I think you run
16 the risk of having more taxes in the
17 citizenry than we really want.
18 I think, as the Mayor mentioned
19 earlier, there is an appropriate level of
20 taxes. But it is a complex decision between
21 the citizenry and their politicians. And I
22 think accountability is the key reason why
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1 that works better than it would otherwise
2 work.
3 CHAIRMAN GILMORE: Paul Harris and then
4 Gene Lebrun.
5 MR. HARRIS: I have a question for
6 Mr. Guttentag. And it's related to the whole
7 discussion that goes back to our discussions
8 about the EU and taxing services, and
9 basically having a broad tax base.
10 If we decide to go down the road of
11 taxing services -- online transactions that
12 are services -- in the name of equity and tax
13 fairness, which are two of the principles
14 which we've been discussing, wouldn't we also
15 have to go back here in the United States and
16 revisit how we're going to tax services that
17 are done in more traditional forms? And how
18 would that take place?
19 MR. GUTTENTAG: Yes, certainly. I
20 think that when we talk about taxing
21 services, I think there has to be a level
22 playing field, whether the goods -- that
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1 would include haircuts, which probably are
2 not going to be digitized, and also the
3 services delivered over the Internet.
4 Certainly in that way we should be
5 able, Mr. Harris, to end up with an overall
6 lower tax rate. That the broader our tax
7 base -- which is something I think most tax
8 economists agree with -- the broader the tax
9 base, the lower the rates can be. And I
10 believe that we should include all
11 economically-similar transactions within the
12 tax base, and then keep the rate as low as we
13 can.
14 MR. HARRIS: Okay. That sounds
15 wonderful in theory. But my question really
16 is, where does the authority lie for
17 reforming our entire tax system, for example,
18 on a state-by-state basis, where services are
19 not taxed, haircuts are not taxed in
20 Virginia? How are we going to get to a
21 uniform system? Where does the authority
22 lie, for example, for Congress to push the
127
1 states towards some sort of system where we
2 tax stock trades by Charles Schwab? Since
3 this seems to be such a good idea, I'm
4 wondering how we practically get to this
5 point?
6 MR. GUTTENTAG: I'm sorry if I
7 meant anything other than that's a matter for
8 the state and local governments to decide how
9 they're going to tax. I think when we were
10 talking about trying to harmonize the
11 systems, I think we would probably be in
12 agreement that if the question of what goods
13 should be taxed, what services should be
14 taxed, should be a matter for the state and
15 the local governments and not the federal
16 government to decide.
17 MR. HARRIS: But if in the name
18 of -- we keep talking about simplification.
19 But everything we talk about seems to be
20 anti-simplification.
21 If we talk about taxing services
22 online as something that is practicable, then
128
1 my question is, in the name of tax fairness,
2 we are also saying -- I guess you would
3 agree -- that services that are done in
4 traditional forms, that are not conducted
5 online, ought to be subject to the same tax
6 requirement. Isn't that true?
7 MR. GUTTENTAG: Yes, and I'm sorry.
8 Maybe I'm missing your point, Mr. Harris. I
9 think the goods should be -- the services
10 should be taxed. That should be a matter for
11 local decision. And whether they're
12 delivered online or whether they're delivered
13 in person, the taxes and the tax rate should
14 be the same. But that's a local decision to
15 make.
16 When we talk about simplification,
17 I think everyone would agree that there's a
18 lot of simplification that can be done. But
19 with our present technology, we can leave
20 substantial variances to allow one state to
21 tax services, to allow one state to tax food,
22 to allow another state not to tax food.
129
1 MR. HARRIS: Right. I just wanted
2 to clarify the point that as we discuss this,
3 I think there are some members here at the
4 table who might have a particular interest in
5 this. That is, the move towards taxation of
6 services.
7 If we're going to promote as an
8 ideal or concept that services ought to be
9 taxed, at the state level or the local level,
10 in the decision of what the tax rate is going
11 to be, also lies at both state and local
12 jurisdictions, then they had better be
13 prepared, as well, in the name of tax
14 fairness to have their services that are not
15 conducted online in more traditional forms to
16 be subjected to taxes as well, and be
17 prepared to explain those to their
18 stockholders.
19 CHAIRMAN GILMORE: Before I go to Delna
20 Jones, Joe let me ask you a question.
21 Usually governments want to get as much
22 revenue as they can get. The general feeling
130
1 of governments is that they can always do
2 more with more revenue.
3 Are there examples that you're
4 aware of of where additional taxes have been
5 extended to additional forums, like services,
6 and then the rate has been reduced? I can't
7 think of any government that's ever reduced a
8 rate because they decided to put taxes on
9 something else.
10 MR. GUTTENTAG: Well, I think
11 our -- again, we don't deal with the federal
12 government with our state taxes. But I think
13 an example was the Revenue Act of 1986, when
14 we broadened the base, eliminated certain --
15 what we considered to be inappropriate
16 deductions, and were able to lower rates
17 substantially.
18 But, Mr. Chairman, please, I'm not
19 proposing that services be subject to tax.
20 I'm just pointing out that if we are going to
21 subject them to tax, it should be across the
22 board, and that that can be done. That's,
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1 again, a decision that each jurisdiction
2 should be made, and that's the decision which
3 the EU made. And it has -- that does not
4 mean that that's a decision which our states
5 should also make.
6 CHAIRMAN GILMORE: Delna Jones?
7 MS. JONES: This is really an
8 interesting discussion we're going through,
9 but I wouldn't want to start taxing haircuts,
10 because we have an aging population and we'd
11 probably have a reduced revenue stream.
12 So I think that it seems to me,
13 unless I'm misjudging this discussion, we've
14 gotten a little far afield from our mission.
15 I wouldn't be in a position to tell
16 Europe how to tax their citizens or whether
17 their system is good or not good. I think I
18 only care when it affects our citizens, and
19 how it affects our economy. And I think when
20 we've had the example of the bottle of wine
21 coming from France to somebody in Virginia,
22 or let's make it Oregon -- because we don't
132
1 have a sales tax. The tax is paid with a VAT
2 tax. And I think we've lost track of this --
3 by the supplier or the manufacturer. So that
4 winery has already paid the tax, whether our
5 citizens pay a tax or not.
6 Is that not correct?
7 MR. AUJEAN: No, for goods which
8 would be exported from the EU to the U.S. and
9 imported by a final consumer within the U.S.,
10 there is, of course -- if they are goods,
11 there is an exemption of tax at exportation
12 from Europe. And consequently, the only tax
13 which they could bear would be taxes like
14 excise duties or sales taxes supplied by the
15 state where the citizen is residing.
16 MS. JONES: Do I understand
17 correctly that you aren't taxing the wine
18 that leaves France?
19 MR. AUJEAN: We are taxing every
20 product which is exported from the EU.
21 MS. JONES: That's what I thought.
22 Okay.
133
1 CHAIRMAN GILMORE: Mr. Smith, do you
2 want to respond also?
3 MR. SMITH: I'm not sure. You have
4 the tax removed when you leave -- I mean, if
5 you want to. When you leave Europe, you can
6 have your tax refunded to you. That's right,
7 isn't it?
8 MS. JONES: I'm talking about when
9 it's shipped. You order -- I don't care what
10 method you use to order it. If it's sent to
11 me in Oregon or to our Chairman in Virginia,
12 the winery has paid a tax already in Europe.
13 MR. AUJEAN: No.
14 MS. JONES: Well, I thought you
15 just said they did. It's de-taxed?
16 MR. AUJEAN: De-taxed.
17 MS. JONES: Okay. So it's not
18 taxed if it's exported. So you do not
19 collect the tax, period?
20 MR. AUJEAN: When we are talking of
21 goods, yes.
22 MR. SMITH: And to follow up on
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1 that, there is a complexity here which we
2 haven't gotten into, but probably the people
3 from the trade group. The United States, as
4 you can see, has a different tax structure
5 than Europe does. And one of the attempts
6 the United States has done, for various
7 reasons, to try to handle trade-related taxes
8 as a foreign sales corporation, and that gets
9 us into a whole set of complexities, which I
10 will say.
11 MS. JONES: And I realize that, and
12 I also realize having dealt with the issue of
13 wines and a winery, that's another issue all
14 together, and I shouldn't have ever used that
15 example. Thank you.
16 CHAIRMAN GILMORE: I believe that --
17 Robert, did you have your hand up? No.
18 MR. NOVICK: I was just seeking to
19 clarify the point that the European Union
20 de-taxes -- takes the tax back, the VAT on
21 goods, when it's exported.
22 CHAIRMAN GILMORE: Thank you, gentlemen.
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1 Governor Leavitt?
2 GOVERNOR LEAVITT: I'd like to ask
3 Mr. Smith, as we were having this discussion
4 about digitized data and the question of
5 whether or not the sales tax in the next
6 century is really going to be a feasible tax,
7 I got the impression from your testimony that
8 you don't believe that it is?
9 MR. SMITH: You know, like
10 everything, yes and no. I think it's going
11 to be very hard to have, as Mr. Guttentag
12 suggested, a broad-based sales tax. That
13 necessarily wouldn't be a bad thing. There
14 were salt taxes in Europe and so on. And the
15 argument that a bad tax is a good tax and a
16 good tax is a bad tax.
17 It might make sense to have some
18 specific items that would be retained for
19 sales tax. There would be a lot of people
20 who would picked a digitized alternative in
21 those areas. But it might be a part of the
22 tax base.
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1 We have a lot of taxes that have
2 survived, even though there are no longer
3 dominant taxes any longer in our
4 society.
5 But I do believe that, as was
6 mentioned earlier, we've moved from a goods
7 society to a service society. I do believe,
8 very much so, in the 21st century we'll be
9 moving from a service society with physical
10 goods associated to a largely information
11 society.
12 Just one last point on that:
13 Taxing a good that is inherently not
14 scarce -- which informational goods are.
15 They can be used everywhere. An idea --
16 Ethial De Solo Pool (phonetic) argued that
17 ideas want to be free. And therefore,
18 potentially we have a tremendous ability for
19 the developing world to leapfrog over,
20 because they don't have to use resources to
21 get physical goods.
22 So in a way, I think that the sales
137
1 tax will be a declining tax in the future. I
2 think we'll have to find alternative ways of
3 dealing with it. And I think we will.
4 I just think that we shouldn't be
5 trying to salvage a tax at the cost that we
6 seem to be trying to do.
7 GOVERNOR LEAVITT: Any thoughts about
8 what the alternatives might be?
9 MR. SMITH: Now, for me to
10 recommend a tax policy is obviously not my
11 normal situation. But we could obviously
12 have conservative income taxes or other kinds
13 of taxes out there that could be done. I
14 mean, in effect, a consumed income tax is a
15 Value Added Tax that deals with all. You
16 have exceptions, you can go for investments
17 and so on. And then everything else is
18 considered part of your non -- the part of
19 your tax that you haven't invested.
20 I think we're going to have to
21 investigate that. I don't have a positive
22 tax alternative. I just think that it's
138
1 going to be -- just as a tariff became harder
2 to collect, I think the sales tax is going to
3 be a much harder tax to equitably and, and in
4 a politically-accountable way, collect in the
5 future.
6 GOVERNOR LEAVITT: So if we ended up
7 with a situation as we move into the 21st
8 century where this sales tax just turns out
9 to be infeasible -- we just can't work with
10 the complexities, we can't work with the
11 inequities, we can't work with all of the
12 inefficiencies -- what I hear you saying is
13 we're going to ultimately have to find some
14 alternatives. We could raise the income tax.
15 We could fuss around and maybe raise the
16 property tax a little more. We might use
17 tolls on roads.
18 Those are the kinds of things that
19 you're thinking of?
20 MR. SMITH: Well, I think I'm a
21 little more optimistic than that. I think
22 it's possible that the electronic age could
139
1 actually see us moving back towards a smaller
2 government. And part of those Internet
3 savings could be used to allow us to have a
4 less -- a larger tax take.
5 I think tax rates are -- don't have
6 to be the size they are in America in the new
7 economy we're moving into. I think
8 inherently the burden of collective goods
9 could be less, because individuals will be
10 able to do so much more in a world where
11 transaction costs are dropping dramatically.
12 And there's emerging literature out there
13 that we can talk about, but it illustrates
14 just how many areas we can substitute
15 informational resources for physical
16 resources. And including in some of the
17 goods that have historically been government:
18 Environmental protection, fire protection,
19 road maintenance -- road monitoring and so
20 forth.
21 And so I'm optimistic that we could
22 have a smaller, better government, and less
140
1 taxes at the same time.
2 CHAIRMAN GILMORE: Gene Lebrun?
3 MR. LEBRUN: I come from a state
4 which does have a sales tax on services. It
5 has had for many, many years, including such
6 things as attorney's fees. This is the
7 decision that the state of South Dakota made
8 many years ago.
9 That tax base, including taxes on
10 services, has been broadened several times,
11 and as a result of that there's been a
12 substantial reduction in real estate taxes.
13 So yes, sometimes when you do broaden the tax
14 base, there is a offsetting reduction in
15 other taxes. Our state has chosen to reduce
16 real estate taxes by broadening the sales tax
17 on services.
18 Now, if I as a lawyer, I'm writing
19 a brief on a case and I want the expertise of
20 a lawyer, let's say in California. So I
21 associate that California lawyer to help me
22 write this brief to file in court in South
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1 Dakota, that California lawyer has to charge
2 sales tax on his fee -- his or her fee. If
3 he doesn't charge it and collect it, I'm
4 responsible for it.
5 We have no problem with finding
6 lawyers in other states, if they want to do
7 business in South Dakota, to go ahead and
8 recover a revenue stream from that business,
9 to charge a sales tax and to pay it to the
10 state of South Dakota.
11 Now, what if that lawyer writes
12 that brief and submits it to me over E-mail,
13 over the Internet, rather than in hard copy?
14 Should there be a distinction? I don't think
15 so. I don't see why a digitalized brief done
16 in California for service in South Dakota
17 should be treated any differently than a hard
18 copy brief.
19 That again, though, I think, should
20 be and is a decision of the individual
21 states. That California lawyer doesn't get
22 to vote on the tax scheme in South Dakota,
142
1 but he chooses to do business there because
2 he's getting a revenue stream from it.
3 When I checked into the hotel here
4 in San Francisco, I noticed there's a 14 -- I
5 think a 14 1/2 percent sales tax on my hotel
6 room. Now, I didn't get to vote on that.
7 But if I want to come to San Francisco and
8 enjoy the beautiful weather and the beautiful
9 city of San Francisco, I voluntarily pay that
10 tax. I don't voluntarily, I have to pay it
11 because I'm here.
12 I just came back from Europe. I
13 was taxed on my food and my motel rooms and
14 other things. But if I chose to go to those
15 countries and enjoy the benefits of those
16 countries, I shouldn't be able to say, "I
17 don't want to pay your taxes."
18 You know, one of the first things
19 that I learned when I was a political science
20 major in college was the sovereignty of state
21 governments, of national governments. If I
22 choose to go to Ireland and Ireland has a
143
1 different speed limit than we have in South
2 Dakota, I should have to obey that speed
3 limit. I should have to pay the taxes, if
4 I'm going to enjoy my trip to Ireland.
5 I think if we're going to retain
6 the sovereignty of our individual states, as
7 we've had under our Constitution, the states
8 have the reserved powers, if a business wants
9 to do business in South Dakota or California,
10 they should have to abide by the laws of that
11 state. And I don't think it should make any
12 difference whether it's a hard copy, a
13 digitalized copy, or information.
14 Thank you.
15 CHAIRMAN GILMORE: Mr. Sokul?
16 MR. SOKUL: Thank you, Governor. I
17 have a more, maybe speculative question with
18 respect to the EU. You've come to agreement
19 on collection of taxes within the European
20 Union -- VAT taxes -- for each other's
21 countries. But one of the advantages you've
22 had is that every member state has a VAT. In
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1 the United States, not every state has a
2 sales tax. I'm from New Hampshire which --
3 originally from New Hampshire -- which
4 doesn't have a sales tax. Delna Jones is
5 from Oregon, you know, Delaware -- that's two
6 other states. 46, including the District,
7 out of 51 state-level jurisdictions have a
8 sales tax, but 5 don't. And there are
9 businesses in those states which don't deal
10 with a sales tax, but under some people's
11 view in the world, should have to deal with
12 46 others.
13 I often wonder how different this
14 debate would be if it was 5 states had sales
15 taxes and 46 didn't. You know, what would
16 the drive be then? How important would the
17 vote of the 5 be as compared with the vote of
18 the 46? We probably wouldn't be here, is one
19 thing.
20 So what do you think would have
21 happened -- this is a speculative question.
22 What do you think would have happened had one
145
1 country, say France, not had a VAT and the
2 other countries were trying to force it into
3 this system, the French businesses into this
4 system?
5 As a follow-on, if we do come up
6 with a collection system for our country
7 and -- among the states and by some process;
8 I'm not sure what it would be -- we reach an
9 agreement with European Union, do you think
10 the European Union's ready to force its
11 businesses to collect state sales taxes for
12 the U.S. states?
13 MR. AUJEAN: The principles agreed
14 in Ottawa makes it clear that this is a
15 question which should be dealt with the
16 principles of taxation and consumption. In
17 such a system, there is certainly a big need
18 for cooperation and mutual assistance between
19 countries and between tax administrations.
20 This is nothing new. This has always
21 existed, simply. As we come to the world of
22 digitized products, we should certainly come
146
1 to the world of digitized taxation through
2 mutual assistance and cooperation.
3 So the need for reinforcement of
4 cooperation has been quite clearly indicated
5 in all the areas, and I think in the OECD
6 already. And we should base certainly a lot
7 of activity on this cooperation, cooperation
8 between tax administration and cooperation
9 also between the business and the tax
10 administrations.
11 MR. SOKUL: But that cooperation is
12 based on the fact that every member country
13 has a VAT. Maybe if you imagined a world
14 where France didn't have a VAT, what would
15 your position be on cooperation then in terms
16 of having the businesses of France collect
17 taxes that they don't deal with for their own
18 country?
19 But maybe you can't answer my
20 second question. If the United States
21 resolved the issue domestically, do you
22 foresee the European Union agreeing to
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1 collect 46 state sales taxes, with the
2 assumption being that we'll do it by source.
3 MR. AUJEAN: As I say, it would not
4 be for the European Union to collect the
5 taxes for the 46 states. But it would be for
6 these states to effectively have a system of
7 voluntary compliance to make it easier for
8 the European trader to effectively be part of
9 that system. And this is where certainly
10 there is a need for general cooperation,
11 designing systems of taxation which can
12 enforce this principle of voluntary
13 compliance.
14 CHAIRMAN GILMORE: Mr. Norquist?
15 MR. NORQUIST: Yeah. I think
16 Governor Leavitt was asking, gee, what would
17 we do if we couldn't raise the same amount of
18 money from certain revenues? And I'm glad
19 that Fred came up with a suggestion that
20 maybe government shouldn't necessarily grow
21 without limits. And also that perhaps the
22 new technologies that we look at, that have
148
1 been so helpful for creating jobs and
2 opportunities and reducing costs for
3 businesses and for individuals all around the
4 country, everybody finds that they have more
5 ability to do more things, perhaps it's time
6 to talk to state and local governments and
7 suggest that they also should be reducing
8 their cost to every other business in the
9 country, and creating some of those
10 productivities that the rest of the world is
11 enacting.
12 This is all an argument for not
13 having taxes and spending continue to go out
14 of line. And then the question, can you
15 produce the same quality of government for
16 less spending? I think if you look at the
17 difference between the United States and
18 Europe, which had similar levels of
19 government spending back in the '70s and
20 don't now, we see both higher growth and
21 higher standards of living, and more
22 opportunity is created in a country that has
149
1 lower tax rates rather than the one with a
2 minimum sales tax of 15 percent now.
3 And there are two different
4 directions that we can go as a country. We
5 can follow the path that Europe did, of
6 centralizing our tax code, of harmonizing our
7 tax code, of making the decisions for more
8 taxes and higher taxes, rather than leaving
9 decisions with individuals. Or we -- and the
10 path that Senator Hollings has put forward
11 for us rather clearly in federal legislation.
12 I'm glad he did, so that we can look at that
13 discussion. Do you want to put all the money
14 in Washington and let it parcel out money to
15 state and local governments or do we want to
16 go in the path that we've taken in the United
17 States -- and I hope that we'll stay on -- of
18 allowing state and local governments to
19 compete with each other, to provide the best
20 quality government at the lowest cost and
21 take advantage of the new technologies?
22 I'm hopeful -- even the federal
150
1 government has dropped spending as a
2 percentage of the GNP over the last five
3 years, from 21.5 percent down to 19.5
4 percent. I don't think that we miss the
5 government that we don't have out of
6 Washington. We actually have more freedom
7 and more wealth as a result of that.
8 State and local government over the
9 last 20 years has moved in the other
10 direction, taken more resources from
11 citizens. Perhaps if they became as
12 efficient -- towards efficiency as the feds
13 have picked up, that we wouldn't have some of
14 the problems that some politicians see in not
15 having enough money to spend on things that
16 they'd like to.
17 CHAIRMAN GILMORE: This may be
18 tomorrow's speech. We're coming to a close,
19 Fred. If you could keep it brief, I think
20 we're about ready to stop and take a break.
21 Go right ahead.
22 MR. SMITH: This is just -- I think
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1 I want to speak against harmonization,
2 basically. Because it seems to me -- this is
3 a point that I obviously made inadequately,
4 but there's a value of having competition
5 between political jurisdictions, just like I
6 think we all realize there's a value having
7 competition between private individuals.
8 South Dakota, as you know well, has
9 become -- or was the center of credit cards
10 in the world, because South Dakota tried
11 something different that the other states
12 didn't rush into. California and Nevada have
13 tensions because their tax rates are
14 different, and that encourages California to
15 think twice about how many people it wants to
16 lose to Nevada and so forth.
17 I think creative competition in the
18 private sector and the political sector is
19 one of the best ways to get a better world.
20 I think harmonization seems to suggest that
21 if everything works smoothly, there will be
22 no incentives to be a bit perverse. I think
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1 there really are.
2 CHAIRMAN GILMORE: Ladies and gentlemen,
3 I think we've come to the end of our time.
4 We can continue this. We have another day
5 and a half still to work on these issues.
6 We also -- the next panel which is
7 awaiting us is the presentation of tax
8 proposals, which were solicited in New York
9 and were requested pursuant to Federal
10 Register notice.
11 So we have another panel that is
12 coming. Gentlemen, thank you very much. You
13 can tell that you have made a major
14 contribution to the forward discussion of
15 this panel. I think it's a congressional
16 charge that we examine the international
17 issues. You have helped us facilitate that,
18 and I want to thank you and our federal
19 representatives, especially, very much for
20 what you have done today.
21 Gentlemen, we will reconvene
22 at 3:40. Thank you.
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1 (Recess)
2 CHAIRMAN GILMORE: As we begin to move
3 closer in towards the fundamental tax issue
4 on goods and services on the Internet, at the
5 Commission's meeting in New York City,
6 Governor Leavitt suggested that we should
7 develop a list of criteria and ask the public
8 to submit tax proposals responsive to the
9 criteria.
10 The full Commission agreed -- and
11 we established a set of benchmarks that were
12 deemed important -- to any tax treatment of
13 electronic commerce. The list of criteria
14 reflects the priorities of the Commissioners
15 as it was set down that day. While each
16 criteria is not to be considered a litmus
17 test, each criteria is important to certain
18 Commissioners as they evaluated each proposal
19 that has been submitted.
20 The Commission solicited proposals
21 from the general public and received 37
22 responses. The report drafting subcommittee
154
1 was tasked with reviewing the proposals and
2 recommending those that are being presented
3 at this meeting today.
4 All of the proposals, however, are
5 available electronically on the Commission's
6 Web site, which is
7 www.ecommercecommission.org.
8 I want to thank everybody who took
9 the time to prepare the proposals and to come
10 and see us today. All the proposals, whether
11 selected for presentation today, all of them
12 were thoughtful and creative. The number and
13 quality of the responses indicate that this
14 Commission is, in fact, successfully engaging
15 the public.
16 Today and tomorrow we will hear and
17 have considerable discussions about the
18 various proposals.
19 Additionally, there are many others
20 in the room today who are intending to be on
21 hand as experts, should individual
22 Commissioners wish to ask them a question. I
155
1 think the format that we've really gotten
2 down here is that any individual Commissioner
3 who seeks an expert probably has them here
4 and is aware that they are here. A list of
5 the attending experts is available on the
6 Commissioners' Web site, and I want to thank
7 each of the experts for joining us, as well
8 as the individual people who are here today.
9 So let's get started here. The
10 first group of proposals include the
11 presentation of Internet tax elimination
12 acts, submitted by Congressman John Kasich of
13 Ohio, that will be presented today by Chris
14 Wysocki, president of the Small Business
15 Survival Committee.
16 Welcome Chris, thank you for being
17 here. The E-Freedom Coalition's proposal, by
18 Mr. Adam Thierer of the Heritage Foundation,
19 on behalf of the E-Freedom Coalition.
20 Welcome, glad you're here. Saw you on
21 C-SPAN; you were terrific.
22 Uniform Jurisdictions Standard and
156
1 a prohibition of discriminatory ad valorem
2 taxation on interstate telecommunications, by
3 Mr. Dean Andal, the California State Board of
4 Equalization and a fellow Commissioner, who
5 has indicated his desire to make his
6 presentation from his Commissioner's chair.
7 A proposal for state and local
8 taxation of the telecommunications industry
9 by Mr. Keith Landry, general attorney, Bell
10 South, and Ms. Stacey Sprinkle, assistant
11 vice president for tax, ComNet Cellular, on
12 behalf of Air Touch, AllTell, AT&T, Bell
13 Atlantic, Bell South, ComNet Cellular, Global
14 Crossing, GTE, SBC, Sprint, US West and
15 Western Wireless.
16 So thank you all very much for
17 being here, as well.
18 A proposal for fostering the fast
19 and efficient development and operating of
20 Internet Web-hosting facilities, by
21 Mr. John Morabito, the vice president
22 of Federal, Legislative and Regulatory
157
1 Affairs of Global Crossings.
2 John, welcome, thank you very much.
3 Now, ladies and gentlemen, I think these
4 machines are pointing to someone besides just
5 me. So I would just remind you that we're
6 going to ask each of you to go at about 10
7 minutes. There will be a warning on this, I
8 think, that we'll just warn you when you're
9 getting close, and then finally when we would
10 ask you to stop. The longer you go on -- if
11 you can't yourself within 10 minutes, you're
12 just taking away from the other presenters.
13 So -- and Q&A time from the Commissioners.
14 So thank you very much. Let's
15 begin with Chris Wysocki.
16 MR. WYSOCKI: Mr. Chairman,
17 Commissioners, on behalf of the more
18 than 50,000 small businessmen and women who
19 make up the Small Business Survival
20 Committee, I want to thank you for this
21 opportunity to address the Advisory
22 Commission on Electronic Commerce regarding
158
1 Congressman John Kasich’s Internet Tax
2 Elimination Act. My name is Chris Wysocki,
3 and I am president of the Small Business
4 Survival Committee, a small profit -- small,
5 nonprofit advocacy organization representing
6 the interests of entrepreneurs across
7 America.
8 The world is in the midst of a new
9 age, and Americans are leading what is being
10 called the digital revolution. More than
11 half of all American homes have personal
12 computers today, and according to a
13 Department of Commerce study, 32.7 percent of
14 the U.S. population currently enjoys Internet
15 access. The ease and convenience of the
16 Internet has truly been the cornerstone of an
17 economic and cultural revolution that has
18 brought people from across the nation and
19 around the world together in a way that has
20 never been done before.
21 The growth of E-commerce on the
22 Internet, and technological advances in
159
1 general, have largely contributed to the
2 economic growth we have seen over the past
3 several years. According to a recent report
4 issued by the Department of Commerce, more
5 than one-third of America's economic growth
6 between 1995 and '98 can be attributed to
7 information technology. Consumers are
8 clearly embracing and responding to the ease
9 and convenience of electronic commerce, and
10 small businessmen and women across America
11 are working both hard and smart to meet an
12 increased demand for new and exciting
13 products.
14 The growth of the Internet and
15 E-commerce has made the legislation
16 introduced by John Kasich essential to allow
17 for future growth in America. His
18 legislation would specifically make the
19 existing ban on Internet taxes permanent, and
20 would also prevent state and local
21 governments from imposing taxes on
22 E-commerce. The policy Mr. Kasich proposed
160
1 will guarantee that the small business owner
2 and entrepreneurial sector of our economy can
3 continue creating new jobs, while at the same
4 time, providing consumers with added benefits
5 and convenience. I strongly urge this body
6 to adopt Mr. Kasich's legislation as part of
7 your final recommendation.
8 But first, let me take a few
9 minutes to outline some of the broad
10 principles SBSC believes should be considered
11 and adopted by this group.
12 First, we must recognize the
13 importance of electronic commerce in the new
14 digital economy. Technology and the Internet
15 have given millions of people around the
16 country to strike out on their own and bring
17 their entrepreneurial endeavors to the
18 marketplace more quickly and efficiently than
19 ever. This has helped improve the financial
20 future of these individuals, created more
21 high-paying jobs and has added tremendously
22 to America's economic growth and
161
1 competitiveness in the global economy.
2 In addition to the benefits to
3 small business owners and entrepreneurs,
4 consumers are greatly benefiting from the
5 added efficiencies and convenience that
6 E-commerce has brought to our lives.
7 Allowing the taxation of E-commerce would
8 jeopardize the growth of the new digital
9 economy and hamper the ability of
10 entrepreneurs across America to strike out
11 and start a small business.
12 The Internet and E-commerce are
13 quickly becoming essential tools for people
14 around America. An estimated 81 percent of
15 all small businesses have personal computers
16 in their offices today, and according to a
17 recent Bank One study, half of those
18 companies with 10 or fewer employees with
19 revenues between $50,000 and $1 million a
20 year have Internet access, and 20 percent of
21 those have their own Web sites. The emerging
22 digital economy will only drive this figure
162
1 up in future years, and attempts to tax
2 E-commerce will deal a potentially
3 devastating blow to the future expansion of
4 the small business community.
5 We must also consider the harmful
6 effects on the economy as a whole that would
7 result from allowing states and local
8 governments to tax E-commerce. As University
9 of Chicago economist Austan Goolsbee stated,
10 "Applying existing sales taxes to Internet
11 commerce might reduce the number of on-line
12 buyers by up to 24 percent." A market
13 reduction of this magnitude would be a
14 tremendous blow to our economy, which is
15 becoming increasingly dependent on E-commerce
16 for continued growth and prosperity.
17 The rapid growth and popularity of
18 E-commerce is undeniable. In 1995 the
19 digital economy was roughly $5.3 billion.
20 In 1998 that figure jumped to around $301
21 billion. With 46 of the 50 states having
22 reported budget surpluses last year, SBSC has
163
1 not found any evidence that E-commerce is
2 jeopardizing the ability of state and local
3 governments to fund essential programs.
4 A common mistake made by policy
5 makers and politicians engaged in the
6 discussion of taxing E-commerce is that such
7 taxation is necessary to make up for lost
8 revenue. In preparing for today's testimony,
9 I was unable to identify any lost revenue at
10 all to state and local governments. To the
11 contrary, the data suggests that state and
12 local governments are experiencing record
13 levels of revenue. A recent Investors
14 Business Daily editorial stated that state
15 revenues have grown 227 percent between 1980
16 and 1995, and local revenues have grown
17 by 193 percent over that same period.
18 According to the Kato Institute's
19 fiscal policy analysts, Dean Stansel and
20 Steven Moore, between 1992 and 1998 state tax
21 revenues grew at nearly twice the rate of
22 inflation and population growth. In
164
1 addition, a recent study conducted by Ernst &
2 Young found that an on-line tax would have
3 generated less than 0.1 percent of all state
4 and local sales and use taxes collected.
5 It's important to realize the power
6 of the Internet when it comes to creating
7 small businesses. Not too long ago, starting
8 a business took large sums of capital.
9 Access to capital is not and never has been
10 available to the vast majority of Americans.
11 In the new digital world of technology and
12 E-commerce, however, men and women have been
13 able to combine their good ideas with their
14 computer with Internet access to search for
15 previously unavailable and distant markets.
16 Hundreds of thousands of men and women across
17 the United States have been able to start a
18 small business or home office as a result of
19 technology and E-commerce.
20 The opportunities that exist for
21 entrepreneurs have never been more prevalent.
22 Small businesses that have been built around
165
1 technology and E-commerce would be severely
2 threatened if they were suddenly forced to
3 collect and distribute sales taxes to the
4 nearly 7,500 state and local jurisdictions
5 across America that can impose such taxes. A
6 change like this would not only deal a
7 significant blow to the productivity of small
8 business, but SBSC believes it would
9 significantly reduce the number of men and
10 women who may consider starting their own
11 company.
12 According to Ernst & Young tax
13 economists Robert Kline and Thomas Newbig,
14 the compliance cost to small retailers for
15 collecting sales taxes in all 46 states that
16 imposed them would be roughly 87 percent of
17 the taxes collected.
18 However, this figure does not
19 include the noneconomic cost of sales tax
20 compliance. What is largely immeasurable is
21 the lost productivity. Time spent filing
22 forms, working with bureaucrats in distant
166
1 areas of the country in collecting taxes for
2 thousands of jurisdictions, could be much
3 better spent finding new markets, hiring more
4 people and expanding the small business.
5 Representative Kasich's legislation
6 is simple, and it is clear. It makes the
7 current moratorium on Internet taxes
8 permanent and creates a certain future for
9 E-commerce.
10 Arguments that center on the harm
11 E-commerce will bring to brick and mortar
12 stores seem to ignore the fact that a new
13 digital economy is emerging. There has been
14 a lot of recent rhetoric about the need to
15 tax E-commerce as a way to level the playing
16 field between traditional main street stores
17 and E-commerce businesses that do not charge
18 or collect a sales tax.
19 SBSC believes that Main Street
20 U.S.A. is not losing customers because of a
21 tax-free E-commerce world. Generally
22 speaking, there is no real economic advantage
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1 to a consumer purchasing goods on-line versus
2 going to a store and buying the same product.
3 While a customer who walks into a store to
4 buy a book must pay a sales tax, where the
5 same customer could avoid paying sales taxes
6 by ordering that book from an E-commerce
7 store, Internet tax proponents conveniently
8 overlook the fact that the customer who
9 orders his or her book on-line must pay
10 shipping to have that book delivered, and the
11 money spent on shipping is generally more
12 than the amount of sales tax collected from
13 the customer. A customer would spend
14 hundreds of dollars at once to see any real
15 price advantage in purchasing books on-line.
16 It seems clear that supporters of
17 Internet taxes are using the competitive
18 disadvantage market in a somewhat
19 disingenuous manner. What advocates of
20 Internet taxes really seem to want is a new
21 source of revenue for state and local
22 government. This is despite the fact that
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1 states have enjoyed a $74 billion surplus
2 over the last four years. Technology and
3 E-commerce are historic opportunities to be
4 embraced rather than hampered. At what other
5 time in history could a mother living in
6 rural Montana compete with the largest
7 corporations in the world in a global
8 economy?
9 The new digital age is not an
10 opportunity we can squander. It has been a
11 tremendous equalizer between large and small
12 businesses. Where large businesses could
13 only compete in a global economy 10 years
14 ago, the Internet and E-commerce have enabled
15 anybody with an idea and a computer with
16 Internet access to sell their product from
17 anywhere to any nation in the world.
18 As a final note, I would simply add
19 that this commission has responsibility to
20 craft a well-reasoned and thoughtful
21 recommendation on policies that will direct
22 the future of E-commerce. Past tax and
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1 regulatory models that are increasingly
2 obsolete will only serve to stifle the
3 entrepreneurial spirit fueling our economy.
4 Attempts to tax E-commerce will deal a
5 devastating blow to the future of a new
6 economy.
7 I hope this Commission finds that
8 any attempts to tax E-commerce will send a
9 terrible signal to small businesses across
10 America. The burdens that would be imposed
11 are simply unacceptable.
12 With that, since my time is up,
13 Mr. Chairman, I will close by just saying
14 that I want to be -- I want to thank
15 Congressman John Kasich for introducing the
16 Internet Tax Elimination Act, and I look
17 forward to any of your questions.
18 CHAIRMAN GILMORE: Thank you,
19 Mr. Wysocki. Mr. Thierer, 10 minutes.
20 MR. THIERER: Thank you. Good
21 afternoon. My name is Adam Thierer. I am
22 the Walker Fellow on Economic Policy at the
170
1 Heritage Foundation, where I've spent the
2 past eight years researching and writing
3 extensively on issues pertaining to industry
4 regulation and deregulation, with a
5 particular focus on communications and the
6 Internet.
7 Today I'm here to discuss with you
8 the conclusions of my own research regarding
9 the taxation of the Internet, and also to
10 summarize the proposal constructed by the
11 E-Freedom Coalition, to which I have
12 contributed.
13 The E-Freedom Coalition is an
14 informal coalition of over 25 public policy
15 research organizations, or think tanks,
16 including both national and state-based
17 organizations. I should stress, however,
18 that my testimony before you here today
19 reflects my own views and not necessarily
20 those of the Heritage Foundation or the
21 entire E-Freedom Coalition.
22 I'll begin my attempting to
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1 faithfully summarize the findings of the
2 E-Freedom Coalition proposal to the
3 Commission and then conclude with a few brief
4 independent thoughts of my own regarding the
5 National Governors Association's proposed
6 plan, which I'm currently offering a
7 comprehensive study of for the Heritage
8 Foundation.
9 Part One, Communications Taxes: On
10 November 10, the E-Freedom Coalition unveiled
11 its proposal to the advisory Commission, in a
12 national press club event in Washington. The
13 proposal can essentially be divided into two
14 sections: First, communications taxes, and
15 secondly, sales tax issues related to the
16 taxation of electronic commerce.
17 Regarding general communication
18 sector tax issues, the E-Freedom Coalition's
19 message is simple. The telecommunications
20 industry is no longer being treated as a
21 regulated monopoly, so we should stop taxing
22 it as though it was. That is, as competition
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1 comes to communications in our country, tax
2 policies based upon the regulated monopoly
3 model of the past must be radically reformed.
4 Specifically, the E-Freedom
5 Coalition proposed five specific types of
6 communications industry taxes which should be
7 reformed or abolished immediately. I won't
8 go into detail on them, because I know other
9 presenters will talk about them, but just to
10 mention them, they include, one, the 100 year
11 old 3 percent federal excise tax on
12 telecommunications; two, discriminatory ad valorem
13 taxation of interstate telecommunication
14 services; three, Internet tolls or new taxes
15 and fees levied on telecommunications
16 providers and their customers when cable is
17 installed along highways and roads; four,
18 high state and local telecommunications taxes
19 in general, complicated auditing and filing
20 procedures and so on; and fifth, Internet
21 access taxes.
22 The combined effect of these taxes
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1 is not only higher costs for companies and
2 consumers, but perhaps more importantly, a
3 roadblock to innovation and investment. As
4 Progress and Freedom Foundation President
5 Jeffrey Eisenach has appropriately asked, "In
6 a world in which building out
7 telecommunications infrastructure is policy
8 goal number one, why would we place
9 discriminatory taxes on telecommunications?"
10 In other words, if we want
11 companies to offer innovative new
12 communications services and develop and
13 deploy high-speed broad-band networks, which
14 the public and policy makers alike are
15 clamoring for, then the Advisory Commission
16 will need to adopt the tax reforms I have
17 outlined.
18 Secondly, moving on to this sales
19 tax portion of the E-Freedom Coalition
20 proposal, the plan essentially proposes two
21 very simple things: One, extend and make
22 permanent the Internet Tax Freedom Act's
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1 prohibition on multiple and discriminatory
2 taxation of electronic commerce, and, two,
3 establish a clear nexus standard and set of
4 definitions to determine when companies have
5 sufficient physical presence such that they
6 can be required by a state or locality to
7 collect sales taxes. In this regard, the
8 E-Freedom proposal is similar to that put
9 forward by Commission member Dean Andal.
10 It is vital, I believe, that the
11 advisory Commission endorse these two steps
12 for a very simple reason. It is the only
13 plan that rests on sound legal and economic
14 foundations. Economically speaking, a
15 permanent moratorium and firm nexus standard
16 would remove the uncertainty which currently
17 exists in this market regarding tax
18 collection responsibilities. It would also
19 do so by prohibiting multiple and
20 discriminatory taxation and making it clear
21 that vendors of electronic commerce are
22 required to collect sales taxes only in those
175
1 states or localities where they have a clear,
2 substantial physical presence.
3 Moreover, only by keeping the lanes
4 of interstate electronic commerce free of
5 cumbersome taxes will America be able to
6 remain a global leader in the information age
7 and sustain our record level of economic
8 growth overall, which has been fueled, in
9 large part, by the dynamic developments
10 within the high-tech sector.
11 I should also add, as Chris
12 mentioned, that it's the Internet's explosive
13 growth which, in turn, has helped raise state
14 and local budget surpluses to record levels
15 in recent years. Imposing burdensome tax
16 collection responsibilities on the Internet
17 could be the equivalent of shooting the goose
18 that laid the golden egg by retarding
19 economic activity in this sector and
20 discouraging the job creation and business
21 growth necessary to continue to reap higher
22 and higher tax revenues for states and local
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1 governments.
2 Legally speaking, this proposal is
3 appropriate, because it is consistent with
4 the constitutional framework put in place by
5 the Founding Fathers, and then bolstered by
6 the Supreme Court in a number of important
7 decisions. Multiple and discriminatory taxes
8 on electronic commerce must be permanently
9 prohibited to ensure the commercial union the
10 founders enshrined in the Constitution
11 remains free of unwarranted parochial
12 interference.
13 Sales tax collection
14 responsibilities must continue to conform to
15 constitutional nexus standards so that remote
16 commerce is not burdened by extra-territorial
17 taxation, and, more importantly, so that
18 vigorous jurisdictional tax competition
19 remains alive and well throughout the United
20 States.
21 Let me just conclude with a very
22 few brief thoughts of my own about the
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1 proposal submitted to the Commission by the
2 National Governor's Association, which I'm
3 currently studying and about to issue a
4 report on. I believe there are some very
5 serious problems with the NGA plan which I'd
6 like to briefly outline to you, and then we
7 can maybe talk about later in Q & A.
8 I believe that in the prevailing
9 legal and political climate the NGA plan is
10 untenable for some of the very specific
11 reasons that I outlined in my study. Namely,
12 one, I believe the NGA plan creates a de
13 facto national sales tax cartel. I believe
14 it violates sacred constitutional first
15 principles regarding tax fairness and
16 commercial union. I believe it upsets
17 existing Supreme Court commercial
18 jurisprudence. It threatens America's
19 federal structure of government by
20 discouraging jurisdictional tax competition.
21 It creates a rather untrustworthy trusted
22 third-party tax collections system, which
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1 could very well compromise individual and
2 corporate privacy. It is quite complex and
3 could be extremely costly to implement. It
4 is not voluntary, as the NGA claims. I also
5 fear that it is not compatible with emerging
6 global norms, as well as the administration's
7 proposed global-free trade zone for
8 international commerce.
9 Now, I must again stress that these
10 conclusions are my own. But I believe that
11 with time, as the NGA proposal is more
12 closely examined by others, that these flaws
13 will become evident and the NGA will be
14 forced to significantly revise or come to a
15 compromise regarding their proposal.
16 This is due, in large fact, to the
17 fact that there is simply no logical reason
18 to expect Congress to take the politically
19 unpalatable step of altering existing nexus
20 standards to give state and local governments
21 the authority to impose sales tax collections
22 duties on interstate commercial transactions.
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1 While the NGA apparently believes it can
2 simply evade the will of Congress, ignore
3 existing Supreme Court precedence, and
4 unilaterally impose a new system on remote
5 vendors, I believe they will be in for a
6 bitter wake-up call when they are forced to
7 fight a lengthy and losing court battle on
8 this issue once again, as they have in the
9 past with mail order.
10 This may leave those who support
11 the NGA plan, or proposals like it, to fear
12 that no alternative plan is available, and
13 that the Internet will escape all forms of
14 taxation or tax schemes. This is not
15 necessarily the case. In fact, state and
16 local governments have in their power right
17 now, even with current Supreme Court
18 precedents in place, to tax sales of goods
19 and services over the Internet which
20 originate within their own state. That is,
21 state and local governments could immediately
22 move to a uniform origin-based system of tax
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1 collection and abandon their current
2 destination-based proposals and systems which
3 create so many legal and political headaches,
4 which we're debating here today.
5 Under an origin-based system,
6 simply stated, sales taxes would be levied at
7 the source or point of sale instead of at the
8 destination or point of consumption. This
9 would truly level the playing field by
10 extending to all retailers a de facto
11 origin-based sales tax system that currently
12 applies to bricks and mortar retailers within
13 each state and locality, who are required
14 only to collect taxes for their home state
15 regardless of where their customers reside.
16 By contrast, the NGA plan
17 discriminates against remote sellers by
18 placing unique requirements on them that do
19 not apply to traditional bricks and mortar
20 retailers. In other words, the NGA's playing
21 field is anything but level.
22 By contrast, an origin-based
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1 system, just to summarize, would solve
2 virtually all these problems, since it would,
3 in my opinion: One, eliminate any threat of
4 multiple or discriminatory taxation; two,
5 minimize collection burdens; three, conform
6 to emerging global norms; four, preserve
7 local jurisdictional tax rights; five, again
8 level the playing field by requiring only the
9 same tax rate be imposed on all carriers --
10 or for vendors; six, respect buyers' privacy
11 rights; seven, be constitutionally
12 permissible; and eight, respect federalism
13 principles and preserve jurisdictional tax
14 competition.
15 To conclude, I should just say that
16 it is probably also the only most politically
17 sensible option available, since the courts
18 and Congress are unlikely to change existing
19 standards in this field. To the extent a
20 compromise position is available, therefore,
21 to the Commission, I personally believe it
22 involves a move towards an origin-based
182
1 system of sales tax collection.
2 I should stress again, however,
3 that these views regarding both the NGA
4 proposal and an origin-based alternative to
5 it, are entirely my own and not necessarily
6 those of the entire E-Freedom Coalition.
7 Thank you again for the opportunity
8 to make my views and recommendations to the
9 coalition -- of the E-Freedom Coalition
10 known, and I'd be happy to take any questions
11 when time allows. Thank you.
12 CHAIRMAN GILMORE: Thank you,
13 Mr. Thierer. Mr. Andal, you have two
14 proposals that you filed with the Commission
15 pursuant to the Federal Register. I'm going
16 to ask you to go through both proposals and
17 give you the floor to do that now, but please
18 expedite. Thank you.
19 MR. ANDAL: All right. I wouldn't
20 think of being other than brief.
21 The first proposal is much more
22 detailed, and I'll use the 10 minutes for
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1 that. I don't think the second, the Four-R
2 Act proposal will require but a few minutes,
3 so I won't be using the entire 10 minutes on
4 that.
5 My proposal was given the ultimate
6 insult this morning by Commissioner Sokul,
7 and that's that it was a moderate proposal.
8 I'm not used to being called a moderate.
9 It's deeply offensive to me, I might add.
10 But it does make an effort to do something
11 different than the 20 year tax debate that's
12 been going on in our court systems, in
13 administrative tax appeals throughout the
14 state, in Congress, to try to solve the
15 litigation, the complexity, the compliance
16 cost of nexus arguments throughout the
17 country.
18 The other approaches have been
19 tried. Overturning Quill has been introduced
20 by former Senator Dale Bumpers many times.
21 One year he couldn't even get it out of his
22 own committee, and it has failed over and
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1 over and over again. Now, the courts have
2 also not been willing to overturn Quill, and,
3 plus, the physical presence test has remained
4 in force throughout all those debates. But
5 the states continue to pursue theories that
6 try to break the physical presence test.
7 I think that what is needed -- I
8 also think that it will become apparent that
9 the NGA software proposal is also -- creates
10 more problems than it solves, but I'll leave
11 that until tomorrow. My proposal builds
12 around substantial physical presence. It
13 establishes a series of safe harbors, it
14 codifies Quill, the Supreme Court decision,
15 and it also applies a little broader to
16 Public Law 86272, which has done a lot of
17 good in resolving business activity, a
18 portion that nexus questions over the years.
19 My proposal does it in a unified --
20 a unified way. In other words, the same
21 nexus standard and the same safe harbor from
22 nexus that you would have for sales tax
185
1 collection purposes, would also exist for
2 business activity, a portion of nexus
3 purposes. We use the same safe harbors, we
4 provide a uniform proposal, and, in a sense,
5 are combining most of the principles of Quill
6 with Public Law 86272.
7 The idea is there is that we need a
8 bright-line test. I think part of what
9 hounds this Commission is our different views
10 of what the problem is. Some believe that
11 there is going to be this mass exodus of tax
12 revenue off onto the net that is nontaxable.
13 Others believe that the problem is
14 complexity, litigation and compliance costs.
15 I fall into that camp, and I think there are
16 tangible ways, pragmatic ways, of taking the
17 principles of existing law and solving those
18 problems, creating a bright line test.
19 I'm going to run through the seven
20 safe harbors that I envision. One is order
21 solicitation. If you do nothing other than
22 solicit an order in a state, that's not
186
1 substantial physical presence. If you have
2 nothing but intangible assets in a state --
3 and I'll list those: Patents, copyrights,
4 trademarks, logos, security contracts, money,
5 deposits, electronic or digital signals, or
6 Web pages -- that's not enough to create
7 physical presence under my proposal.
8 Having a Web page is not enough to
9 create physical presence because, as we know,
10 a Web page can be almost anywhere, and that
11 does not create substantial physical presence
12 under my proposal. Using an ISP, an Internet
13 Service Provider, does not create physical
14 presence. Using a telecommunications
15 provider, using the phones, that does not
16 create physical presence. Affiliation with a
17 person that's not an agent of the company, a
18 consultant, does not create physical
19 presence, and warranty or repair.
20 Now, you'll notice there are
21 arguments over nexus that are included on my
22 list, and, I think, create physical presence.
187
1 One of those, for instance, is fulfillment
2 contracts where, for instance, you order over
3 the -- you order over the net, but you want
4 to bring it back. If that occurs in the
5 state that wants to tax you, that will create
6 nexus. So there -- my list is not absolute.
7 It takes some of the real
8 controversies that have been occurring in
9 administrative courts in all 46 states, and
10 in federal courts, and tries to resolve
11 those, creating a bright line. I sincerely
12 doubt -- even though I know there's
13 substantial opposition to my proposal on the
14 Commission -- I sincerely doubt, if we went
15 around the room, that Commissioners would
16 disagree with this entire list. My suspicion
17 is that you would agree with some. In
18 California, for instance, we've specifically
19 taken Web page off the table. Many of these
20 things are existing law in those 46 states.
21 My proposal would provide clarity
22 for income tax apportionment nexus cases. In
188
1 other words, we know exactly what's nexus,
2 exactly what's not. We pick up and build on
3 Supreme Court cases. We're not appending any
4 of the court's decisions, and we're building
5 on those principles, mostly in Quill and
6 Complete Auto Transit.
7 The proposal is constitutional,
8 which is something that some of the proposals
9 can't say, and I think would survive a court
10 test. It would dramatically decrease
11 litigation related to Internet nexus issues,
12 and it works within the framework of existing
13 federal statutory law, because it builds
14 directly from Public Law 86272.
15 I think that my proposal is the
16 only workable way of solving the real problem
17 that we're talking about here. The real
18 problem being complexity, litigation,
19 compliance cost.
20 The other two problems, I'm
21 astonished that we're still talking about.
22 Those are revenue loss and the so- called
189
1 uneven playing field.
2 Revenue loss is just an
3 extraordinary thing for a Californian to even
4 imagine these days. I am on the Board of
5 Equalization in California. We collect $27
6 billion worth of sales tax. We do that from
7 basically traditional retailers. We don't
8 tax services, we do not -- and we also have
9 probably the most Internet tax-friendly laws
10 of any state in the country vis-a-vis the
11 sales tax.
12 While we're doing that -- the
13 receipts aren't in yet, and I'm hoping you
14 all shop while you're here in California,
15 you'll help both Willie Brown and the state
16 with its funding obligations. But we are
17 projected to have a rate of increase in our
18 sales tax this year of 9.5 percent. Adjusted
19 for inflation that's the highest increase in
20 sales tax in one year in California history.
21 So in the very state where we have
22 more Internet users than anywhere else in the
190
1 world -- we have more electronic commerce
2 transactions than anywhere else in the world.
3 We have the most Internet tax-friendly laws
4 vis-a- vise the sales tax. You would think
5 if there's a problem with revenue drain it
6 would show up here.
7 In fact, the opposite is happening.
8 We have our historic high sales tax year this
9 year. So I just don't buy it. This kind of
10 analysis could be done in almost every state
11 in the country right now, and there is no
12 evidence of significant revenue loss.
13 I will alter my comment somewhat in
14 saying that I think there are some things
15 that produced tax revenue in the past that
16 will not in the future. But they're modest,
17 and I'll give you an example, back to Mayor
18 Kirk's Lion King example.
19 We currently buy CDs, music CDs.
20 That's how most people buy their music now.
21 It's a physical product, it's tangible,
22 personal property. When we buy it in
191
1 California we pay a sales tax on it. But in
2 the very near future people are going to be
3 downloading those products. It's quicker,
4 and it will be tax-free, because it's
5 digitally transferred.
6 As a result of that, there a
7 handful of products that there definitely
8 will be a tax loss from. But they're so
9 modest, given the gains we're making in
10 California both on an increase in our
11 traditional sales tax base and boat-loads
12 full of capital gains tax from our income tax
13 system. We have over $2 billion more in
14 California this year than we expected from
15 our bank and corporate tax, largely because
16 of Internet-related businesses producing more
17 income. It's being taxed, and we pick it up
18 through a different tax formula.
19 Then, finally, I wanted to deal
20 with the uneven playing field. I find this
21 the most remarkable argument of all. Almost
22 every state that has a sales tax specifically
192
1 exempts sales for export. That's a great
2 idea. I favor that. But it is clearly an
3 uneven playing field. If you're in
4 California and you produce a product and you
5 sell it in Utah or Virginia or some other
6 country, you do not have to pay sales tax on
7 it in California. That encourages exports
8 from California, and it's good policy for
9 California. But it also is clearly an uneven
10 playing field. If you're in Utah and the
11 sales tax wasn't paid before you went, then
12 you have an advantage.
13 The sales tax system is loaded full
14 of those uneven playing fields. Shipping
15 costs are eating up any of the tax advantage
16 that you incur.
17 So -- I'm getting the hook on this
18 proposal, but my bottom line is, I think my
19 proposal offers the one legitimate solution
20 to solving problems: Less litigation, less
21 costs, less compliance burden, and I don't
22 believe there will be any significant revenue
193
1 loss, because it is mostly existing law.
2 I need another green light here.
3 MR. POTTRUCK: Can we take a vote?
4 CHAIRMAN GILMORE: We can double-back to
5 Dean Andal, or just let him hold forth for a
6 few more minutes on his second proposal.
7 MS. ANDAL: It is -- it won't take
8 as long.
9 CHAIRMAN GILMORE: Without objection,
10 we'll give him about three or four minutes,
11 or something like that, for his second -- if
12 there's objection, we'll double-back and
13 give -- I don't know, whatever.
14 Go ahead, Dean, for a few minutes,
15 if you would, please.
16 MR. ANDAL: The easiest way to
17 explain this, in our New York meeting -- I
18 had really lost touch with these subjects
19 until the New York meeting. One of the
20 testimonies we were offered there was by a
21 group called COST, and they did a study of
22 telecommunications taxes throughout the
194
1 country.
2 It reminded me of a project I
3 worked on in California several years ago to
4 try to sort out what's happening when you're
5 having the convergence of formerly separate
6 businesses -- cable television, long distance
7 telephone, LECs -- local exchange carriers --
8 satellite dishes -- and they're all merging
9 into the same business. They're all going to
10 be providing the same services. They all had
11 different tax formulas, and they still do in
12 California, and it's something we need to
13 work on.
14 But I strongly believe that we need
15 a Four-R Act for telecommunications. Four-R
16 Act is basically a railroad device, and that
17 says that the railroad's property cannot be
18 taxed at a greater level than other
19 businesses in your state. In other words,
20 you can't reach out and tax the railroad's
21 property in your state at a higher rate just
22 because they don't vote there and they don't
195
1 have a presence in your political system.
2 That was designed to prevent states
3 from harming railroad transport between the
4 state and harming interstate commerce.
5 I think that we need to do that for
6 telecommunications. The COST study brought
7 this home. There are several states that tax
8 telecommunications property at a higher rate
9 than other businesses within their state, and
10 those were listed. California actually was
11 not listed, but does do something different.
12 In California, most property is assessed by
13 local county assessors, and they get
14 Proposition 13 protection. As a result of
15 that, they're taxed at a base-year value
16 plus -- at 1 percent -- plus up to a 2
17 percent increase every year. So they're not
18 taxed at market value, and over time you gain
19 an advantage.
20 Telecommunications companies are
21 state-assessed, actually by the Board of
22 Equalization. We have one day every year,
196
1 it's a $61 billion day, where we tax all the
2 property of the state assessees. They are
3 taxed at market value. They receive no
4 Proposition 13 protection. What that means
5 is, companies that are not in
6 telecommunication, their capital is being
7 taxed at a higher rate than companies that
8 are not involved in telecommunications.
9 I think that is a crazy thing to do
10 when we expect telecommunications providers
11 to invest more in the Internet backbone, lay
12 more fiber optics line, add more switching
13 stations, have more capital investment so
14 that we can grow the Internet. At the same
15 time, we disproportionately and
16 discriminatorily tax their property at a rate
17 that other businesses in those states do not.
18 So my proposal, if enacted by
19 Congress, would simply state that every state
20 in the country could not go higher as far as
21 the property tax on telecommunications than
22 they do on other businesses in their state.
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1 That's all I have to offer.
2 CHAIRMAN GILMORE: Dean, thank you very
3 much. Let's see here -- Mr. Landry and
4 Ms. Sprinkle? Mr. Andal had two proposals in
5 one person, you have one proposal in two
6 people. So I would ask you, if you could, to
7 divide your 10 minutes, and the floor is
8 yours.
9 MR. LANDRY: Good afternoon,
10 Mr. Chairman and members of the Commission.
11 My name is Keith Landry. I'm an attorney
12 with Bell South Corporation. To my right is
13 Stacey Sprinkle, the assistant vice president
14 of tax for ComNet Cellular. Stacey is also
15 the vice chairperson of the Wireless Tax
16 Group, and represented that organization in
17 the NTA's telecommunications and electronic
18 commerce tax project.
19 We're here today representing a
20 coalition of telecommunications companies.
21 That includes our own companies, as well as
22 Air Touch, AllTell, AT&T, Bell Atlantic,
198
1 Global Crossing, GTE, SPC, Sprint, U.S. West,
2 and Western Wireless. On behalf of all of
3 these companies we sincerely appreciate the
4 opportunity to speak to you today.
5 The extremely onerous
6 administrative and high tax burden faced by
7 telecommunications companies and their
8 customers in the state and local tax area has
9 been well documented, most recently by the
10 comprehensive 50-state study and report on
11 telecommunications taxes that was presented
12 to the Commission at its last meeting in New
13 York by the Committee on State Taxation, as
14 Commissioner Andal referred to.
15 In addition, a number of states
16 have conducted their own studies on
17 telecommunications taxes, such as Florida and
18 New York. There is no dispute that reform is
19 needed in the state and local taxation of
20 telecommunications, and there's little if any
21 disagreement over the ultimate objective of
22 that reform. Namely, substantially simplify
199
1 the tax system and eliminate the disparity in
2 tax burdens between the telecommunications
3 industry and other competitive industries.
4 The only question is, how do we get there?
5 Our coalition has submitted what we
6 believe to be a sound and rational process
7 for achieving the fundamental tax reform
8 objectives we all agree on within a
9 reasonable period of time and, hopefully,
10 without the need for substantial federal
11 intervention, but rather through the
12 cooperation of the industry and state and
13 local governments.
14 Our proposal has two basic
15 elements: Simplification and the phase-out
16 of discriminatory treatment. I'll briefly
17 outline the simplification element, and then
18 Stacey will explain our recommendations for
19 phasing out discriminatory taxes, and the
20 specific action that we're requesting the
21 Commission to take.
22 The simplification portion of our
200
1 proposal is in the form of two alternatives.
2 The first, Option A, is intended primarily
3 for states in which local governments do not
4 currently tax telecommunication service --
5 services, although it's not necessarily
6 limited to those states. The hallmark of
7 this option is a single state level tax on
8 telecommunications, such as the state sales
9 tax, part of which could be distributed to
10 local governments.
11 From the industry standpoint, this,
12 of course, is the ideal situation, because it
13 necessarily results in companies filing only
14 one tax return in the state and being subject
15 to only one audit. As part of this
16 alternative, it's also recommended that
17 states adopt nationwide uniform definitions
18 of terms, such as local telephone service,
19 mobile telephone service, et cetera. This
20 will greatly reduce the number of disputes
21 over what is and what is not taxable.
22 In addition, we recommend adoption
201
1 by the states of a uniform method of sourcing
2 telecommunication services which will reduce
3 the compliance burden and audit exposure
4 currently faced by carriers, as well as
5 eliminate the possibility of more than one
6 state asserting a claim for tax on the same
7 transaction.
8 Finally, we recommend that any
9 changes in the tax rate or the tax base
10 become effective no earlier than 120 days
11 after enactment in order to allow enough time
12 to implement any necessary changes to billing
13 and accounting systems.
14 The other simplification model
15 offered by this proposal, Option B, is
16 designed for states in which local
17 jurisdictions are currently authorized to
18 impose telecommunications taxes. Given the
19 burden of complying with the tremendous
20 number of local taxes throughout the country,
21 we believe that it's reasonable to try to
22 avoid increasing that number. But we
202
1 recognize that it would be much more
2 difficult, primarily because of budgetary
3 concerns and issues of local autonomy, to
4 curtail the taxing authority that many local
5 governments already possess. In addition, we
6 feel that it's important to minimize the
7 possibility of tax increases to customers not
8 currently paying local taxes.
9 Therefore, Option B would permit
10 local governments currently authorized to
11 impose taxes to continue to do so under
12 traditions designed to ensure that the
13 additional compliance burdens are manageable
14 and that carriers are protected from
15 competing claims. This option essentially
16 includes the same features as Option A,
17 except that local governments currently
18 authorized to impose tax would be permitted
19 to impose no more than one tax per local
20 jurisdiction on the same tax base as the
21 state level tax. Any limitations on the
22 rates of these local option taxes would
203
1 continue to be governed by state law.
2 We also recommend that exemptions
3 be the same for the state and all local
4 taxes, that compliance be through a single
5 unified return and payment at the state
6 level, and that unified audits be conducted
7 by the appropriate state administrative
8 agency.
9 Under this option, we're also
10 suggesting that the state would maintain
11 databases that would provide carriers with
12 the rates of all local taxes and the correct
13 local jurisdiction corresponding to each
14 address -- street address within the state.
15 Some aspects of these databases could be
16 patterned after the database contained in the
17 Mobile Telecommunications Sourcing Act, which
18 is currently being considered by Congress and
19 which has been reviewed and approved by the
20 wireless industry, as well the number of
21 organizations representing state and local
22 government. Carriers would be entitled to
204
1 rely on these databases and would be held
2 harmless for rate or sourcing errors
3 attributable to the information contained in
4 the databases.
5 Finally, because of the additional
6 administrative burden and cost of complying
7 with local taxes, we have included in this
8 option a recommendation that carriers be
9 afforded some level of vendor compensation to
10 be taken as a credit against tax when filing
11 the return.
12 That is our simplification plan in
13 a nutshell. We believe that it is a fair and
14 reasonable means of achieving many of the tax
15 simplification objectives that we all agree
16 are needed in the area of telecommunications
17 taxes and that it will ultimately produce
18 substantial administrative benefits and
19 efficiencies to state and local governments,
20 as well.
21 Now, I'm going to let Stacey
22 outline our proposal for phasing out
205
1 discrimination, but I'll be happy to answer
2 any questions at the end of the
3 presentations.
4 MS. SPRINKLE: Thank you, Keith.
5 The second part of our proposal deals with
6 the discriminatory level of taxation
7 currently imposed on the telecommunications
8 industry. Now we've had several panelists
9 that have already referred to that and have
10 also referenced the cost study that was
11 presented to this Commission in September.
12 I think one of the things that we
13 need to keep in mind is that the structure
14 that applies today definitely migrated from
15 an era when telecommunications was an
16 industry that was a rate-regulated
17 monopolistic utility. That isn't the case
18 today. We are migrating to a competitive
19 environment and because of the underlying
20 importance that telecommunications has to the
21 Internet and electronic commerce,
22 telecommunication companies and their
206
1 services should no longer continue to bear a
2 greater burden of state and local taxation.
3 To that resolve, we have pretty
4 much highlighted three areas of reforms that
5 need to be considered in trying to reduce the
6 discriminatory level of taxation that
7 telecommunication companies pay.
8 First, in the transaction tax area,
9 we need to isolate and bring down
10 telecommunication rates that are higher than
11 that applied to general business. In
12 addition to that we need to identify and
13 isolate specific targeted taxes that are only
14 applied to the telecommunication industry and
15 eliminate those.
16 In the property tax area, we also
17 need to look at reducement of the assessment
18 ratios and the tax rates that Commissioner
19 Andal alluded to, but just as important we
20 need to look at the valuation tools that are
21 being used by state and local governments
22 today and ensure that the methods that we are
207
1 being applied to telecommunication companies
2 is similar to that applied to other
3 commercial and industrial businesses, as
4 well.
5 This would also take into
6 consideration, then, the types of property
7 that could be taxed, so that the
8 telecommunications property being taxed is
9 also on the same playing field as other
10 commercial and industrial business.
11 The third area of reform is the tax
12 treatment of business inputs. Many states
13 today already exempt various equipment that
14 companies use, and we're asking that the
15 exemption be applied to telecommunications
16 companies, as well. What this will do is
17 help avoid the pyramiding of taxes that may
18 exist today, as well as to continue to
19 encourage development of the physical
20 infrastructure used to support the Internet.
21 I think it's important to note that
22 at this point in our proposal we are not
208
1 seeking a federal legislation mandate to
2 implement these reform measures. What we are
3 proposing to do instead is to work with each
4 affected state and local government and try
5 to tailor fit the reform needed for each
6 jurisdiction.
7 We've had positive experiences in
8 the past. As Keith referenced the Mobile
9 Telecommunications Sourcing Act, was a joint
10 venture and we believe that the resultant
11 outcome was mutually beneficial to both sides
12 and that there was productive support by
13 working together to reach that resolve.
14 Most importantly, too, I think, is
15 that it needs to be pointed out that I think
16 a problem has been clearly identified. That
17 the telecommunications industry is very
18 heavily taxed and that there is a lot of
19 administrative burden currently borne by that
20 industry. I think what we're asking for
21 today is a solution to that problem versus
22 determining whether another problem exists in
209
1 that industry.
2 So to that end, what we are
3 specifically asking the Advisory Commission
4 on Electronic Commerce to do is provide an
5 endorsement for the reform measures that we
6 have outlined for you today. Additionally,
7 we are asking that you ask Congress to pass a
8 resolution encouraging state and local
9 government and industry representatives to
10 work towards a resolve of these problems, as
11 well as providing the resources of federal
12 agencies, if necessary.
13 Third, we would ask that you
14 recommend to Congress to enact a law to
15 establish a review commission, that after a
16 period of three years would analyze the
17 effect of state and local government and
18 industries to work towards accomplishing the
19 reform measures that we have proposed here
20 today.
21 We have considered these reform
22 measures and we believe that this would bring
210
1 substantial simplification to the
2 telecommunications industry, while also
3 recognizing the legitimate that local
4 governments play within our national system.
5 Additionally, we're working towards
6 a resolve to try to eliminate the
7 discriminatory taxation that we believe is no
8 longer relevant to a system that is a
9 competitive industry.
10 So, with that, thank you again for
11 the opportunity to present this proposal, and
12 we would be happy to answer any questions at
13 the end.
14 CHAIRMAN GILMORE: Thank you,
15 Ms. Sprinkle, Mr. Landry. Last, but not
16 least, Mr. Morabito? Is that right? It's
17 close.
18 MR. MORABITO: Thank you,
19 Mr. Chairman and Commissioners for inviting
20 Global Crossing to testify today. We have a
21 unique proposal and we greatly appreciate the
22 opportunity to share our views with you.
211
1 By way of background, Global
2 Crossing is a full-service, all-distance,
3 telecommunications Internet service provider.
4 We offer services both domestically and
5 internationally, and we're building the
6 world's first global fiber-optic network. We
7 are also constructing data centers that will
8 serve as the electronic hubs around which the
9 Internet operates. These data centers, or
10 Web-hosting facilities, are the bridge that
11 connect content providers to end users.
12 Inside the facilities are the
13 necessary servers and routers that are used
14 to store and retrieve information on the
15 Internet. Walking through a data center is
16 like walking through an electronic mall where
17 companies such as Yahoo, The Motley Fool and
18 E-Toys offer products and services from
19 servers that sit side-by-side. The demand
20 for Web-hosting facilities continues to grow
21 and the market for such services is highly
22 competitive.
212
1 Overall, the Web-hosting industry
2 is expected to grow from $2 billion in 1999
3 to almost $15 billion in 2003. To date,
4 Global Crossing has constructed Web-hosting
5 facilities in four states and two foreign
6 countries.
7 With this background, it's
8 important to recognize the vital role that
9 Web hosting will play in electronic commerce
10 and our nation's economy. The Web-hosting
11 industry represents part of the foundation
12 upon which electronic commerce is built.
13 Vendors, large and small alike, need the
14 redundancy in power, redundancy in
15 connectivity, the physical security, and the
16 technical expertise to make their businesses
17 reliable and accessible to customers.
18 The converse is also true. Without
19 Web hosting we would likely see a reduction
20 in on-line consumer confidence, because the
21 vendors Web sites would not be as fast,
22 secure, or reliable. To build on this
213
1 foundation we are proposing a modest way to
2 reduce the cost of Web-hosting operations in
3 the United States.
4 The proposal would impose a
5 moratorium on sales and use taxes associated
6 with the construction and operation of
7 Web-hosting facilities. The proposal also
8 seeks to impose a moratorium on property
9 taxes associated with the operation of
10 Web-hosting facilities.
11 In practical terms, what this means
12 is that the raw materials used to construct a
13 Web-hosting facility, such as the bricks,
14 mortar, alarm systems, bullet and explosion
15 proof barriers, specialized vapor barriers,
16 and other basic materials would be
17 temporarily exempt from sales and use
18 taxation. It also means that both real and
19 personal property associated with the
20 operation of a Web-hosting facility would be
21 temporarily exempt.
22 Other tax incentives may also be
214
1 needed to encourage the deployment and
2 operation of these sites. A moratorium of
3 this nature will provide the proper incentive
4 to build the facility in a particular state,
5 thereby allowing for the possibility that Web
6 site customers will choose that state for
7 their business.
8 In addition, the proposal provides
9 a proper incentive for Web-hosting facilities
10 to be built in the United States, as opposed
11 to overseas.
12 In addition, this proposal will
13 help spur investment in the United States,
14 and it's the type of investment that is
15 necessary to sustain the information economy.
16 In addition to the current rust-belt
17 initiatives that try to retain manufacturing
18 and industrial jobs, government should find
19 ways to create economic magnets in their
20 states for purposes of benefiting the
21 information economy. Web-hosting facilities
22 serve as such magnets.
215
1 The decision to site a facility
2 means millions of dollars in direct
3 investment to a community, to rental fees,
4 the purchase of sophisticated computer
5 equipment, and new jobs. Web-hosting
6 facilities also bring collateral benefits to
7 a community when customers commit significant
8 resources, such as purchasing hardware,
9 software, and hiring full-time technicians
10 and programmers to work in and around the
11 Web-hosting site.
12 In Chicago alone, we estimate more
13 than $125 million will be invested either
14 directly or collaterally in the local
15 community.
16 Finally, we can't underestimate the
17 revenue generated as a result of Web-hosting
18 facilities. A significant portion of the
19 trillion dollar estimates that E-commerce
20 will be generated as a result of the traffic
21 originated at Web-hosting facilities in the
22 United States.
216
1 In conclusion, we hope that the
2 Commission will view our proposal favorably
3 and make the appropriate recommendations to
4 Congress.
5 I'd like to thank the Chairman for
6 his leadership on this issue and look forward
7 to working with him and the other
8 Commissioners as we move forward.
9 CHAIRMAN GILMORE: Thank you,
10 Mr. Morabito. Members of the Commission, the
11 agenda has the floor open until about 6:00,
12 so the floor is open for any questions or
13 comments that anybody would care to make. We
14 have plenty of time.
15 Mr. Pottruck?
16 MR. POTTRUCK: I have a question
17 for Mr. Morabito. Don't states already have
18 the right to do exactly what you're
19 suggesting, to create a tax exemption for Web
20 hosting in their state if they so choose to?
21 To attract economic development exactly the
22 way you've described? If so, why would we
217
1 need any kind of federal legislation along
2 these lines?
3 MR. MORABITO: Yes, states do have
4 the current authority to do that. The idea
5 here is to promote investment in the United
6 States, and we're trying to develop and
7 promote a national policy that would give us
8 the incentive to continue to deploy these
9 facilities here, as opposed to locating
10 overseas. So we're trying to make this a
11 national issue.
12 MR. POTTRUCK: Does there seem to
13 be any suggestion that Web hosting is not
14 growing or that there's not a lot of Web
15 development? I mean, is this a problem to be
16 solved or -- I guess I'm missing the problem
17 that we're solving.
18 MR. MORABITO: We're a
19 Bermuda-based company, and I don't know if
20 that answers your question.
21 CHAIRMAN GILMORE: Would you like to
22 elaborate on that or -- we can go to other
218
1 questions, unless you wanted to --
2 MR. MORABITO: No, no. I mean the
3 idea, again, is to come up with a -- I don't
4 want to -- I think "level playing field" is
5 not the right term, but the idea is, again,
6 to create a national policy that would give
7 us the incentives to locate these facilities
8 in the United States.
9 CHAIRMAN GILMORE: Mr. Lebrun?
10 MR. LEBRUN: A follow-up question.
11 Rather than tinkering or asking Congress to
12 tinker what the states can do in terms of
13 their tax base, why don't you just ask
14 Congress to give you some type of a tax break
15 at the federal level, whether it's income tax
16 or some other federal tax?
17 MR. MORABITO: Well, I mean, the
18 research and development tax credit was just
19 given and just extended, so the federal
20 government does have a role for the high tech
21 industry and giving the right incentives.
22 CHAIRMAN GILMORE: Mr. Sidgmore?
219
1 MR. SIDGMORE: Yeah, I hate to
2 disagree with tax breaks for the
3 telecommunications industry, but I guess, you
4 know, to sort of parlay off of David's
5 comment, the real question to me would be,
6 aren't we already, "we" being everybody in
7 the telecommunications industry -- building
8 Web facilities as fast as humanly possible?
9 Here, in Europe, everywhere where we can do
10 business. I'm not sure we can build them
11 that much faster, number one.
12 Number two, generally speaking, we
13 deploy Web facilities where the network gains
14 efficiency, not necessarily where you get the
15 best tax breaks.
16 So I guess I'm not totally sure
17 what -- you know, what the content of the
18 proposal is. I mean, what is the basis of
19 your suggestion that you would build more
20 facilities with this break?
21 MR. MORABITO: Well, I think I'll
22 try again to answer that. We're looking for
220
1 a national policy on deploying Web-hosting
2 facilities in the United States.
3 MR. SIDGMORE: Right. But I guess
4 I'm, you know -- and I understand the Bermuda
5 angle, but you know all of the Web-hosting
6 companies are not in Bermuda. Most of them
7 are headquartered here, somewhere.
8 I'm not trying to be argumentative,
9 I'm just -- I don't -- it's hard to see
10 how --
11 MR. MORABITO: But it's our goal
12 and our goal is that the states will fight
13 with one another to come up with best tax
14 incentives that will give us the incentives
15 to deploy facilities in those states. We're
16 seeing that today. We have a couple of
17 states -- and Virginia is an example --
18 showing leadership in this area. New York is
19 also showing some leadership, and so is
20 California.
21 So, yes. The goal is to have those
22 states continue to fight, and to raise this
221
1 at the national level is part of this forum.
2 MR. ANDAL: As one of those states
3 that's very interested in you coming here,
4 how would you describe -- how broad is your
5 definition of Web-hosting facility?
6 MR. MORABITO: It could be --
7 MR. ANDAL: What types of property
8 are you -- do you imagine being given an
9 exemption?
10 MR. MORABITO: If you think about
11 what it takes to construct a Web-hosting
12 facility, it has to do with the bricks, the
13 mortar, the -- like I said, the bullet and
14 explosion proof barriers, the raised
15 ceilings, the floors -- the special floors.
16 These sites need to be --
17 MR. ANDAL: I'm trying to figure
18 out how broad your business is. Are you --
19 are we talking switching stations and
20 fiber-optic line networks and --
21 MR. MORABITO: I think we're mostly
22 talking about the servers, the routers, the
222
1 racks, the material that goes into
2 constructing the Web-hosting facility.
3 MR. ANDAL: Who are your
4 competitors?
5 MR. MORABITO: I think our largest
6 competitor is Exodus, but obviously MCI
7 WorldCom and AT&T and Quest are also in this
8 business.
9 MR. ANDAL: Any states offered tax
10 exemptions so far?
11 MR. MORABITO: I'm not sure.
12 CHAIRMAN GILMORE: Another question from
13 any members of the panel?
14 Mr. Pottruck?
15 MR. POTTRUCK: I had a question for
16 Mr. Wysocki and perhaps Mr. Thierer.
17 There was something that was said
18 before that I found internally in conflict.
19 On the one hand, I thought I heard you say
20 that if we had sales taxes on Internet
21 purchases, that would make a big difference.
22 The Internet wouldn't grow as much. People
223
1 wouldn't buy on the Internet. There was an
2 estimate -- I think you cited from Ernst &
3 Young, or someone, a 20 percent plus decline
4 if there was sales taxes on the Internet.
5 Then you said local companies are
6 not disadvantaged by charging taxes and that
7 the fact that the sales -- there's no sales
8 tax on the Internet doesn't really advantage
9 the Internet.
10 Now it seems to me you can have it
11 one way or the other, but that it's hard for
12 me to reconcile both of those statements.
13 Perhaps either or both of you would
14 comment on that?
15 MR. WYSOCKI: I'll just comment
16 briefly, and then I'll let Mr. Thierer answer
17 if he wishes. But the -- to me, the
18 psychology of a consumer that goes out and
19 buys something on the Internet, it is
20 possible that they are buying it to avoid
21 state sales taxes. That is a distinct
22 possibility, and I think -- the reference
224
1 that you cited was Austan Goolsbee, the
2 University of Chicago economist.
3 There is that possibility that
4 somebody who purchases on-line is doing so to
5 avoid state sales taxes. At the same time,
6 however, the realities of the market clearly
7 show that it costs more money generally,
8 generally speaking, to ship a product that is
9 exempt from state sales taxes. So I
10 understand where it may seem inconsistent,
11 but when you're dealing with the psychology
12 of a consumer versus the practical realities
13 of state tax policy and this situation that
14 we're facing today, I don't think that in
15 reality they are inconsistent.
16 CHAIRMAN GILMORE: Mayor Kirk and then
17 Delna Jones.
18 MAYOR KIRK: I wanted to follow up on
19 that line of questioning, and I think you did
20 make the point that that was the differential
21 in the shipping versus the sales tax. But on
22 the other hand, that retail merchant that has
225
1 the Disney Store, that has the Nieman's, the
2 Macy's, is paying property taxes. He's got a
3 bigger employment base. He's got inventory.
4 He has a lot more that goes into his
5 calculating that purchase price that doesn't
6 exist on the net. So while the shipping may
7 outweigh the sales tax, those bill payment
8 costs can create that disparity that we're
9 concerned with.
10 But my concern is one of
11 specifically -- since you were here to
12 present Congressman Kasich, is, one, give me
13 some reason why that Congressman feels that
14 strongly about it. He wouldn't -- as I think
15 I heard Mr. Sidgmore or one of the other
16 Commissioners recommend, why doesn't Congress
17 pay for this? I mean, we all love -- we can
18 all agree -- the good thing is we all love
19 the net. We don't want put access taxes, we
20 don't want to do anything to hinder this
21 great growth.
22 As a mayor, I think the neatest
226
1 thing in the world would be for Congress to
2 propose a tax and Congress to pay for it.
3 So, first of all, tell me why
4 Congress won't go ahead and pay for this tax.
5 Then, secondly, since most state and local
6 governments have to operate under
7 constitutional precepts that say we'll tax
8 everything equally, if you essentially put in
9 a bill that says we cannot tax sales
10 transactions on the Internet, help me
11 understand the constitutionality, then, of a
12 sales tax that applies to the same
13 transaction that occurs on Main Street.
14 Isn't it effectively what you're talking
15 about is a constitutional ban on all sales
16 taxes?
17 MR. WYSOCKI: If you'll permit
18 me --
19 MAYOR KIRK: This is one of these
20 long questions.
21 MR. WYSOCKI: That's all right.
22 MAYOR KIRK: The other thing, you've
227
1 also made the point that there's no
2 diminution in local revenues. We're in the
3 infancy of this. Amuse me. Just go ahead
4 and humor me and my other thousands of
5 mayors, that as more and more people begin to
6 shop over the net, there will be a
7 degradation of the state and local sales tax.
8 How are we supposed to make up that revenue?
9 MR. WYSOCKI: Well, if you'll
10 permit me a few minutes?
11 MAYOR KIRK: I would.
12 MR. WYSOCKI: If I may, I'd like to
13 address the constitutionality of the
14 proposal, first, which is the second part of
15 your question.
16 I think while not I'm not an
17 attorney, and certainly not a constitutional
18 scholar, on the face of it, Congressman
19 Kasich's proposal is clearly constitutional.
20 The reason is that Congress has historically
21 dealt with intra-state issues on numerous
22 occasions, in the Cable Television Act,
228
1 the 4-R legislation that Mr. Andal is
2 proposing. The fact is that the court has
3 ruled, in doing some cursory analysis,
4 that -- actually, I'll just quote:
5 "Wherever the interstate and intra-
6 state transactions of carriers are so related
7 that the governing of the one involves the
8 control of the other, it is Congress and not
9 the state that is entitled to prescribe the
10 final and dominant rule. For, otherwise,
11 Congress would be denied the exercise of its
12 constitutional authority and the states, and
13 not the nation, would be supreme in the
14 national field."
15 That's out of Houston and Texas
16 Railway v. United States.
17 It seems clear that when you look
18 at the history of the commerce clause --
19 which I think is what's at issue here -- that
20 Congress has the authority to deal with
21 issues that are by their very nature
22 interstate. It is the position of SBSC that
229
1 the Internet, by its very nature, is an
2 interstate mechanism, just as railroads are,
3 waterways, et cetera.
4 So while not a constitutional
5 scholar and not an attorney, I want to be
6 very clear on that, it seems on the face of
7 it to a layman that Congressman Kasich's
8 proposal is definitely true and
9 constitutional.
10 Now, if I can go back to the first
11 part of your question, which is why doesn't
12 Congress pay for it? I think that's the
13 essence of the question. Our position at
14 SBSC is very clear in that this is a proposal
15 that will bolster E-commerce, it will bolster
16 job creation, it will enable more people to
17 earn more, thereby paying more sales taxes.
18 So it has not been shown to me with any
19 conclusive -- any level of satisfaction on my
20 part that there has been a net loss of state
21 or local revenue as a result of E-commerce.
22 MAYOR KIRK: I don't want to be
230
1 argumentative, but, Chris, at least from here
2 you look like a pretty intelligent fellow.
3 MR. WYSOCKI: I am.
4 MAYOR KIRK: On the topic of consumer
5 spending habits is that I am, unfortunately,
6 all of those things. I am a lawyer and I'm a
7 Mayor -- and that may make it doubly bad.
8 But I also grew up in retail. I promise you
9 if you walk in a store -- in every grocery
10 store now. I mean, if you're single -- maybe
11 you're not single and you go in and you've
12 got two items, you're not going to stand in a
13 line with 100 people. You're going to go to
14 a line that says, if you've got fewer stuff,
15 come over here. If you have even fewer stuff
16 and you're going to pay cash, come over here.
17 We'll get you out faster.
18 If you've got a line that says pay
19 your taxes, and a line that says don't pay
20 your taxes -- I mean in the words of my seven
21 year old, well, duh. I think we're all going
22 to go to the line that says, don't pay your
231
1 taxes. I can accept a lot of what you're
2 saying, except for the fact that saying
3 there's not going to be any degradation of
4 it.
5 Now, I guess, let me put it another
6 way. Would your small business, whom you
7 represent, would they rather have a system
8 where they don't have to collect it, but have
9 a sales tax, which they're not going to
10 pay -- it's going to be a pass-through -- or
11 have a 25 reduction in that and then have
12 their local governments risk the proposition
13 of either raising property taxes or raising
14 income taxes?
15 MR. WYSOCKI: I'm not --
16 MAYOR KIRK: Which is the least
17 attractive of those three?
18 MR. WYSOCKI: Well, I would say the
19 imposition of any new taxes is clearly wrong.
20 I'm not sure where most of our members would
21 be, in terms of which is the less evil of the
22 tax proposals.
232
1 What I do know is that the number
2 of entrepreneurs that are able to start new
3 businesses as a result of electronic commerce
4 is really an exciting thing that ought to be
5 embraced. Congressman Kasich's proposal, I
6 think goes a long way towards bolstering and
7 increasing the economic productivity of the
8 country.
9 MAYOR KIRK: Chris, let me ask you
10 one more thing. I mean, is there any
11 empirical data out there? Because we keep
12 getting these numbers from you and Adam and
13 others that say state and local revenues have
14 just gone up explosively. The Internet's
15 gone up. Therefore, the two are related.
16 I can only relate to my own
17 experiences at the city, in which we went
18 through a horrible economic downturn in
19 the '80s and our tax base has gone up
20 principally because we've invested in
21 infrastructure, made the city safe, put
22 police on the streets, brought people in.
233
1 Most of that growth is from property taxes.
2 A lot of it is sales tax, but it's more
3 complex than just saying because the
4 Internet's grown, our revenue's grown.
5 Is there any empirical data out
6 there to support that?
7 Secondly, has anybody gone out and
8 polled all of the Internet businesses -- of
9 which we have an extraordinary number in
10 Texas -- to find out are you going in this
11 business because you didn't think you'd pay
12 sales taxes or are you going in this business
13 because the world is your universe, it's
14 faster and safe, you don't need the
15 capital -- all the other reasons you
16 articulated, that I agree with.
17 I think the reason that the
18 Internet's growing is much more related to
19 the latter than the former.
20 MR. WYSOCKI: I'll actually let
21 Mr. Thierer address that as to research.
22 MR. THIERER: The answer to your
234
1 question is, no, there's not a lot of
2 empirical work in this field, because this is
3 a very new field of economic study.
4 Unfortunately we're all looking around for
5 good numbers, good information. It's tough,
6 because there's not a lot of economists
7 working on this, as they should be.
8 Hopefully things like this will prompt them
9 to do so.
10 To go back to some of your points,
11 though, about what are the other options that
12 state and local governments have, I think
13 you've forgotten a couple. I think,
14 obviously, it's not a very attractive
15 proposal, but -- at least to state and local
16 ears -- but the idea of reforming government
17 programs or cutting expenditures is an
18 option. It's one -- you know, they say,
19 well, there's a set pie. We have to pay for
20 these programs, these functions that the
21 state and localities provide for. Well,
22 apply existing sales taxes more broadly to
235
1 those service-based companies or other things
2 that you exempt them from.
3 Agriculture, services of any
4 variety.
5 MAYOR KIRK: So we'll let the poor
6 farmers and the other peoples pay for --
7 MR. THIERER: Well, if you want to
8 talk about level playing fields, shouldn't
9 everybody pay the same sales tax?
10 MAYOR KIRK: I think they should.
11 MR. THIERER: Well, but there's a
12 lot of exemptions at the state and local
13 levels to sales taxes currently that could be
14 captured -- revenues could be captured.
15 MAYOR KIRK: But you're still talking
16 a tax shift to pay for a tax cut from one
17 industry to the other.
18 MR. THIERER: I'm not sure about
19 that.
20 MAYOR KIRK: I mean, there's a reason
21 most people don't tax, say, drugs or food or
22 medicine or some services.
236
1 MR. THIERER: Right. Well, again,
2 we could go on on this for a while.
3 MAYOR KIRK: But, I mean, I agree
4 with you. You have made my point, that if it
5 diminishes, we either cut services or we
6 raise taxes on somebody else to make up for
7 it.
8 CHAIRMAN GILMORE: If I could, Delna
9 Jones has her hand up, then Governor Locke.
10 But let me ask a question. Why do we not tax
11 food, Mayor Kirk? Why do we not tax some of
12 these other exemptions? Is there a reason
13 for it?
14 MAYOR KIRK: I'm a Mayor. I have to
15 live by the rules that you Governors make,
16 so.
17 CHAIRMAN GILMORE: But all humor aside,
18 there is a reason --
19 MAYOR KIRK: There's no humor.
20 CHAIRMAN GILMORE: There is a reason,
21 Mayor Kirk, why we distinguish between one
22 activity and another, one good and another,
237
1 and one form of taxation and another. There
2 are policy reasons that we do to either
3 encourage something, discourage something, or
4 provide a special benefit. Especially, for
5 example, in the nature of the food tax.
6 Isn't that legitimate?
7 MAYOR KIRK: I would agree with you
8 in every case, Governor. We go through a
9 fairly healthy debate when we do that. So we
10 sit there and we balance the taxation of food
11 and drugs versus legal services or toys or
12 footballs. Or in Congress right now, in
13 which we arguably have a surplus. We're
14 going through a very healthy national debate
15 on whether we should put all of the savings
16 into bolstering social security or help
17 Medicare. Maybe we should give more money to
18 the states to help welfare reform or do
19 something else.
20 One of my concerns on this
21 proposal -- since you gave me this
22 opportunity -- is we're going to unilaterally
238
1 take out an industry that Mr. Sidgmore,
2 Mr. Waite and others would tell us --
3 notwithstanding the fact we'd all like a tax
4 break -- is doing pretty good on its own. If
5 we're going to do this, I think we ought to
6 make that same policy decision that you
7 referenced and decide do we want to help
8 E-commerce companies? Do we want to help
9 school teachers? Do we want to help farmers?
10 Do we want to help other businesses that
11 aren't doing as well, or more people?
12 CHAIRMAN GILMORE: Or perhaps poor
13 people.
14 MAYOR KIRK: Or do we want to help
15 poor people?
16 CHAIRMAN GILMORE: Who shouldn't be
17 paying food taxes.
18 MAYOR KIRK: Absolutely. But I think
19 we should make that decision in a broader
20 perspective, and not just in a narrow one.
21 CHAIRMAN GILMORE: That is, indeed, the
22 debate we're engaged in.
239
1 Delna Jones?
2 MS. JONES: Isn't this fun? A
3 couple of questions. Most of this is to
4 Chris.
5 You really did open the door,
6 didn't you, Chris? Where -- you talked about
7 your organization and an organization that
8 I'm very familiar with and that is known
9 nationally that represents small business is
10 NFIV. I want you to tell me where they are
11 and are they a part of your group, or is your
12 group just a piece of that? Who do you
13 represent, really?
14 The other thing, I think you quoted
15 something from an economist that said it
16 might be as much as 24 percent. I understand
17 what it means when it says "might be." It
18 might not be, too. So, I guess, there again,
19 when we make assumptions I think it's very --
20 I'm concerned that we not assume things that
21 are not necessarily true.
22 The other piece that I think is
240
1 important, and I'd like to have you comment
2 on this -- and maybe others, too -- do you
3 have evidence that the feds do a better job
4 of tax policy than local governments or state
5 governments? Is that why you believe we
6 ought to have a national policy on Internet
7 taxation?
8 MR. WYSOCKI: If I can address the
9 three parts of your question in order? I
10 want to thank you for the opportunity to do a
11 commercial for SBSC, first of all.
12 SBSC, as I mentioned, we have
13 about 50,000 members. It was started
14 in 1994, largely as a result of some members
15 of the business community that were
16 affiliated with other groups did not feel
17 that there was a principle organization that
18 was aggressive enough. That was really the
19 nexus of SBSC coming into creation.
20 In terms of where NFIB and some of
21 the other small business organizations are on
22 this issue, I don't know. I simply don't
241
1 know. I haven't consulted them. They may be
2 on the same side as we are, I just don't
3 know. I apologize for not knowing.
4 CHAIRMAN GILMORE: Governor Locke?
5 MS. JONES: I'd like him to answer
6 the rest of the question.
7 CHAIRMAN GILMORE: Sure, go ahead.
8 MR. WYSOCKI: In terms of -- and,
9 actually, if you could just refresh my memory
10 on the third point?
11 MS. JONES: What evidence do you
12 have the federal government sets better tax
13 policy than state and local governments? Is
14 that why you're doing this this way?
15 MR. WYSOCKI: What we want to do by
16 supporting the Kasich legislation is really
17 to create an entrepreneurial environment. We
18 believe that by eliminating sales tax on
19 electronic commerce -- and we do believe that
20 electronic commerce is national in scope,
21 even between state -- even within a state,
22 where a customer and a retailer that are
242
1 conducting business on-line, it is our
2 position that the Kasich legislation is
3 right-on. That states should not be able to
4 tax that transaction, because of the very
5 inter-state nature of the Internet. That's
6 basically where we are on that.
7 In terms of whether or not the
8 federal government is more efficient than
9 state and local governments in collecting and
10 dealing with tax issues -- tax policy -- I
11 wish I could say yes, but I certainly can't
12 say no.
13 What I'm looking for in terms of a
14 small business perspective is to create a
15 situation where entrepreneurs are able to go
16 out, start a business with minimal government
17 interference, and deal with the minimal level
18 of government that gets in their way.
19 I really don't know if the federal
20 government in the future is going to be any
21 better than state or local governments at
22 collecting sales tax. But I do think that
243
1 this is a national issue and it deserves
2 national attention.
3 CHAIRMAN GILMORE: Governor Locke?
4 GOVERNOR LOCKE: For Chris Wysocki, I
5 have a question. Congressman Kasich's
6 proposal is not just dealing with
7 inter-state, I think as you just said a few
8 minutes ago, it would apply to even
9 transactions within a state. I take it,
10 then, if there's a company that's located in
11 one state -- headquartered in that state, has
12 thousands of outlets and stores, huge
13 warehouses, that you're saying, then, that if
14 a citizen were to purchase something from
15 that major store -- company -- via the
16 Internet and that citizen is of the same
17 state, five miles down the road, that there
18 would be no taxation under the Congressman's
19 bill on that transaction of any sort?
20 MR. WYSOCKI: That's correct.
21 GOVERNOR LOCKE: If that citizen called
22 up that company and made the order, the
244
1 Congressman is not saying that no taxes would
2 be charged? Taxes would still be applied on
3 that transaction?
4 MR. WYSOCKI: My -- Congressman
5 Kasich's legislation deals with the Internet.
6 GOVERNOR LOCKE: All right. If the
7 citizen drove five miles to that store and
8 physically purchased it, that citizen would
9 pay the tax?
10 MR. WYSOCKI: That is also correct.
11 GOVERNOR LOCKE: Aren't the highways
12 part of the interstate system -- interstate
13 commerce?
14 MR. WYSOCKI: Yes, they are.
15 GOVERNOR LOCKE: Aren't the telephones
16 interstate commerce?
17 MR. WYSOCKI: Yes, they are.
18 GOVERNOR LOCKE: But Congressman Kasich
19 would say that using the federal highways to
20 go to that store five miles, you pay the tax.
21 You use the telephone, buy that same item,
22 you pay the tax. Use the Internet, which is
245
1 over the telephone, you don't pay the tax?
2 MR. WYSOCKI: That's exactly what
3 Congressman Kasich's legislation does. The
4 reason that he's able to do that is because
5 that Congress does have the authority to have
6 that debate.
7 Now, what I'm suggesting is that by
8 Congress acting on this measure, they have a
9 constitutional right to do so. And --
10 GOVERNOR LOCKE: I'm not disputing that.
11 MR. WYSOCKI: The policy debate is
12 something that I think that Congress will be
13 very -- it will be a very fun debate in
14 Congress.
15 GOVERNOR LOCKE: How about this -- I'm
16 not disputing the power of Congress issue. I
17 just want to make clear what the transactions
18 would be that are subject or not subject to
19 taxation.
20 If the person goes down to that
21 store -- drives the five miles to that
22 store -- goes onto the counter, looks at all
246
1 the items that the store has, and then
2 decides to -- at the counter -- at the store,
3 order the item over the Internet, because the
4 Internet is on the counter of the store, and
5 not subject to taxation, then?
6 MR. WYSOCKI: That's correct. But
7 may I ask a rather simple question in
8 response? Why would a person want to wait 24
9 hours or so to get a product that he's
10 standing right in front of to buy?
11 GOVERNOR LOCKE: Well, I can imagine --
12 I can imagine that a lot of stores are going
13 to become showcases or they don't have the
14 product right there, because of limited
15 storage space. You go down to the store, you
16 touch and feel the product, and you get a
17 sense of it. The color's not there, the very
18 item is not there, and so you decide to --
19 you know, they have Internet computers right
20 there, and everything, and they decide, well,
21 I'm going to order it over the Internet.
22 MR. WYSOCKI: Then you wouldn't be
247
1 subject to a sales tax, but you'd still be
2 subject to a shipping charge. You'd still be
3 subject to the 24-hour or so delay of
4 personal gratification before you get the
5 goods.
6 GOVERNOR LOCKE: Well, suppose they
7 bring it to the store the next day and you go
8 down and pick it up? That's what happens now
9 in stores if they're out -- temporarily out.
10 You go back the next day or they deliver it
11 to you.
12 MR. WYSOCKI: Or you can go to
13 another store that has it.
14 I mean, what I'm suggesting is that
15 the economy as a whole -- I mean, I think the
16 problem is that a lot of people in this
17 debate are looking at the economy as a fixed
18 piece of pie, and retail stores are still going
19 to be around in the digital age. People like
20 to go and touch and feel and shop. Whereas,
21 people enjoy E-commerce as a new activity.
22 There's a lot of excitement in buying things
248
1 on-line. I don't think that this is a
2 zero-sum game.
3 CHAIRMAN GILMORE: Let me keep this moving here because we’ve had a number of people who have had their hands up who want to get in. In fact almost everygody wants to get in the game. Governor Leavitt,
4 you're next.
5 GOVERNOR LEAVITT: Thank you. I read an
6 article recently. It was actually a speech
7 by Lou Gursner of IBM who was espousing and
8 celebrating, as we all do, this remarkable
9 opportunity we have with the Internet. His
10 point -- I think the phrase was, what we're
11 seeing are the fireflies before the storm.
12 The big players are now just barely starting
13 to get into this. Yes, we've seen tremendous
14 potential, but wait until the WalMarts and
15 the K-Marts and Sears and the JC Penny's and
16 GAPs and the Radio Shacks and all of these
17 big players become focused on this
18 opportunity, as they are.
19 I'm just wondering, as you have
20 thought about this -- and I'm asking of both
21 you -- have you considered what will happen
22 when these big retailers who have nexus in
249
1 all 50 states, when this collision between
2 those who have nexus everywhere and those
3 that have an unlimited status? I mean, can
4 we -- can we -- what's going happen when that
5 collision happens? Are we going to -- can we
6 operate in that kind of environment?
7 MR. THIERER: It's going to be very
8 difficult. I think you raised the point
9 earlier, Governor, about is the current sales
10 and use tax system viable in the 21st
11 Century? That's a very good question. There
12 was an important submission to the Commission
13 by Hal Varian, the Dean of the Berkeley
14 School of Business Management where he said,
15 the answer is no. That we need to find a way
16 to replace this system completely. I don't
17 think anybody's prepared to go that far right
18 now, at least at the state and local level,
19 because we rely so heavily upon sales taxes
20 as a revenue source.
21 However, there are other potential
22 alternatives here. I've mentioned a couple
250
1 of them before about potentially getting rid
2 of exemptions or changing the way you
3 administer certain taxes or moving towards
4 other systems, or taxing at the origin. As a
5 compromise position, it offers the potential
6 for a state like Utah to assess -- or to
7 levy, rather, a tax evenly on any vendor,
8 Internet or main street merchant, at the same
9 rate, within the state of Utah, not outside
10 of it. Fitting within into the
11 constitutional confines that are currently in
12 place and which are not likely to go away any
13 time soon.
14 So I think there are alternatives
15 out there, but I think you're right. There's
16 no way we're going to stop this train from
17 moving down the tracks.
18 GOVERNOR LEAVITT: What about you,
19 Mr. Wysocki? Is the sales tax going to
20 become obsolete? Is this a tool that we're
21 just flat not going have in the 21st Century?
22 MR. WYSOCKI: I think in order to
251
1 fund government programs in the future we
2 have to take really hard look at the way we
3 fund government programs. I think there's no
4 way to get around it.
5 GOVERNOR LEAVITT: Grover and I both
6 agree that we really need to reduce
7 government and keep it as flat as we possibly
8 can and we'll go through that process. But
9 when we get there, how -- once we've done all
10 of that, where -- what would you suggest we
11 do as an alternative to this? We've closed
12 all the exemptions off. You got some
13 thoughts about the survival of small
14 businesses when we've got to that point?
15 MR. WYSOCKI: Well, I think small
16 businesses will survive in an environment
17 that -- where taxes are simple and low.
18 Whatever solution that can be reached, that
19 guarantees the simplest and the lowest taxes
20 possible, that's when small businesses will
21 really take off.
22 GOVERNOR LEAVITT: I agree with that.
252
1 One of the things that happens when
2 businesses are profitable is that they have
3 to deal with income tax.
4 MR. WYSOCKI: Absolutely.
5 GOVERNOR LEAVITT: I guess the point I
6 would like to ask is what do you think would
7 be the best way for us to deal with this once
8 we've done all of those other things that the
9 Internet -- if this truly is the fireflies
10 before the storm and this is going grow as we
11 all believe it will --
12 MR. WYSOCKI: I don't know I'm
13 prepared to answer what's the best -- the
14 best way to fix the problem today. I really
15 just don't feel prepared to answer that.
16 What I will say about it, however, is that
17 whatever tax is honest and low and simple is
18 generally going to be the tax that does the
19 best for small business.
20 GOVERNOR LEAVITT: Maybe fair?
21 MR. WYSOCKI: Fair.
22 GOVERNOR LEAVITT: One that everybody
253
1 pays the same?
2 MR. WYSOCKI: Yeah.
3 CHAIRMAN GILMORE: Mr. Pincus?
4 MR. PINCUS: Thank you, Governor.
5 I wanted to follow-up on Governor Locke's
6 question about the kiosk in the store.
7 Because as I read Congressman Kasich's bill,
8 actually if you ordered the good over the
9 kiosk in the store and it was given to you
10 right there, you'd still use electronic
11 commerce. So I wonder why that also wouldn't
12 be -- the bill just says it has to be via
13 electronic commerce, so wouldn't that be tax
14 exempt, also?
15 MR. WYSOCKI: My understanding is
16 that it would.
17 MR. PINCUS: Yeah. So any -- I
18 think we have -- sort of right now we have
19 Quill in effect. So under that regime there
20 is -- there are some taxes -- perhaps people
21 quarrel about how much that are not being
22 collected. I guess it just seems to me that
254
1 under the regime you're proposing it would be
2 pretty easy for any store owner to integrate
3 the Internet into how they do business. So
4 the impact on sales tax collection would
5 probably be pretty dramatic. I wonder if
6 you've tried to scope that out at all?
7 MR. WYSOCKI: What impact? What
8 the impact would be, I think, is you would
9 have a situation. The situation where
10 you're -- that you're proposing or suggesting
11 is that people are going to be going into
12 stores, ordering on-line, going home, coming
13 back to the store the next day --
14 MR. PINCUS: No, I don't think
15 they'd have to wait until the next day, I
16 think they could get it right there. As long
17 as they order it over the kiosk, they just go
18 to the check-out counter and it's delivered
19 to them and they pay for it and they've used
20 the Internet. So wouldn't -- I mean I guess
21 my question is just wouldn't it -- in a year
22 or two, wouldn't every store owner of any
255
1 size in America have integrated the Internet
2 into their business in a way that there
3 wouldn't be any sales tax?
4 MR. WYSOCKI: It would be a good
5 idea.
6 MR. THIERER: Actually, if I
7 could -- there might be a point there to
8 clarify. If existing nexus standards
9 continue to remain in effect, that might not
10 necessarily be the case.
11 MR. PINCUS: But I think the bill
12 that the Congressman wrote overrules existing
13 nexus standards.
14 MR. THIERER: I'm not sure if
15 that's correct. That's a good question.
16 MR. PINCUS: Yeah, I mean the bill
17 was attached to his testimony and what the
18 bill says is, if it's electronic commerce,
19 it's per se exempt from tax.
20 MR. WYSOCKI: That's a good idea.
21 CHAIRMAN GILMORE: Next person, I think
22 it was Mr. Lebrun and then Mr. Sokul.
256
1 MR. LEBRUN: A question again for
2 Chris. Chris, your Small Business Survival
3 Committee which you told us had 50,000
4 members, I assume some of those 50,000
5 members are brick and mortar small businesses
6 that don't have Internet?
7 MR. WYSOCKI: That's correct.
8 MR. LEBRUN: As I understand it,
9 your committee is supporting this bill by
10 Representative Tiosh. Did the members who
11 don't -- did the members who are brick and
12 mortar of your committee support this
13 position, and how did your committee arrive
14 at this position to support this?
15 MR. WYSOCKI: Because it's the
16 right thing to do.
17 MR. LEBRUN: No, you're not
18 answering my question.
19 MR. WYSOCKI: No, I am answering --
20 MR. LEBRUN: How did the 50,000
21 members that you represent arrive at this
22 decision? Or was it decided on by an
257
1 executive committee? How was it arrived at?
2 MR. WYSOCKI: The decision making
3 process of the Small Business Survival
4 Committee is very clear. If it's right, we
5 do it. If it's wrong, we oppose it. We
6 don't --
7 MR. LEBRUN: Who decides if it's
8 right or wrong?
9 MR. WYSOCKI: Basically, I do and
10 our Board of Directors.
11 MR. LEBRUN: Thank you.
12 CHAIRMAN GILMORE: Mr. Sokul?
13 MR. SOKUL: Thank you. I have a
14 couple of questions. But first, I just have
15 a general comment the exchange that occurred
16 with Mr. -- with Mayor Kirk who's not here
17 now, and your response about the availability
18 of data. What is the data?
19 It seems to me the basic debate
20 occurring on the effect on state and local
21 governments has to do whether you look at
22 from a static point of view or a dynamic
258
1 point of view. Does the -- I think from a
2 static point of view you can say when someone
3 shops on-line and sales tax isn't collected
4 on that one purchase, sales tax is being
5 lost, or the use tax.
6 Dean Andal's point to counter that
7 is, well, yeah, but the dynamic effect, the
8 ripple effect as outlined in the Commerce
9 Report that we received in June is so strong
10 that, for instance, California's revenue is
11 growing at historic rates.
12 So, you know, it depends on your
13 perspective and your point of view, but I
14 would, you know, just ask -- not for a
15 specific response but just in general -- if
16 we don't have the data, I mean what do we
17 recommend to Congress? I mean, should one of
18 our recommendations be, you need to study
19 this better. We need more data before we can
20 make recommendations? But -- yeah, go ahead.
21 I going to ask -- maybe you can --
22 I'll have two questions, then.
259
1 The other thing I wanted to ask you
2 is, you noted that the zero burden plan of
3 the streamlined sales tax system is
4 unconstitutional. I, as I understand it,
5 it's a voluntary system on the part of
6 business, and I wanted to ask you why do think
7 it's unconstitutional? Is it because there
8 are others in the stream that have mandatory
9 obligations imposed upon them, like credit
10 card companies or --
11 MR. THIERER: Yeah, there's a
12 number of reasons why that the NGA plan is
13 problematic from a constitutional
14 perspective. I think, number one, it still
15 doesn't get around this idea of whether or
16 not use tax collection is constitutional.
17 The question is, "By removing the burden on a
18 remote seller and placing it on a,
19 quote-unquote, trusted third party, removing
20 any constitutional issues from the field of
21 play?" I don't necessarily think so.
22 There's still an issue of extra-territorial
260
1 tax reach at play here, and whether or not a
2 state or local government can have the net
3 effect of taxing a company outside of its
4 state that does not have substantial physical
5 presence.
6 But there are other questions. I
7 don't necessarily think this plan is going to
8 work if it's, quote- unquote, voluntary. I
9 don't see companies rushing to adopt it any
10 time soon. I don't see states that don't
11 have sales taxes adopting it. I don't know,
12 maybe they will, but I don't how it could be
13 voluntary and work in practice at all. I
14 think essentially they're going to have to
15 find a way to coerce folks to join the
16 system.
17 Regarding your first point on data
18 and what it should mean for this Commission,
19 I think you're right, there is an absence of
20 data and information. It doesn't mean that
21 there can't be steps taken by this
22 Commission -- or later by Congress when it
261
1 debates this issue -- to make the law clear
2 on this point. There remains an ambiguity
3 regarding electronic commerce. The laws that
4 currently stand deals with the modern
5 technology of the 1960's mail-order telephone
6 sales and catalogue orders. That needs to
7 potentially be brought up to date with
8 something along the lines of what
9 Commissioner Andal is suggesting.
10 MR. SOKUL: Just one final question
11 for Chris, and maybe I'll try to help you out
12 rather than slam you here.
13 The notions of fairness that
14 something like Congressman Kasich proposes is
15 just terribly unfair to local merchants.
16 What is unfair is because of what states are
17 doing to local merchants right now. The
18 existing tax system, I think everyone here
19 would agree, is a mess. The accumulative
20 burdens that are posed on national merchants
21 are incredible. We'll hear about that more
22 tomorrow.
262
1 The costs of compliance are
2 tremendous. What is fair is based upon
3 current reality which is terrible for local
4 merchants. It seems to me what Congressman
5 Kasich is proposing, although certainly on
6 the, you know, the hyper-technical level --
7 maybe it's not so hyper-technical, but on
8 certain levels can be attacked as, you know,
9 that's unfair.
10 What he's really saying is, we have
11 Internet commerce and where should I prior --
12 where should our priorities be? You know, as
13 we recommend to Congress, perhaps one thing
14 we can do is to take a step back, rather than
15 getting caught up in details and just saying,
16 you know something? Our priorities should be
17 with the Internet and the future. It should
18 not be with a depression era tax system
19 designed for the cash register economy. It
20 should not be preserving that, and our
21 decisions should not be made on the basis
22 of -- we should not accept the underlying
263
1 assumption that that is what we have.
2 You know, people around this table
3 have changed the world -- these very
4 people -- by what they've done in creating
5 the Internet economy. It's awe-inspiring to
6 sit at this Commission with some of these
7 folks. They didn't accept the current world
8 when they started their businesses. They
9 changed the world. Why things are fair or
10 unfair based upon a current government system
11 is -- it just baffles me.
12 Don't give government a pass.
13 Isn't that what your saying?
14 MR. WYSOCKI: I think you said that
15 very well.
16 MR. SOKUL: Governor, I wonder --
17 Governor, I don't want to be accused being
18 unfair to anyone, and I -- or
19 hyper-technical -- and if I can just maybe
20 clarify for one second --
21 CHAIRMAN GILMORE: Merely technical, but
22 go ahead.
264
1 MR. PINCUS: Actually, I -- one
2 sense, the Congressman's plan is the fairest
3 to local merchants, because what it basically
4 says is anyone who uses the Internet in any
5 way will be free of tax. I think the issue
6 is -- the revenue implications are not
7 the $20 billion that we've talked about with
8 remote sales, I think they're probably all
9 sales taxes in a few years. I think that's
10 really the issue with the Congressman's plan,
11 is whether that revenue effect, which I think
12 would pretty well follow, is sustainable.
13 So I actually think the issue
14 there, with that particular plan, isn't
15 fairness, it's just overall impact.
16 CHAIRMAN GILMORE: Mr. Pincus, can you
17 think of no way to alter the system in order
18 to avoid the issue of the kiosk? You can't
19 think of any way to keep the Internet tax
20 from bleeding over into all sales taxes.
21 MR. PINCUS: Well, this particular
22 approach seems to me --
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1 CHAIRMAN GILMORE: Mr. Pincus, perhaps
2 not.
3 MR. PINCUS: I think we've got a
4 lot -- we've got some approaches on the table
5 here -- we're going to hear a lot tomorrow.
6 I want to -- I've got questions for
7 everybody, to see how they work. I hope by
8 the end of this process we will have
9 something that works.
10 CHAIRMAN GILMORE: Mr. Norquist and then
11 Mr. Guttentag and then Mr. Andal. Mr. Grover
12 Norquist?
13 MR. NORQUIST: Yes. I appreciate
14 the presentation on Mr. Kasich's proposal.
15 I'd just point out that Mr. Senator McCain
16 has introduced similar legislation in the
17 Senate with a number of Senate co-sponsors,
18 as well.
19 I had a question for Adam. I'm
20 reading the list of coalition members of the
21 E-Freedom Coalition that have endorsed your
22 proposal, and I'm just struck. It's
266
1 everybody from the Heritage Foundation to the
2 Rippon Society to all of the confident state
3 think-tanks, and so on. The Utah state
4 think-tank, Sutherland Institute, and others.
5 I'm just quite impressed with the number of
6 state and national think- tanks that you put
7 together, and I'm wondering whether they
8 might be able to put forward some
9 suggestions. Some of the politic leaders
10 have sort of said, gee, we have to raise more
11 money somehow. I know that you and some of
12 these other groups have actually put out
13 books on privatization and user fees and so
14 on. I was wondering whether you might make
15 that available to political leaders who think
16 the only alternative to not collecting a tax
17 is to collect it somewhere else?
18 MR. THIERER: Well, sure, of
19 course. Everything I've written on the
20 subject is available at our Web site
21 heritage.org or by personally contacting me.
22 But every member that -- of the E-Freedom
267
1 Coalition has issued a number of reports on
2 tax policy, Internet and
3 telecommunications-related issues, and ways
4 to reform government to potentially bring
5 government down to size and make it live
6 within its means.
7 So I think there are plenty of
8 alternatives out there. I think we,
9 unfortunately, just sort of roll our eyes
10 when we hear proposals that say, why not cut
11 back expenditures and find ways to roll back
12 certain -- the price of government programs?
13 Then maybe it will be much easier to
14 administer a tax system that works, if we're
15 not spending as much money. But, of course,
16 again, a lot of people are not interested in
17 having that debate, unfortunately.
18 MR. NORQUIST: We went through it
19 in the '80s when we were told if we cut
20 income tax rates we wouldn't have any money,
21 and it turns out that they've got more money
22 than they ever had before and that revenues
268
1 have just poured in with lower rates.
2 MR. THIERER: Yeah, that's right.
3 It's the seeming paradox of how is it that
4 the Internet is currently un-taxed and is
5 growing out of control, and yet state and
6 local and even federal budget revenues are
7 growing at record pace? I think it has a lot
8 to do with the supply side effects at play
9 there and the fact that these businesses are
10 creating new jobs, new economic opportunity,
11 economic growth. They are being taxed as
12 corporations. They are being taxed as
13 holders of property. The employees of these
14 new companies are being taxed. They're
15 creating new opportunities and new taxpayers.
16 MR. NORQUIST: He's not necessarily
17 on the panel, but Governor Gilmore provided
18 leadership over the last year when some
19 people said, we have to spend more money on
20 roads. You found it in existing budgets
21 without tax increases, although I know you
22 had a lot of helpful people explaining that
269
1 the only way that Virginia could deal with
2 its transportation problems was to raise
3 taxes.
4 We have a lot to learn from you,
5 sir.
6 CHAIRMAN GILMORE: Thank you. We prefer
7 to cut all of our taxes and get all the
8 business and let everybody else suffer.
9 That's not exactly true.
10 Joe Guttentag?
11 MR. GUTTENTAG: Thank you,
12 Mr. Chairman. Mr. Wysocki, I think you've
13 created a new digital divide here that -- in
14 a different way than we've been talking about
15 it before. That is, that people who buy on
16 the Internet don't seem to be smart enough to
17 realize they're not saving any money. I hope
18 you realize you've been on national
19 television now announcing -- announcing this.
20 MR. WYSOCKI: That's not exactly
21 what I said.
22 MR. GUTTENTAG: I appreciate your
270
1 being here and presenting Mr. Kasich's
2 proposal, because I think it does present
3 something that is very useful for us to look
4 at as we -- and a good beginning, as we look
5 at the various proposals.
6 I agree with my colleague,
7 Mr. Pincus, that as I read the legislation --
8 and I've gone over it and I used to be a tax
9 lawyer -- that I think I could advise most
10 merchants that they could avoid the sales
11 taxes. I think the result would be the
12 destruction of the sales and use tax system
13 as a revenue source, if that legislation were
14 to be enacted.
15 Based on that, now, others -- as
16 the Governor has suggest -- Governor Gilmore
17 has suggested, we could, of course, amend the
18 bill to limit it, but that's not Mr.
19 Kasich's bill and not the one that you're
20 presenting. I'm surprised we haven't heard
21 from Mr. Andal, who is very proud of all of
22 the sales taxes --
271
1 CHAIRMAN GILMORE: I just haven't called
2 on him yet. He's coming, he's next.
3 MR. GUTTENTAG: If that source of
4 revenue disappears, but we can from him. But
5 we are talking about revenue which amounts to
6 one-third of the total state revenues
7 throughout the country. In some
8 jurisdictions, such as Governor Locke's, a
9 greater percentage of state revenues.
10 I think, respectfully, Mr. Wysocki,
11 I think that you and Mr. Kasich should, in
12 putting this mandate on the state and local
13 tax jurisdictions -- you were asked by
14 Governor Leavitt what are the alternatives.
15 It seems to me that you were told -- and also
16 Mayor Kirk asked, would the federal
17 government pay for this?
18 I think it's appropriate in this
19 area for there to be for when such a proposal
20 is made -- such a -- quite a drastic proposal
21 and I think you would agree with that -- that
22 there be a presentation and some ideas from
272
1 you as to how that revenue ought to be
2 replaced. To indicate the fairness, the
3 simplicity, all of the various factors which
4 go into a tax system, as well as why -- the
5 other question was asked, I think, by
6 Ms. Jones, as to why the federal government
7 is prohibiting states from enforcing laws
8 which would -- which account for such a large
9 proportion of their revenues.
10 So I would suggest, Mr. Wysocki,
11 that if you pursue this and Mr. Kasich
12 pursues it, that such a recommendation be
13 heard.
14 CHAIRMAN GILMORE: Mr. Andal?
15 MR. ANDAL: Oh, I have so much to
16 say. First of all, on the kiosk example, I
17 feel like I'd have a real chance at the vice
18 president's support, and I didn't want to
19 miss this opportunity. But under my
20 proposal, the kiosk example that you
21 mentioned would constitute physical presence
22 and would be taxable. No doubt about it,
273
1 under my proposal that would be taxable. I
2 think -- I think part of the -- and by the
3 way, I'm dying to answer the question as to
4 what tax would I prefer to replace these
5 taxes with. I would volunteer a tax on
6 lawyers and accountants.
7 But I think we have the burden all
8 wrong here. I lost all the lawyers on this
9 panel. Here's the question for you. Right
10 now it is unconstitutional to make
11 out-of-state sellers collect tax unless they
12 have physical presence in your state. That's
13 the law of the land. My proposal codifies
14 that, expands it, makes the brighter lines,
15 brighter. But really does not change the
16 underlying principles that we have today.
17 I might be a single voice on this
18 question, but I don't believe the sales tax
19 is fatally flawed. We collect about $27
20 billion a year in California. It's about
21 somewhere between 35 or 40 percent of our
22 general fund. It finances our schools, helps
274
1 us house prisoners, finances health and
2 welfare to the poor. It does -- other than
3 the state income tax, it's is the most
4 important state tax. Most of the property
5 tax goes to local needs.
6 I don't think the state's sales tax
7 is fatally flawed. We do that, by the way,
8 at a collection cost of less than 1 percent.
9 It's not a fatally -- it has problems,
10 though, and some of the problems that it's
11 had for, say, 20 years, involved nexus and
12 are exacerbated by the Internet.
13 The solution to that is not blowing
14 up our entire sales tax system. The solution
15 is not a software program that basically
16 allows forcing out-of-state sellers to
17 collect our sales tax for us. We don't need
18 any of that. All we need is some bright
19 lines that make some refinements to our
20 existing sales tax system and prevent some of
21 the abuses that could harm the Internet in
22 the future.
275
1 I think the burden of proof,
2 instead, is on those who want to collect from
3 out-of-state sellers. They're the ones that
4 want to change the existing system, either
5 through software or through overturning
6 Quill, and the question ought to be asked of
7 them, how you solve all of the inevitable
8 problems that you create?
9 The answer to Mayor Kirk's
10 question, when he was here, was -- he asked,
11 who's going to pay for this? Is the federal
12 government going to pay for this? Pay for
13 what? There is nothing being lost. The
14 question is are you going to allow state and
15 local governmental entities to go after more?
16 To collect more, to provide more sales tax
17 collection responsibilities on out-of-state
18 retailers.
19 So the question is a little
20 backwards. That is, if you don't -- if you
21 think the sales tax system is not bringing in
22 enough money and you need to tax -- make
276
1 out-of- state sales tax collectors pay more,
2 then it's your burden to solve the problem.
3 But there is no revenue loss of any
4 significance occurring. You have -- you have
5 to have that burden of proof if you want to
6 exchange our existing system with such a
7 dramatically different system.
8 CHAIRMAN GILMORE: Delna Jones?
9 MS. JONES: Let me just -- Mayor
10 Kirk needs no one to be in his corner, and I
11 wouldn't want to try to do that. However, I
12 was going to say, I think that the question
13 was related directly to Chris who was looking
14 at really, in the end, almost eliminating all
15 sales tax. So I think that was the issue.
16 Let me just add another piece from
17 a state that doesn't have a sales tax. One
18 of the things that I'm very supportive of
19 the -- of the comments that you've just made,
20 and that is, because there is no -- just
21 because there is not a sales tax does not
22 mean that the tax system is fair or better.
277
1 What I think it means is that you have a very
2 high income, then, or you have other tax
3 structures that are not necessarily as broad
4 based, and are not related to choices and
5 much as the sales tax.
6 So when we look at the idea of
7 eliminating all sales tax, I don't think that
8 is necessarily a good step forward, from
9 experience.
10 Plus the fact that one of things I
11 think our citizens have become very capable
12 of doing, especially in states with an
13 initiative petition process, is if one area
14 of taxation has become more burdensome to
15 them than they feel is realistic, they will
16 find ways to reduce that tax structure, so
17 that that does not feel -- so they do not
18 feel the effect of that.
19 I think the broader base tax you
20 have, the better chance you have of being
21 fair in that regard.
22 CHAIRMAN GILMORE: Grover Norquist?
278
1 MR. ANDAL: Do you want to give
2 Mayor Kirk rebuttal?
3 CHAIRMAN GILMORE: Go ahead, Grover.
4 MR. ANDAL: That will teach you to
5 leave the room.
6 MR. NORQUIST: Commissioner Andal?
7 In your extension of the 4-R law to protect
8 the telecommunications industry from being
9 discriminated against or -- by state and
10 local governments, compared to other
11 industries, do I understand correctly that
12 you just forbid state and local governments
13 from having discriminatory property tax laws?
14 MR. ANDAL: Yes.
15 MR. NORQUIST: Why not include in
16 that the excise taxes and other taxes that
17 have gotten awfully high, as well?
18 MR. ANDAL: My proposal was only
19 designed to deal with what I consider
20 discriminatory ad valroem or property tax.
21 There are -- that basically falls into three
22 separate categories. Some states tax
279
1 intangible assets of telecommunications
2 companies, while they don't tax the
3 intangible assets of other companies in their
4 state. Some tax telecommunications companies
5 at a higher rate of taxation. Then others --
6 and in the case of California, the
7 discrimination that we engage in is we tax
8 property of telecommunication carriers at
9 market value, whereas all other businesses
10 are taxed at a base year value set by
11 Proposition 13 with an annual increase of 2
12 percent.
13 So my proposal only deals with the
14 property tax piece, and the reason I didn't
15 deal with the rest was others were.
16 CHAIRMAN GILMORE: Andy Pincus?
17 MR. PINCUS: Thank you, Governor.
18 I wanted to put another issue on the table,
19 although you alluded to it and so did Mayor
20 Kirk, which is a question of fairness in
21 discussing the food and drug exemptions.
22 You've talked about how they were based on
280
1 the public policy concern about who would
2 bear those -- the cost of paying sales taxes
3 if they were imposed on essentials of life,
4 like food and medicine. It seems to me in
5 deciding whether and how to change the
6 current system, because even Commissioner
7 Andal's proposal is a change, one question
8 that we have to consider is the fairness of
9 the rules that we would adopt, if there are
10 new rules, and the fairness of the current
11 system. At that, seems to me, to bring us to
12 the issue of the digital divide.
13 I think it's been mentioned here,
14 but in the Commerce Department's study that
15 came out last summer we found that households
16 with incomes of 75,000 and higher are more
17 than 20 times more likely to have access to
18 the Internet than those at the lowest income
19 levels, and more than nine times as likely to
20 have a computer at home.
21 All of us, I think, got a letter
22 from nine Senators that raised this issue and
281
1 expressed concern about the burden of sales
2 and use taxes falling most heavily on low
3 income consumers who are the least likely to
4 have Internet access and the ability to buy
5 goods on line.
6 So it just seems to me that one
7 issue that we all should keep in mind in
8 accessing all these various proposals is what
9 that will do to the -- where that adjustment
10 will put the burden of the sales tax.
11 Because I think some of the proposals will
12 change where that burden falls.
13 CHAIRMAN GILMORE: Andy, I want to get
14 on with this issue. I absolutely believe
15 that the digital divide is an important issue
16 before the country, and I don't think we
17 should assume, or have any right to assume,
18 that people of modest means shouldn't have --
19 won't have access to the Internet. I imagine
20 that this discussion was had at the time that
21 the telephone was being introduced and people
22 were talking about how, well, people of
282
1 modest means, they can't make phone calls
2 and, gee, they've got to run down to the
3 local access or something.
4 I think that we should be finding
5 ways to get people onto the Internet. I
6 think we should find ways to do that. My
7 proposal, that I put in, which is included in
8 the issues paper which will be discussed
9 tomorrow afternoon, in fact says we ought to
10 take TANF funds and take federal regulations
11 and clarify it in order to give Governors a
12 free hand to utilize excess surplus TANF
13 funds in order to help cross the digital
14 divide and give people more opportunities for
15 access.
16 Once you've done that, once you've
17 extended the hand of the Internet down into a
18 broad range of the people of this country,
19 then a no-tax regime at that point really
20 cuts generously to people who, otherwise, are
21 having to make trips long distances, to go to
22 malls, and can't, because they don't have
283
1 cars. Senior citizens, who are -- of whom I
2 some personal knowledge of this, who have a
3 hard time getting places in order buy things
4 for themselves. People who are concerned
5 about what level of quality of life they're
6 going to have, which could get four to -- in
7 some states, more than 8 percent more,
8 because they're not having to pay the tax,
9 because they have an opportunity now to get
10 on line.
11 So I believe, absolutely, that the
12 digital divide is a key issue, and the more
13 generous proposals that I think are being
14 offered, I think are more long-term prospects
15 for people of modest means in this country.
16 MR. PINCUS: Governor, if I could
17 for just a minute? We -- I couldn't agree
18 more that government should do everything it
19 can to close the digital divide. In fact, we
20 had a conference on that subject in the
21 Commerce Department last week with the
22 business community, the public interest
284
1 community -- a whole bunch of people -- to
2 try and bring together to focus on that. But
3 in the short term, I think we can agree --
4 although that's an important goal and one we
5 should move forward with, I think one
6 question is where we are in the short-term
7 and what some these proposals will do in the
8 short-term until that era happens.
9 CHAIRMAN GILMORE: I believe it makes no
10 sense to argue that we should preserve taxes
11 on commerce on the Internet, because today
12 poor people can't get on the Internet. I
13 believe that's a very short-sighted point of
14 view. But this is also going to be discussed
15 again tomorrow.
16 Ron Kirk?
17 MAYOR KIRK: Governor, I did want to
18 commend you, at least, for addressing that
19 issue in your proposal, but I think it's a
20 little more complex than that, because it's
21 not just having a computer, it's the
22 knowledge to use it.
285
1 Also the reality -- the statistics
2 Mr. Pincus gave us to instruct us, but more
3 than that, 99 percent of the people that buy
4 over the Internet pay with a credit card.
5 So it's not going to help if you
6 get someone at the lowest poverty level a
7 computer. They don't have the knowledge and
8 they don't have credit, so they still have
9 got a computer. But if they can't use a
10 credit card to pay for it, they won't.
11 But, briefly Dean, I wanted to
12 ask -- answer your question in terms of what
13 cities and states would use with that money,
14 and I want to elaborate, because to me the
15 most exciting thing that's going to happen
16 in 20-something days is not whether -- I
17 mean, we will survive Y2K. We'll survive the
18 year of celebrations, but the next year is a
19 decennial, and we're going to go into a
20 census.
21 States like California and Texas
22 and border states, I would imagine, are
286
1 seeing explosive growth, because people are
2 moving to our part of the world to
3 participate in this economy, and in some
4 cases of migration, both legal and illegal.
5 The biggest drain -- biggest drains challenge
6 for high growth barriers, high growth states,
7 is education.
8 Paying for education, paying for
9 roads, paying for streets, paying for
10 increased demands for city services,
11 out-strips the capacity of every government
12 entity in this country. Even though we've
13 had tremendous surpluses the last several
14 years, the few years before that we had
15 tremendous losses. Our city just now is back
16 at the same tax levels that we were in 1984.
17 We're proud of that. But there was a lot
18 times we didn't invest in infrastructure, and
19 we would never propose to go in and tax
20 people as much as we could so that we could
21 fill every pothole, build every school. So
22 you have to spread that out.
287
1 I think as someone involved in
2 state government, you know that it does not
3 equate to say, because you've got a surplus
4 in one year that you don't have needs. I
5 would imagine even the most prosperous cities
6 like Dallas and New York and others have
7 billions of dollars of unfunded needs and
8 projects that have to be met. The federal
9 government helps, because they want us to
10 clean up our air, clean up our water, and do
11 a number of other things that they give us no
12 money to fund, and we should do that.
13 But all of that takes money. I
14 assure you that our dollars are spent wisely.
15 Unlike the federal government, we have to
16 balance our budget at the end of every day.
17 We don't get to do deficit spending. So we
18 live in a real world of service delivery that
19 either we raise taxes or we cut services.
20 CHAIRMAN GILMORE: Richard Parsons?
21 MR. PARSONS: Thank you, Governor.
22 One wrestles as you sit here and listen to
288
1 this discussion with the question of how is
2 this Commission ultimately going to come to
3 some conclusions or endpoints, because
4 essentially here the debate is between
5 positions. Just trying to think about it
6 puts -- and particularly for tomorrow, what
7 strikes me in listening to this conversation
8 is that we need to be clear on what the issue
9 is we're trying to solve for here.
10 I mean, is the question before the
11 House on this sales tax issue? I mean,
12 that's where the shoe is binding around the
13 table. Is the question what do we need to do
14 to level up the playing field? By that I
15 mean, you know, how do we make sure that
16 electronic commerce gets treated in the same
17 fashion from a tax point of view as
18 nonelectronic commerce?
19 So, I mean, if that's the issue, I
20 think our fellow Commissioner Dean Andal has
21 fairly interesting proposition that's at
22 least a good strawman to start from. Because
289
1 what he's trying to, as I understand it, is
2 to draw the bright lines between where
3 E-commerce really has a nexus with the state
4 and should be taxed from a sales tax point of
5 view and in the same way that other commerce
6 with a nexus to a state does and where it
7 doesn't.
8 But there are at least two other
9 issues. One is -- is there something special
10 about electronic commerce that suggests it
11 should be exempted from sales tax altogether?
12 That's the argument we're hearing from
13 Mr. Wysocki and others that basically says,
14 "Oh, if you tax it in any kind of way, we're
15 going to put a burden on this goose that's
16 laying the golden egg and potentially kill
17 the goose."
18 Now, while one hears the arguments,
19 there doesn't seem to be any evidence at this
20 point in time to actually support those
21 arguments, but that's a different question
22 than the question that Dean is trying answer.
290
1 The other side of that coin is, you
2 know, is there something about E-commerce
3 that really reveals the need to reform the
4 entire sales tax system? That's kind of
5 where, I think, Governor Leavitt and Mayor
6 Kirk and others are coming from and they're
7 saying, you know, we could tolerate remote
8 sales as kind of a loophole or a hole in
9 our -- in the bucket out of which a little
10 bit of sales tax leaked in the past, because
11 remote sales just never had the capacity to
12 sort of overwhelm the entire market.
13 This new thing called E-commerce
14 does and so we now have to go back and kind
15 of re-examine the entire sales tax structure.
16 Now, again, that's an argument. I haven't
17 heard any evidence that suggests it's a
18 reality staring us in the face at this point
19 in time. It could happen, could not. But
20 one of the things we might do as a Commission
21 is try and figure out, you know, what are we
22 trying to solve for here? Because if
291
1 everybody's got a different question in their
2 mind or everybody's trying to resolve for a
3 different issue, we're not going to make it
4 as a Commission in terms of coming to some
5 kinds of conclusions.
6 I know we've all put in the time
7 and listened to enough witnesses, that it
8 would be useful to kind of come out of this
9 thing with some recommendations that we could
10 all get our arms around.
11 CHAIRMAN GILMORE: Paul Harris?
12 MR. HARRIS: Thank you, Governor.
13 As I'm listening to the debates today, I find
14 it all very interesting, and obviously, it's
15 complex, and I think the presenters have
16 facilitated our understanding of just how
17 complex these issues are. Certainly, there
18 are no easy solutions to these problems. But
19 as I listen, I am increasingly am able sort
20 of break out the Commission into several
21 distinct camps which I think best
22 characterize some of the deliberations that
292
1 we're having.
2 It is written that Oliver Wendell
3 Holmes once said that taxes is the price we
4 pay for living in a civilized society. I
5 think we have those here who represent that
6 point of view. John Marshall, our most
7 famous Chief Justice, also said the power to
8 tax is the power to destroy. Certainly, we
9 have individuals on the Commission who come
10 from that perspective, as well. Then the
11 rest of us are either just confused or don't
12 really care.
13 But I think -- but also I wonder if
14 we've really taken the time as a Commission
15 to answer some more fundamental questions
16 which I think are dispositive in the long
17 run. As I sit here and listen to these
18 discussions, all of which are very, very,
19 intellectual stimulating and interesting, I
20 wonder if we're debating in the proper
21 constitutional framework.
22 I hear Delna Jones ask a question
293
1 about whether the federal government is
2 better at setting tax policy. I'm not sure
3 that's the right question. I think a better
4 question is whether E-commerce is inherently
5 interstate commerce. If E-commerce is
6 inherently interstate commerce, then the
7 question has already been disposed of in
8 Article 4 of the Constitution, which provides
9 that Congress has authority to regulate
10 interstate commerce.
11 Then if we go beyond that, there is
12 a question of whether regulation of
13 interstate commerce also empowers Congress
14 with the authority to mandate tax policy
15 within the various states and how that might
16 conflict with the 10th Amendment.
17 Then, finally, I wonder if states
18 have a constitutional right to tax citizens
19 in a different state that have little to no
20 contact with the state that is doing the
21 taxing? I throw these questions out because
22 I'm hopeful that they are constitutional
294
1 lawyers or scholars who might be watching
2 this via the Internet and might be willing to
3 give us some guidance on this. But, you
4 know, we can talk about these issues ad
5 nauseam, and it's all very interesting and
6 exciting and we give the press a lot to write
7 about -- and we've all had our various
8 dealings with the press. It's like having
9 lunch with a tiger. You can enjoy the lunch,
10 but the tiger always eats last.
11 But we need some guidance on these
12 constitutional questions as to whether all of
13 this discussion is being conducted and
14 discussed with any proper constitutional
15 framework, and I'm not sure that some of
16 these basic questions have been answered.
17 CHAIRMAN GILMORE: The time is up. We
18 will have some more time to continue this
19 even more sharply tomorrow, I suspect. I
20 would like to ask the members of the funding
21 subcommittee to meet Delna Jones and me --
22 that being Grover Norquist, and John
295
1 Sidgmore.
2 Let me mention one thing before we
3 conclude, ladies and gentlemen who are
4 getting up. I would like to point out that
5 in this hotel, according to a friend who's
6 passed me a note, Mr. Tony Rocowski -- in
7 this hotel in March of 1973, Bob Kahn
8 convened the DARPA principle investigators,
9 sketched the TCPIP protocol on a napkin, and
10 the Internet was born in this hotel in 1973.
11 We'll convene again tomorrow
12 morning. Thank you.
13 (Whereupon, at 6:00 p.m., the
14 PROCEEDINGS were continued.)
15 * * * * *
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On this page: transcript of December 14 |
