 First Meeting:
Transcript of June 22, Part 1
1
1
2
3 Meeting
4 of the
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6
7
ADVISORY COMMISSION ON ELECTRONIC COMMERCE
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9 VOLUME I
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held on
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JANUARY 22, 1999
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at
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THE COLLEGE OF WILLIAM & MARY
18 COMMONWEALTH AUDITORIUM
WILLIAMSBURG, VIRGINIA
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21
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23 COOK & WILEY, INC.
Registered Professional Reporters
24 Post Office Box 14582
Richmond, Virginia 23221
25 (804) 359-1984
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1 MEMBERS:
2 The Honorable James S. Gilmore, Chairman
Governor, Commonwealth of Virginia
3 State Capitol, Third Floor
RIChmond, Virginia 23219
4
Mr. Dean F. Andal
5 Chairman, California Board of Equalization
754 Shoreline Drive, Suite D
6 Stockton, California 95219
7 Mr. Michael Armstrong
Chief Executive Office, AT&T
8 32 Avenue of the Americas
New York, New York 10013
9
Mr. Joseph H. Guttentag
10 Senior Advisor to the
Assistant Secretary for Tax Policy
11 U. S. Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3330
12 Washington, D. C. 20220
13 The Honorable Paul C. Harris
Delegate, Virginia House of Delegates
14 100 Court Square Annex, Suite B
Charlottesville, Virginia 22902
15
Ms. Delna Jones
16 Commissioner, Washington County
Administrative Offices
17 155 North First Avenue, Suite MS22
Hillsboro, Oregon 97124
18
The Honorable Ron Kirk
19 Mayor, City of Dallas
1500 Marilla Street, Suite 5EN
20 Dallas, Texas 75201
21 The Honorable Michael O. Leavitt
Governor, State of Utah
22 State Capitol, Suite 210
Salt Lake City, Utah 84114
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24
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1 Mr. Gene N. Lebrun
President, National Conference of
2 Commissioners on Uniform State Laws
First National Bank Building, 8th Floor
3 909 St. Joseph Street
P. O. Box 8520
4 Rapid City, South Dakota 57709
5 The Honorable Gary Locke
Governor, State of Washington
6 Legislative Building
Olympia, Washington 98504
7
Mr. Grover Norquist
8 President, Americans for Tax Reform
1320 18th Street, NW, Suite 200
9 Washington, D. C. 20036
10 Mr. Robert Novick
Counselor, U. S. Trade Representative
11 600 17th Street, NW
Washington, D. C. 20508
12
Mr. Andrew Pincus
13 General Counsel, U. S. Department of Commerce
14th Street and Constitution Avenue, NW, Room 5858
14 Washington, D. C. 20230
15 Mr. David Pottruck
President and Co-Chief Executive Officer
16 Charles Schwab Corporation
101 Montgomery Street, 28th Floor
17 San Francisco, California 94104
18 Mr. John W. Sidgmore
Vice Chairman, MCI Worldcom and Chairman, UUNET
19 MCI Worldcom
8620 Willow Oaks
20 Fairfax, Virginia 22031
21 Mr. Stanley S. Sokul
Davidson & Company, Inc.
22 1101 Pennsylvania Avenue, NW, Suite 810
Washington, D. C. 20004
23
Mr. Theodore Waitt
24 Chairman and CEO, Gateway, Inc.
610 Gateway Drive
25 South Sioux City, South Dakota 57049
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1 GOVERNOR GILMORE: Good morning, Ladies and
2 Gentlemen. I hereby call this historic first
3 meeting of the Advisory Commission on Electronic
4 Commerce to order.
5 I want to welcome everybody to the historic
6 Williamsburg, specifically to the College of
7 William & Mary. I hope everybody has enjoyed
8 their stay in Williamsburg so far.
9 Ladies and Gentlemen who are in attendance
10 here today, the members of the Commission
11 obviously are seated with their names before
12 them so that you can see who all of the members
13 are appointed by the members of Congress.
14 We are very proud of the diversity and
15 balance that exists within this Commission from
16 the business community to private sector and
17 private associations as well.
18 We have a great historic task ahead of us
19 to determine the direction of Internet Commerce and,
20 specifically, the taxing authorities and the approach
21 and policy that might apply to it.
22 This is an exciting time. We're very proud
23 to be here. We're honored to be able to do this in
24 the College of William & Mary.
25 Now I would like to call on the President
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1 of the College of William & Mary, Dr. Timothy
2 Sullivan, for a few introductory remarks.
3 Dr. Sullivan.
4 DR. SULLIVAN: Thank you. Thank you,
5 Governor Gilmore.
6 Speaking as I do just in this moment for
7 all Virginians, may I congratulate you, sir, on
8 being named Chair of this important Commission.
9 Governor Gilmore, we recognize your
10 leadership in the critical area of technology
11 development and to the deployment of technology
12 for the citizens of commerce.
13 You have made all of us proud by creating
14 the Secretary of Technology at the cabinet
15 level, signing the Nation's first comprehensive
16 Internet policy, and now, sir, chairing this
17 Commission.
18 The work of this group will produce what
19 may well be the definitive policy that impacts
20 the way people everywhere conduct Electronic
21 Commerce.
22 It's fitting, I think, that you hold the
23 Commission's first meeting on this historic
24 campus. Now in our 307th year, William & Mary
25 is the nation's second oldest institution of
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1 higher learning. We appreciate the past. We
2 don't live in it.
3 Despite our maturity, the college is
4 recognized as one of the most wired campuses in
5 the country. From top to bottom in academics,
6 research, and administration, the college
7 employs advanced information technology and
8 expects all students to gain practical
9 experience in the use of this technology during
10 their stay here.
11 One of the first universities to use the
12 Apple network, William & Mary is ranked by
13 "Yahoo!" magazine as one of the 100 most wired
14 campuses in the country.
15 When I was an undergraduate student here a
16 very long time ago, I could not imagine that my
17 alma mater's historic buildings, residences,
18 offices, and classrooms would one day house
19 global computer monitors that could send and
20 receive messages from anywhere at any time.
21 That is our situation today.
22 Rich in tradition, William & Mary is
23 committed to the task of preparing our students
24 for the 21st century. For this reason,
25 information technology is integrated into every
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1 college program and operation.
2 As you can imagine, I find myself in this
3 room, the Commonwealth Auditorium, quite often.
4 But when I walked in today, I had to look twice
5 to be sure that I hadn't happened by accident to
6 go into a Circuit City store. It is still the
7 Commonwealth Auditorium.
8 On behalf of the students, faculty, and
9 staff of the College of William & Mary, it is my
10 honor to welcome all of you to our campus.
11 We're delighted to host you, and we hope
12 this room, as old as it is, will serve your
13 needs well as you begin your comprehensive and
14 globally important work.
15 Thank you.
16 GOVERNOR GILMORE: Dr. Sullivan, thank you
17 very much. We appreciate the warm welcome to
18 the wonderful College of William & Mary.
19 We're proud to be able to use what is a
20 magnificent facility for this Commission to
21 begin and to get started in this historical
22 work.
23 I appreciate the opportunity to be here and
24 to join the other Commission members in
25 welcoming you to Williamsburg, Virginia, and to
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1 the first meeting of the National Advisory
2 Commission on Electronic Commerce.
3 Ladies and Gentlemen, nearly four centuries
4 ago, a great journey started here in America
5 very close to this location where we're seated
6 right now. That was at Jamestown Island.
7 The site of the first permanent English
8 settlement in North America. Jamestown was at its
9 core a commercial venture, and its first
10 colonists were employed by the Virginia Company.
11 The investors who formed the Virginia
12 Company and the crown that chartered it
13 eventually found commercial success. But, the
14 colonists, through a whole period of struggle
15 and strife, particularly near here, near
16 Yorktown, for example, they found much more than
17 just commercial success.
18 They found democracy and capitalism and
19 freedom. They found what ultimately became
20 America.
21 This Commission today begins a journey, and
22 it is not very different from the one we began
23 at Jamestown. We have struggled, frankly, to be
24 able just simply to get to meet and to organize,
25 but we're here now and prepared to face head on
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1 the issues that are before us.
2 The core issue is the intersection of a tax
3 structure based on boundaries with an Internet
4 which is a medium that defies boundaries.
5 Other issues have to be considered,
6 including the protection of consumer privacy on
7 the Internet, the
8 impact of Internet taxes on our economy and
9 government, and the collection and administration of
10 those taxes, if they are to be levied at all.
11 But there is something at stake even beyond
12 creating a meaningful and effective taxing
13 technology policy. At stake is the future of
14 commerce in America. A future that I believe is
15 with eCommerce is the ability of individuals and
16 businesses to freely exchange goods and services
17 over the Internet.
18 We all know and appreciate this explosive
19 potential of eCommerce for individuals and
20 businesses, but we must also recognize the potential for
21 eCommerce on the American economy as a whole.
22 The University of Texas recently reported
23 that the Internet generated over 300 billion
24 dollars in U. S. revenue in 1998. A third of
25 that was eCommerce related.
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1 That makes the United States Internet
2 economy, by itself, the 18th largest economy in
3 the entire world. But it's not just the
4 Internet blue chips that are leading the way.
5 The top 80 eCommerce sites only generate a
6 third of the Nation's eCommerce revenue.
7 Established small businesses and start-ups are
8 contributing the lion's share of revenues to
9 America's Internet economy.
10 Take, for example, a local business that is
11 not too far from here called the Virginia Diner.
12 It was started a long time ago in a railroad
13 car. It expanded. It kept adding space. Then
14 in 1995 it opened a new wing, and that wing was
15 www.virginiadiner.com.
16 So no longer do they sell peanuts on the
17 side of the road a long way away from a major
18 city. Now they can deliver everywhere at the
19 point of a click of a mouse on the Internet.
20 So this is an example of the powerful
21 contributions that small Main Street businesses
22 are making to the Internet economy. Accounting
23 for more than three-quarters of global eCommerce
24 of the world's eCommerce leader.
25 Now, if we keep in mind businesses of all
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1 sizes as we forge ahead, the potential to create
2 opportunity is tremendous, but the potential to
3 hinder it is tremendous, too.
4 We have to ask several questions: How do
5 we levy a system of taxation based on thousands
6 of geographic boundaries over a medium that
7 operates in an environment without boundaries?
8 How do we do that? Do we want to? Is it
9 possible to do it?
10 What are the implications for the medium?
11 Are foreign competitors able to secure a
12 competitive advantage depending upon what we
13 recommend and what the Congress ultimately
14 passes? What is the cost to our businesses?
15 What is the cost to our privacy of our citizens?
16 Each member who is here today may have a
17 different answer to each of these questions. As
18 Chairman, I want to commit that every member's
19 point of view will be heard and valued and
20 considered, and I believe our organizational
21 meeting yesterday reflected that.
22 It's vital if we're going to have any
23 prospect at all of achieving any type of
24 consensus in this very difficult, challenging
25 issue.
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1 The process is not one, in my view, of
2 simply counting votes on logistical proposals of
3 which there will be many. Some believe in the
4 existing tax framework over the Internet.
5 Others call for different forms of
6 simplification.
7 Many don't want taxation on eCommerce at
8 all. Many think, after hearing input from all
9 the affected parties, only then can our proposal
10 be legitimate, because everybody will have a
11 chance to have had their point to be heard.
12 We hope this will foster an inclusive
13 national debate, one that builds step by step
14 with a series of formal meetings as we take the
15 time that has been allotted to us by the
16 Congress to conduct these meetings.
17 Each of these meetings should be punctuated
18 by months of research and consultation and
19 collaboration between Commission members, the
20 public and interested parties, and staff people
21 to develop policy approaches as an entire group.
22 During these meetings we're going to listen
23 to things. We'll listen to every voice, seek
24 the advice of experts. I think we're going to
25 learn a great deal.
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1 We should be in a position to not only
2 learn but to educate people and to give the
3 public information to recognize the legitimate
4 concerns that exist on all issues at hand.
5 Of course, state and local governments are
6 concerned about the effect that this has on the
7 tax base, revenue base, and businesses are
8 concerned about the implications of the current
9 tax framework.
10 So if we do these things well, we're in a
11 position to lead to a conclusion. If together
12 we lead and produce recommendations that are
13 driven by a more consensus approach, then
14 Congress, I think, is in a better position to
15 fully consider our recommendations.
16 So let me conclude by just returning once
17 more to this opportunity that is before us. I
18 think all of us recognize that the Internet
19 knows no geographical boundaries.
20 But there are other boundaries that are
21 also not recognized on the Internet: Race,
22 religion, economic circumstance, and offers
23 scholars and writers and artists and
24 philosophers some parallel opportunities to
25 exchange ideas and conduct research and find
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1 their audience.
2 Thirty years ago, a Russian novelist's,
3 Aleksandr Solzhenitsyn's, works were smuggled to
4 the west at great risk and cost.
5 Today, with access to a personal computer
6 and a telephone, dissidents have instant access
7 to a global audience. It's the most democratic
8 denominator devised, a medium that most closely
9 mirrors the promises of values of a free and
10 open society that these forefathers envisioned
11 nearly two and a quarter centuries ago.
12 That's why we begin here. We believe we
13 will carry our meetings to other key technology
14 areas across the country. But we begin here in
15 the shoes of people like George Washington,
16 Thomas Jefferson, and Patrick Henry.
17 Now it is our turn. It's our opportunity
18 to reinvigorate America's founding values and
19 set a standard that may flourish worldwide.
20 Those who sit on the Commission have an
21 opportunity afforded, because we stand at the
22 dawn of a new age. Generations have been judged
23 by their response to challenges and
24 opportunities that confronted them in their own
25 time. What will they write about us?
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1 Will we accept the challenge to be the
2 forefathers of the information age, or will we
3 engage in simple and comfortable approaches or
4 turf battles, preservation of status quo, or any
5 type of squabbling?
6 I think the opportunity is ours. Let's
7 seize it. This is the start of an historic
8 journey. I'm honored to be here and to have the
9 trust and faith of the people that are here that
10 have asked me to serve as Chairman.
11 I know by our working together, we can
12 produce work and recommendations that are worthy
13 of this challenge and the opportunity before us.
14 I thank all of you for participating and
15 all of you for being here today.
16 Ladies and Gentlemen, we're beginning a few
17 minutes late because of an effort to work out
18 some of the administrative details that were
19 under such intense discussion yesterday
20 afternoon.
21 Hopefully, we have advanced some of that.
22 I'm not sure we have. I think maybe we have.
23 We talked through some of those matters. To the
24 extent we have used our time, that is the
25 reason.
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1 Nevertheless, now in terms of moving on
2 into the policy implications of what we're
3 doing, we would like to afford some time to each
4 of the Commission members to be able to give a
5 short opening statement.
6 Of course, we have to be sensitive to the
7 fact that there are so many of us. I would ask
8 you, if you could, please, to try to give your
9 remarks in a succinct manner in about three
10 minutes so that we could move ahead.
11 I want to invite my fellow Commissioners to
12 share their vision in the outcome of this work.
13 We will begin perhaps here and move down and
14 then come back on this side, if that would be
15 acceptable. Why don't we begin.
16 Just a moment. One of the members is
17 prepared to give us some opening remarks, an
18 opening presentation, and I don't want to run by
19 that. Why don't we do that.
20 I have asked one of the members to open
21 with some general discussion and have asked him
22 to spend about 15 minutes or so doing that.
23 Instead of going first to opening statements,
24 why don't we talk, once again, in a general
25 summary type of way, and then each member should
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1 give his views in accord with the agenda.
2 First, I would like to call on John
3 Sidgmore. He's the Vice Chairman of MCI
4 Worldcom and Chairman of UUNET and Commissioner
5 of the Advisory Commission on Electronic
6 Commerce.
7 John, thank You for your willingness to
8 give us a sum-up presentation.
9 MR. SIDGMORE: Thank you, Governor. It is
10 certainly a pleasure to be here.
11 First, I was asked to talk about 30 minutes
12 about the future of the Internet. I noticed
13 yesterday it was 25 minutes. Now it's 15
14 minutes. I can certainly be flexible.
15 I have to say that these are
16 extraordinarily exciting times for our industry,
17 technology industry in general, wild times,
18 crazy times. It's almost hard to come up with
19 adjectives anymore to describe what is going on
20 in technology today. It's skyrocketing.
21 Maybe the best way to think about that,
22 really, is Internet stock valuation, something
23 we have all looked at over the last couple of
24 years.
25 If you just think about how much value has
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1 been created on Wall Street by the Internet.
2 Some of these things are crazy, and an awful lot
3 of us laughed at this over time. You just look
4 at the market valuations of some of these new
5 companies.
6 Amazon.com didn't exist three years ago.
7 It has no stores. It has almost no inventory.
8 Its market has 18 billion dollars. It's larger
9 than Barnes & Noble and Borders combined.
10 Combined they have 7,000 stores. It has ten
11 times the revenue, et cetera.
12 There are lots of other examples. Ebay,
13 one of my favorite companies, a company that
14 actually auctions antiques and dusty objects on
15 line, this company is now worth, after nine
16 months of being public, 18 1/2 billion dollars.
17 I could go on and on.
18 Level Three, a so-called new age telephone
19 company, started with less than 100 million
20 dollars in revenue, a terrific business plan,
21 now has 28 billion dollars in revenue.
22 Now, what is going on here in the market
23 today? What is going on here? Has the market
24 gone crazy? It's possible. I do think some of
25 these market valuations will rationalize.
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1 I think the important point is, the world
2 has recognized that the Internet is not only the
3 future of communications, future of technology,
4 it's probably the future of eCommerce and, I
5 think, finally the world, and is truly the
6 foundation of the big business models of the
7 future.
8 In our industry I think the combination of
9 deregulation in communications and the new
10 Internet technology have completely exploded an
11 industry, which by my reckoning has been very
12 boring and stable for 100 years, 100 years of
13 monopoly. All of a sudden there is this huge
14 explosion of competition.
15 We're facing issues of growth and change in
16 this industry that have never been faced before,
17 I think, by any industry. And it's all very
18 exciting.
19 More importantly, it has given us a new era
20 of innovation and technology, I think, unmatched
21 by any era since perhaps the beginning of
22 aviation and transportation at the beginning of
23 this century.
24 You know, the interesting thing is, it's
25 not going to slow down. It is actually going to
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1 speed up, because we will have to speed up. We
2 will have to speed up the rate we employ
3 technology. We're going to have to speed up our
4 transactions. The next three years are going to
5 be even more exciting.
6 Let's look at the Internet and see what is
7 going on. You have seen these charts before.
8 They all look exactly the same, as far as the
9 research data showing the rate of growth and
10 revenue on the Internet. This is quick data
11 showing the growth of networks on the Internet.
12 It doesn't matter what headlines you put on
13 the charts, because they are all exactly the
14 same. They all show the Internet growing like
15 crazy.
16 The other interesting thing on the charts,
17 it shows it was only a few years ago that the
18 growth accelerated. It was really 1994 with the
19 advent of the World Wide Web, or I should say
20 the browsers that are available on the World
21 Wide Web, that we actually saw this at all.
22 All of this hype and talk we have had about
23 the Internet, all of this growth, it has really
24 only been the last four or five years. Now it's
25 between four and six. That tells us it's a very
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1 young industry and has a long way to go.
2 We used to look at the growth of the
3 Internet as sort of analogous to the growth of
4 the PC industry because it had such a rich
5 explosion of new technology. We created models
6 and so forth.
7 Actually, if you look at it objectively, we
8 couldn't find anything analogous to the
9 Internet. Think about the PC. PC models have
10 been driven by Moore's law for the last 25 years
11 and been very consistent.
12 Now Moore's law says productivity relative
13 to its price doubles every 18 months. It has
14 been inconsistent.
15 If you try to find an analogy to the
16 Internet, you use Internet bandwidth, our demand
17 for bandwidth on our Internet backbone, it
18 doesn't double every 18 months. It doubles
19 every 3 1/2 months.
20 What that means, if you do the math, is
21 that it increases in scale by 10X per year,
22 1,000 percent per year of growth in
23 infrastructure. If you go back in history, you
24 will never find another example of that kind of
25 growth.
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1 What does that mean? You do the math.
2 Look what it has done at the communications
3 industry. It is growing 1,000 percent per year,
4 the industry of voice is growing at 8 percent a
5 year. It has been around for 100 years.
6 After the Internet has been around for only
7 five years, half of all the bandwidth in the
8 world is now Internet and half is voice and
9 everything else. It is just astounding how fast
10 this has happened.
11 If you do the math and you continue this
12 out for another few years, by the year 2004, 99
13 percent of all the bandwidth and the
14 telecommunications infrastructure in the world
15 will be used on the Internet, 1 percent for
16 voice and everything else. We won't even know
17 it's there.
18 That's why I think when people talk about
19 when will voice be on the Internet, it's
20 irrelevant. It will be a nixed application. It
21 is that fundamental, this change.
22 When people say it's going to slow down,
23 you know what? I can make the ridiculous
24 argument, which I always make, it's actually
25 going to speed up over the next few years.
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1 All the growth we have had in the last
2 couple of years has been solely driven by adding
3 new subscribers to the Internet.
4 All the multimedia applications, video,
5 audio, distance learning, all of these new
6 things we talk about, that is all to come in the
7 future. That will have a dramatic impact on the
8 current command profile.
9 Why is the Internet here to stay, and why
10 is the growth going to continue? Here is a very
11 simple nutshell summary why the Internet is
12 different. By all new technologies, it does
13 have a cost structure differential. It's a
14 dramatically lower-cost potential than the
15 traditional model.
16 The big thing about the Internet is, it
17 gives ubiquitous access. Businesses for the
18 first time in history can ubiquitously reach all
19 of its customers, all of its vendors, all of its
20 employees in a simple way interactively.
21 Let's face it. This is the world's first
22 interactive public network. It has never been
23 done in history. That is what makes the
24 difference.
25 That's what changes all the models. It
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1 changes all the technology models. It changes
2 the social models. And it changes all the
3 business lives. It gives us lots of new
4 breakthroughs.
5 As an example, take Amazon.com. After just
6 a couple of years in business, they created a
7 bookstore that is taking on the big players in
8 the industry and surprising them with how fast
9 they have been successful.
10 Because they have a store that is always
11 open. It's always available. It's easy to buy
12 from. People are buying, to the surprise of the
13 established players.
14 Why? Because they buy when they want to.
15 They don't have to go to the store in the middle
16 of the night or whatever. They don't have to
17 wait for that store to be open.
18 A friend of mine just started a business
19 selling office supplies on line. She started
20 this not with hundreds of millions of dollars
21 and thousands of stores. In fact, there are no
22 stores. This is just a couple hundred thousands
23 of dollars and some great ideas. Now she is
24 taking on the big players in that industry.
25 This model is going to take time to
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1 develop. I think it's going to be very similar
2 to the growth of ATMs. What I mean by ATMs is
3 not simply a transfer mode but cash machines.
4 If you were around in the '70s, you will know
5 that a lot of banks employed cash machines in
6 droves.
7 They were very unsuccessful at the
8 beginning. Why? For the same reason people are
9 concerned about Electronic Commerce. They were
10 worried about security. They were worried about
11 quality, et cetera. Now, 20 years later, you
12 couldn't imagine life without them.
13 Again, you go to the store. You go to the
14 cash machine. You get the cash when you want
15 it, even if it's in the middle of the night.
16 It's really all about freedom. I think
17 it's all part of the larger trend in our society
18 towards decentralization. People want access
19 when they want the access.
20 To give you some examples, I think Sony
21 Walkmans were part of that trend, wireless
22 phones. People want untethered access to the
23 technology and the content they want. That's an
24 example.
25 VCRs and video stores. It used to be you
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1 had to wait for CBS or NBC for them to put on
2 the movie you wanted. You waited for that to
3 show up.
4 Now you go to the video store. You pick
5 the video you want. You put it on when you want
6 to. You're free to do what you want. I think
7 that has been the huge, huge trend in America
8 over the last 20 years.
9 By the way, home catalogs, home shopping, I
10 think are very, very much a part of this trend.
11 Now, what this all means is that the
12 Internet really levels the playing field, levels
13 the playing field between large companies and
14 small companies. It allows small companies for
15 the first time in history to do things like
16 national advertising.
17 So we have created a huge number of new
18 competitors. We have made the world much more
19 competitive than ever, because big guys don't
20 necessarily have the advantage they used to
21 have.
22 I would argue that with the development of
23 the Internet, the winners are now determined by
24 the best ideas, by the people who can implement
25 new ideas the best, that have the highest
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1 Internet IQ and take advantage of the new
2 technology.
3 It is not the guy that has the largest
4 number of stores. It's not the guy that has the
5 largest distribution anymore.
6 The players with the best ideas, I think,
7 will win, not necessarily the biggest players.
8 I think that is a very fundamental difference.
9 Now, how is this all going to change in the
10 next generation? I'm not going to talk about
11 this much.
12 I think broad band local access that you
13 have heard a lot about, a number of us like Mike
14 at AT&T and MCI Worldcom and AOL and others are
15 struggling and competing with the position to
16 offer broad band local access in a ubiquitous
17 way.
18 Broad band will open the next generation of
19 applications. It will make things possible,
20 like instant learning. It will make things
21 possible, like telemedicine. We will have
22 elections on line, as an example. I know that
23 is of no interest to any of you. I do think
24 this will bring on the next generation.
25 Which brings up this question that has been
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1 in the press lately about bandwidth and whether
2 this will be a glut on bandwidth.
3 There are a lot of new players in this
4 whole economic scene in the last couple of
5 years, like MCI, Worldcom, and UUNET that nobody
6 heard of, Level Three, et cetera. People are
7 building new fiber and new bandwidth for the
8 first time in history.
9 The reality is that either with all this
10 new bandwidth, if you believe what I have said
11 about demand, you need to increase the fiber
12 capacity every year by 1,000 percent just to
13 stay even. This is before broad band.
14 I personally think there are going to be
15 drivers of the next generation of bandwidth we
16 don't know about. Broad band will be the
17 biggest piece of the equation.
18 When broad band comes, we will see a whole
19 string of new applications never thought about
20 before. You are going to see more audio. And
21 you will see much more video in the next couple
22 of years.
23 Then the biggest driver of all is what we
24 call silicon cockroaches. These are computer
25 communications, and for the first time in
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1 history you will see an explosion here on a
2 scale we really never dreamed about.
3 If you think about it, computer-to-computer
4 communications are much different than human
5 communications. They use a lot more bandwidth.
6 They have a huge purse of information, and they
7 are not slow and unpredictable as voice
8 communications are. These are enormous
9 implications for new kinds of technology.
10 And, of course, as I said before, these
11 kinds of applications will breed and grow much
12 faster than just human applications.
13 I think you are going to see an explosion
14 of new kinds of services, new kinds of devices.
15 If you think about the kinds of devices we have
16 now connecting to the Internet, computers, fax
17 machines, cell phones, PCs, you have web phones,
18 you have daytimers, personal digital systems
19 like Palm Outlets, these devices are exploding
20 right now. They are multiplying in huge
21 numbers. They are Increasing not only in number
22 but also in type.
23 I think more scary than anything else is
24 the new generation of equipment that is going to
25 be increasingly global. That is a very
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1 different world from where we were before.
2 There are seers out there -- you know what
3 sears are -- one seer talks about every human
4 being having five Internet protocols operating
5 on their body by next year.
6 I don't know how you get five. You can
7 imagine your cell phone and a pager. You could
8 certainly imagine a personal digital system. A
9 lot of us here have them. Internet watches now
10 that cost $50.
11 There are Internet glasses. Sounds
12 ridiculous, doesn't it, Internet glasses? You
13 can imagine these glasses. They are actually
14 voice activated. You have these glasses on.
15 You're driving down the road. You're lost.
16 Up on the side pops a map of where you are
17 and says "Idiot, turn right!" Hopefully, you
18 are still looking at the road. That's with your
19 glasses on.
20 That sounds futuristic. The fact is, they
21 are being made right now. The company was just
22 bought by Sony, which means it will probably
23 work and cost 25 bucks.
24 This is a very different world. Maybe the
25 best simple way to think about these new
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1 computer applications is the web. Today when
2 you're on the World Wide Web searching, you're
3 doing it all manually. You search from one site
4 to another. Some are better than others.
5 Suppose there are intelligent agents. And
6 there are intelligent agents. They are getting
7 more intelligent every day. Suppose in the
8 morning you told your computer "I want you to go
9 out and research every single web site in the
10 world that has these cameras. I want you to
11 find the price. And here is what I'm looking
12 for. You find out of all these thousands of web
13 sites the best one for me to buy and give me a
14 report when I get home."
15 Imagine how much bandwidth that requires,
16 that thing out there all day searching every web
17 site. It's a very, very different world. There
18 are lots of different applications.
19 Today web sites are built for humans. They
20 are built to attract humans, and they have green
21 and pink and mauve and all kinds of great colors
22 that people like to look at. The computer could
23 care less what color it is. The computer wants
24 to look at the price and specs.
25 This has enormous implications. This is my
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1 view of five IP objects on your body. No
2 particular rhyme or reason where I placed the
3 dots, just to show you a depiction. It was made
4 well before the sex scandal we had last year.
5 I think this is a very different world than
6 we had before. There's one problem. We have
7 this enormous capability coming. We have an
8 expectation problem in the middle of it, because
9 the world expects Internet access to be really
10 cheap, actually sometimes free, but certainly
11 the world expects it to be cheap, $21 a month or
12 whatever Steve is selling it for this month.
13 Bill Gates -- A lot of smart people say it
14 should be free. Bill Gates says bandwidth
15 should be free. We think software should be
16 free, but it's not.
17 The reality is, it is still today somewhat
18 more expensive than we need to be to become
19 totally ubiquitous. What is going to save us in
20 the next couple of years is new technology.
21 That is what has saved us in the past.
22 We're going to have much better fiber, much
23 better switching equipment and optical
24 equipment, and much more better software and
25 caching techniques, so we won't have the cross
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1 problem that we have today.
2 I think what you're going to see here is an
3 explosion of competition in new technology like
4 it has never occurred in the past. Every
5 manufacturer knows this is where the action is.
6 This is where the world is.
7 I think you're going to see the next era of
8 innovation coming in here, and I think it's
9 going to surprise us as we continue to ride this
10 wave.
11 I'll tell you what, I think the Internet
12 revolution is really just starting, really just
13 at the beginning. The reason is very simple:
14 This is where all the capital is. This is where
15 the financial capital is going. This is where
16 all the intellectual capital is going. This is
17 where everyone wants to be. They want to create
18 the next Netscape or AOL.
19 So what we have done here as a Nation is we
20 have allowed tens of thousands of the smartest
21 people in the world that we have ever had in
22 history to go try new things and become sort of
23 like a biological experiment.
24 Since it's not totally controlled by the
25 government, we don't know exactly how it's going
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1 to come out. What we do know is that a lot of
2 new technology is going to come out of this, and
3 I think it's very, very exciting because we
4 don't have boundaries.
5 This is going to sound corny. I always end
6 on this. I really believe 50 years from now,
7 people will look back on this time as the golden
8 age of communication where it all changed. I
9 think it's very, very exciting to be part of
10 this industry now. I think it's the best time
11 to be in business.
12 I just want to show you one more chart. I
13 mean nothing negative by this, just to point out
14 you have to be little concerned about helping
15 the Internet too much because they have done
16 pretty well.
17 You have to remember the government
18 controlled the Internet for 20 years, '69 to
19 '89. I don't know how many of you heard of it
20 during that period. To show you the growth
21 rates during that period, I think we
22 substantially outperformed the top of the model.
23 Thank you.
24 GOVERNOR GILMORE: Thank you, John. That
25 was enlightening and perceptive, it seems to me.
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1 We appreciate very much the opening remarks.
2 We would like now to give some time to each
3 member to state their opening thoughts about
4 this process. At 3 minutes per individual, that
5 would be 48. And by the time we do all the
6 calling in and so on, it's closer to an hour.
7 Please be cognizant of the time, if you
8 would. As Chairman, I do want to keep this
9 thing moving. I believe, in fact, we have some
10 warning signs that will come up on the screen so
11 that we can try to keep things moving in the
12 right direction. So I may, unfortunately, have
13 to interrupt if it runs on too long.
14 In the meanwhile, we're looking forward to
15 the initial thoughts of the members of the
16 Commission and the breadth and dynamism of their
17 experience in this area.
18 As I had suggested a little earlier, I
19 think I will start and go down this row and then
20 down this row, and that way we can move right
21 along in an orderly way.
22 Why don't we begin with Mr. Mike Armstrong,
23 head of AT&T.
24 Mike.
25 MR. ARMSTRONG: Thank you, Jim. There are
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1 two very fascinating things that are taking
2 place in society today: One is, borders all
3 over the world are coming down, being political
4 borders, commercial borders, monetary borders,
5 tariff borders, nontariff borders.
6 Societies are emerging. They want a little
7 bit more of that economic and educational pie of
8 the world.
9 At the same time, as John so eloquently
10 described, we have the most exciting
11 communications age in the history of the world
12 taking place. It's leaping over borders.
13 Whether it's government or commerce, it's
14 providing efficiency and access to the entire
15 world.
16 It's really on that platform that this
17 Commission must reflect and decide the
18 fundamental issue of taxing, sales taxing.
19 I would suggest that there are two things
20 that at least I should keep in mind: One is
21 that we have got to use this opportunity for
22 simplicity.
23 My company fills out 39,000 tax forms a
24 year. That's one every 3-1/2 minutes. The
25 potential of this Commission is to make that a
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1 new world and to bring simplicity to what we're
2 addressing as well as what is before us.
3 The second thing is neutrality. The last
4 time I checked the telecom excise tax that the
5 telecommunications industry lives under -- was
6 born out of Spanish-American War deeds -- the
7 last time I checked, we had settled that issue,
8 but we continue with our taxation.
9 In fact, I can recall back in the mid-'80s,
10 the last time the tax policy really was not
11 neutral in the area of real estate, we all had
12 to invest in real estate in order to
13 respectfully fill out our tax forms with limited
14 partnerships.
15 And, of course, what happened is that the
16 real estate industry completely overbuilt and
17 was influenced by the arbitrage of tax policy.
18 We need neutrality to consumers, neutrality
19 to technology, neutrality to the needs of
20 government, neutrality and fairness to all who
21 need to participate to make this great
22 communications golden age the reality and
23 potential it reflects.
24 GOVERNOR GILMORE: Mike, thank you very
25 much.
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1 As every member of the Commission can see,
2 we have a very dramatic timekeeper before us as
3 well.
4 Mike, that was an awful lot in a
5 three-minute period. We appreciate that
6 insight.
7 The next speaker is Ron Kirk. He is the
8 Mayor of Dallas, Texas.
9 MAYOR KIRK: Thank you, Governor. And good
10 morning. I'm thrilled to be here as a
11 representative of the Nation's mayors and
12 Nation's cities.
13 I have great hope for the work of this
14 Commission, that we will be able to come up with
15 some answers to present to Congress, given the
16 talent and energy on this Commission, and
17 hopefully we can do that in a way it will be
18 fair and help the lives and protect the
19 interests of the citizens we serve.
20 John, I was interested in your remarks
21 about a lot of people wishing that access was
22 free and others wish that software was free. We
23 live in the practical world that people wish
24 that their schools, police, and firemen were
25 free. They are not.
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1 The increasing concern of cities is that we
2 don't want to be independent. We can't be
3 independent to this incredible technology.
4 There is not going to be an end to this age of
5 information and technology. It is exploding so
6 fast we can't control it.
7 We don't want to have the unintended
8 consequence of removing a major source that
9 funds the basic sources that people rely on
10 every day.
11 As Mayor of Dallas, we like to claim
12 ourselves as the birthplace of this incredible
13 technology back in the 1950s. We have a short
14 history. We don't have all of the excitement of
15 Williamsburg.
16 We're proud of the fact that back in the
17 1950s, a young engineer from Texas Instruments,
18 who was working on weekends, named Jack Kilby,
19 stumbled across something called an integrated
20 circuit, which allowed all of this incredible
21 technology to come into place.
22 Out of that, Texas Instruments created the
23 first handheld computers, which were probably at
24 least half the size of one of these tables.
25 We're all from that telecommunication and
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1 transportation age.
2 Mike, you are right. We live in a much
3 more blended economy. It's clear to us this
4 next industry is going to be a century of cities
5 and metropolitan regions taking on different
6 roles and responsibilities.
7 We just want to make sure whatever comes
8 out of this process, we still recognize that
9 government has a fundamental role to maintain
10 people's basic needs, and we have to have a tax
11 structure that recognizes that and gives the
12 cities and states the ability to do that.
13 I look forward to working with all of us.
14 I think we can achieve all of our goals.
15 GOVERNOR GILMORE: Thank you very much,
16 Mayor Kirk.
17 The next speaker is the Governor from the
18 State of Washington, Governor Gary Locke.
19 GOVERNOR LOCKE: Thank you very much,
20 Governor Gilmore. It's really a pleasure to be
21 here and be part of this Commission.
22 It's clear from my reading of the Internet
23 Tax Freedom Act, the role of this Commission is
24 to establish a fair and technologically neutral
25 way of applying tax to the Internet.
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1 I am not an advocate of imposing new tax
2 burdens on the Internet or allowing any type of
3 taxes that would hurt the golden age of
4 communications that John is talking about.
5 Neither am I a proponent of awarding
6 Internet vendors substantial tax advantages that
7 would put Main Street merchants at a competitive
8 disadvantage.
9 And, as the Mayor of Dallas was talking
10 about, nor are we talking about or supportive of
11 eroding the ability of state and local
12 governments to provide various and essential
13 services.
14 We're very proud of the role of the
15 Internet and technology firms in our state of
16 Washington, companies like Amazon.com that
17 started in Washington, and Microsoft. We also
18 lead the nation in the application of computer
19 technology within government. So we embrace
20 this new industry.
21 At the same time, our state relies, as do
22 many other states, on sales taxes, and our state
23 of Washington, we rely on sales taxes. We have
24 no personal income tax, which is perhaps why
25 many of the investors and start-up companies
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1 like doing business in the state of Washington.
2 If on-line shopping grows rapidly, as many
3 experts predict, it will impose particular
4 challenges for governments, both local and
5 state, all across the country.
6 In our state of Washington, 48 percent of
7 our general tax revenues come from sales tax.
8 60 percent of our general state budget is
9 dedicated to education, because in our state
10 virtually 85 percent of funding for all schools
11 comes from the State.
12 It's not the responsibility of the local
13 districts to provide uniformity and fairness.
14 In fact, the Supreme Courts of many states are
15 ruling it's the obligation of the state
16 government to provide for education to nonlocal
17 school districts.
18 So we have a particular challenge. Our
19 country is the world leader in electronic
20 commerce today, not because of simply public and
21 private investments to the Internet, but also
22 because of the education of the visionaries and
23 the entrepreneurs who transformed it into a
24 vibrant new industry.
25 It would be ironic if the growth of
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1 electronic commerce erodes our ability to
2 educate innovators and leaders in this
3 particular industry.
4 We're looking for in this Commission ways
5 to address issues of encouraging the growth of
6 Internet commerce while not restricting and
7 unduly hampering the ability of local and state
8 governments to fund the very necessary services
9 and, in fact, the education that the leaders of
10 tomorrow need.
11 GOVERNOR GILMORE: Governor, thank you very
12 much.
13 The next speaker, next member of the
14 Commission, is David Pottruck, CEO of Charles
15 Schwab.
16 MR. POTTRUCK: Thank you, Governor Gilmore.
17 It's nice to be here. I know we have the
18 important task of balancing all the interests,
19 and competing interests, really, that we have to
20 face.
21 Charles Schwab has had a real front-row
22 seat in seeing the growth of the Internet. We
23 had 6 million hits a day on our web site in the
24 first quarter of 1998, and 60 million hits a day
25 in the first quarter of 1999.
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1 Today we have nearly 2 billion dollars a
2 day transacted over the Internet at Schwab, and
3 nearly a million clients are using the Internet
4 each and every day to do business with us.
5 So we have seen that the Internet is not
6 really a channel. It's a reinventing technology
7 that dramatically lowers costs and dramatically
8 improves service. So it has a real opportunity
9 to raise the welfare of all Americans.
10 Now, our challenge here is not to constrain
11 the growth but to allow the Internet to flourish
12 and create the jobs and the opportunities that
13 raise the standard of living for all Americans.
14 It's our belief, however, that the Internet
15 should not be favored over other forms of
16 commerce. The physical world will continue to
17 exist. Stores will continue to play a very
18 important role in American commerce.
19 We don't believe that physical distribution
20 stores should be disadvantaged by tax advantages
21 for eCommerce.
22 It seems to me I'm the only financial
23 services representative on the Commission, and I
24 take that responsibility very seriously to
25 represent all the investment firms and banks,
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1 that custody, not just the 14 billion dollars of
2 American financial wealth, but also the
3 financial dreams of all Americans.
4 So we look to find the ability and balance
5 of all of the competing interests. That's what
6 is crucial to our world. Governments need money
7 less than they may think sometimes, but we know
8 that governments need money. Consumers want
9 privacy, and tax systems need to be fair.
10 We're delighted to be here. I'm delighted
11 personally to have an opportunity to
12 participate, to listen, to learn, and to find
13 the compromise and the balance between competing
14 interests that the Congress and the President
15 have asked us to do with this important work.
16 GOVERNOR GILMORE: David, thank you very
17 much.
18 The next speaker is Governor Norquist,
19 President of Americans for Tax Reform.
20 GOVERNOR NORQUIST: Thank you, Governor
21 Gilmore.
22 I was asked to serve on this Commission to
23 represent consumers and taxpayers. And I think
24 as we look through history, the factors of
25 production become more mobile, it's not possible
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1 to maintain the all-existing levels of taxation.
2 We saw this with taxes on labor and income
3 taxes.
4 In the United States we used to have a tax
5 rate of 90 percent on income. They have the
6 same thing in Britain and Europe. Over time,
7 the Beatles left Britain and other people
8 started moving, and income tax rates had to come
9 down to be competitive and functional in a more
10 mobile society. United States top rates are now
11 40 percent, as they are in Britain.
12 If we're now looking at similar situations
13 with taxation on sales and commerce, it's now
14 clear that we're in a more mobile society than
15 those governments that have relied on old
16 mechanisms of raising taxes and old high tax
17 rates and continue to do so.
18 Certainly, Main Street merchants, when they
19 talk about the high sales taxes they face, their
20 problem isn't the Internet. The problem is the
21 high sales taxes that they face. I think we
22 need to focus on that.
23 I think we should start by taking the
24 approach, we should do no harm. We should not
25 put burdens on this new industry, this new area.
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1 We saw the very interesting chart about
2 what 20 years of tender, loving care from the
3 government did to begin with. I don't think we
4 should go back to that part of the graph with
5 higher taxes.
6 I think we also need, before we do no harm,
7 we need to undo the harm that has been done, the
8 3 percent tax on telecommunications. It's been
9 100 years. The Spanish-American War is over.
10 That should be repealed.
11 Recent taxes that have been put on the
12 Internet on telecommunications recently also
13 need to be removed.
14 The limitations on robust encryption for
15 the Internet eCommerce and recent threats of the
16 FBI's interest in reading everybody's e-mail and
17 undoing people's private encryption
18 domestically, that threat needs to be removed.
19 We need to maintain privacy of commerce in
20 the Internet, and remember this is an
21 opportunity to think about how to reduce the tax
22 burden on all Americans.
23 Thank you.
24 GOVERNOR GILMORE: Grover, thank you very
25 much.
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1 Next member of the Commission to speak is
2 Gene Lebrun. He's President of the National
3 Conference of Commissioners on Uniform State
4 Laws.
5 Gene?
6 MR. LEBRUN: Thank you, Governor. As I
7 stated yesterday, depending on who you read or
8 what you read, I'm a private citizen, a lawyer
9 from South Dakota, former legislator, former
10 Speaker of the House.
11 As the Governor indicated, I'm currently
12 President of the National Conference of
13 Commissioners on Uniform State Laws, also a
14 friend of Tom Dashnell (ph.). I'm not sure
15 which of those help me get on this Commission.
16 I'm delighted to be here. In 1996 the
17 National Conference of Commissioners on Uniform
18 State Laws undertook a study of just this topic
19 to see what, if anything, should be done about
20 taxation of the Internet.
21 Our study committee concluded it was very
22 controversial at that time, still is. Our
23 Constitution of the Conference provides we
24 should entertain desirability for uniformity and
25 practicality of getting something enacted.
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1 We felt, after looking at what was being
2 done by other groups, we should monitor the
3 situation, but the Conference was not yet in a
4 position to start drafting an act.
5 I believe, however, that with this
6 Commission, the makeup of the Commission, and
7 the charge that we received from Congress, that
8 is, to take testimony from citizens, from
9 interested groups, from state and local
10 government, and industry, that this Commission
11 can come up with the right balance and propose
12 something that is fair and that can be adopted
13 uniformly throughout the states. And I truly
14 look forward to working on the Commission on
15 this project.
16 GOVERNOR GILMORE: Gene, thank you very
17 much.
18 Last night the members of the Commission
19 were treated to a short presentation by former
20 Governor of Virginia, Patrick Henry.
21 The next speaker holds the seat that was
22 once occupied by Thomas Jefferson. That
23 gentleman is a member of the House of Delegates,
24 member of the State Legislature here in
25 Virginia, Delegate Paul Harris.
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1 Paul, thank you.
2 MR. HARRIS: Thank you, Mr. Chairman. Last
3 evening we heard a little concern about the
4 location for this meeting, but as a member of
5 the House of Delegates and the current occupant
6 of Mr. Jefferson's seat in the House, I think we
7 have chosen a most appropriate setting for our
8 first meeting and am delighted we're finally
9 underway.
10 I consulted with my wife last night, who is
11 more of a technology expert than am I, and I
12 asked her what I might say during this three-
13 minute period.
14 She told me "not to try to be charming,
15 witty, or intelligent, just go be yourself."
16 Following her advice this morning, I will
17 briefly state what I hope we will accomplish
18 over the next several months.
19 First of all, the task before us is
20 obviously enormous. I am privileged to
21 represent a district that hosts one of the
22 largest on-line shopping companies, Value
23 America, located in Charlottesville, Virginia.
24 And then I have folks who think the Internet is
25 something you use to fish.
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1 But in order to accomplish what Congress
2 has set before us, I think our debates must be
3 open and honest. I don't think there is any
4 higher priority for us over the next several
5 months. That's number one.
6 Number two, I hope we can give due
7 consideration to all sides of the issue that we
8 will be discussing over the next several months.
9 Those issues, obviously, involve taxing issues
10 but also privacy, fraud issues, collection
11 issues, distribution issues, Federal issues, and
12 issues related to global competition.
13 The third is that our recommendations do
14 not stifle on-line eCommerce but enhance
15 eCommerce through tax and technology neutral
16 policies.
17 Simplicity and neutrality have already been
18 mentioned as bywords for this Commission. I
19 echo those sentiments.
20 To accomplish the three goals I have set
21 forward, I think we need to define the scope of
22 our discussions quickly and decisively. We need
23 to make critical use of our time and our
24 resources, and, again, I think we need to keep
25 an open mind throughout the life span of this
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1 Commission.
2 If we can proceed in this fashion, I'm sure
3 we will accomplish the goals that Congress has
4 set before us. I look forward to serving under
5 the Chairman and working with all of you over
6 the next several months.
7 Thank you.
8 GOVERNOR GILMORE: Paul, thank you for your
9 opening remarks. We appreciate that.
10 The next member of the Commission to speak
11 is Andrew Pincus, General Counsel to the U. S.
12 Department of Commerce. He is the delegate on
13 this Commission for Secretary William Daley.
14 Andy?
15 MR. PINCUS: Thank you, Mr. Chairman. It's
16 an honor to be part of this distinguished group.
17 As John's presentation made clear, we are
18 truly in the midst of a revolution of historic
19 proportions in the way we shop and the way we
20 work and the way we organize and conduct our
21 businesses, and the way we interact with each
22 other and the rest of the world.
23 For that reason, we at the Commerce
24 Department have been spending a considerable
25 amount of time dealing with the variety of
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1 policy issues that arise from this explosion of
2 eCommerce.
3 These include privacy, consumer protection,
4 electrical property standards, quality, and a
5 host of others. One thing I have learned from
6 that experience is these are difficult issues.
7 One concern I want to express now is about
8 the time left for the Commission to complete its
9 deliberations. We have a lot to do in a short
10 period of time, and I think we all agree we have
11 to make the most of it.
12 In that connection, it seems to me that the
13 focus of our work should be state and local
14 taxation. That's what the moratorium is focused
15 on. That's an issue that, in itself, will be a
16 challenging one to resolve and a lot to bite
17 off.
18 My view is we need to focus in on that
19 issue. Hopefully today, at the end of the day,
20 we can come up with at least the outlines of a
21 work plan that can be fleshed in so that we can
22 meet the goal that others have stated of trying
23 to address that issue.
24 In terms of how to go about it, I think you
25 set the right tone, Mr. Chairman, in your
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1 opening remarks. We have to be open and
2 transparent. We have to cast the wide net, be
3 very inclusive, bring in all viewpoints, and
4 provide a fair forum for what will be very
5 difficult issues to resolve.
6 I think Mike set the keynote that others
7 have focused on. Neutrality has to be the
8 hallmark of what we do. We have to be neutral
9 to make sure that eCommerce isn't hindered in
10 achieving its truly great potential in creating
11 a new and different kind of global marketplace.
12 At the same time we don't want to
13 disadvantage traditional brick-and-mortar
14 businesses that deserve the same kind of
15 neutrality.
16 I look forward to working with the other
17 members of the Commission to try and work on
18 this challenging task.
19 Thank you, Mr. Chairman.
20 GOVERNOR GILMORE: Thank you. Andy, thank
21 you very much.
22 Next speaker is Dean Andal, the Chairman of
23 the California Board of Equalization.
24 Dean?
25 MR. ANDAL: Thank you very much, Governor.
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1 I would like to also thank you and the people
2 for Virginia for having us. This has been an
3 extraordinary place to do this. We appreciate
4 your leadership.
5 This is one of those rare occasions when I
6 will reference "USA Today." This morning the
7 article reads, "E-World Fuels U. S. Economy,
8 Report Said." That's what I'm interested in.
9 I believe that we're on a path of one of
10 the most wonderful times in our history. We're
11 going to have rapid increases in the growth of
12 personal income, the growth of job opportunities
13 for ordinary people around the country, and our
14 fundamental goal ought to be not to limit that
15 but to accelerate.
16 In that regard, I wanted to deal with one
17 subject that has been of great interest and will
18 probably dominate our conversation here, and
19 that is what effect could Internet sales and
20 growth of Internet sales have on the government
21 revenues that state and local governments depend
22 on to provide government services?
23 I have a chart to pass out to the
24 Commissioners. This is California only
25 information where I come from. California right
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1 now as we speak has the most Internet tax-
2 friendly laws for sales tax purposes of any
3 state in the country, other than, of course,
4 those states who have no sales tax.
5 To give an example, we do not believe in
6 California that a web page alone establishes an
7 access for sales tax purposes. That is one of
8 many examples.
9 We also have more Internet users than
10 anywhere else in the world. I would argue that
11 we have more Internet customers than anywhere
12 else in the world.
13 So if the argument that growth of the
14 Internet is going to somehow diminish states'
15 sales tax revenues to any substantial degree was
16 true, you would think it would show up in
17 California. But the opposite has been true.
18 Over the last five years, we are having
19 gangbuster increases in our traditional sales
20 tax revenue, and at the same time the Internet
21 is growing rapidly in our state.
22 I put a chart in front of all of you that
23 shows our taxable sales, and, of course, the
24 revenue generated from it is exceeding the
25 population growth less inflation.
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1 I believe we ought to deal with facts.
2 Before we chase out these existing tax systems
3 that are allowing the Internet to grow, we
4 should make certain that we prove that there is
5 any harm before we do it.
6 Thank you very much.
7 GOVERNOR GILMORE: The next speaker is
8 Delna Jones. She is the Commissioner from the
9 Washington County Administrative Offices, the
10 state of Oregon.
11 MS. JONES: I would like to say for those
12 of you watching and listening, I understand I'm
13 the last member to be appointed to this
14 Commission.
15 Depending upon your view of this Commission
16 and its work, we now have a limited amount of
17 time as compared to in the beginning. But maybe
18 those of you who have watched legislators work,
19 great, because you will benefit because we now
20 have a product we must produce and a limited
21 time to get it done.
22 I am from a state that does not benefit or
23 will not be affected, for the most part, by the
24 acts of this Commission or the recommendations,
25 because we have no sales tax, unless, of course,
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1 we're requiring all states to collect.
2 Now, you might say "Well, Lady, then you
3 really are in a position where this isn't
4 affecting you, so you really don't have any
5 reason to have a participation."
6 I think that is exactly why I have a reason
7 to participate. And what I'm looking forward to
8 is to recognize that, while I may have a state
9 that is not personally affected, I represent
10 also a lot of local governments around the
11 nation who are affected a great deal by what
12 this Commission may recommend.
13 As I know, they are watching with concern
14 as this Commission deliberates.
15 I also recognize and represent a lot of
16 constituents who also expect service delivered
17 by government. I'm hopeful we will keep that in
18 mind.
19 But at the same time, I believe we need to
20 balance the great potential that our economy has
21 and its impact on the world as we look at
22 expanding Internet access and opportunities
23 without government interference for especially
24 those people in the past who have been mentioned
25 today that are entrepreneurial and also
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1 disenfranchised by the local economies and the
2 way that tradition has allowed them to do
3 business and encourage that so that what we have
4 is a Commission that looks beyond our local
5 issues, while keeping those in mind, and looks
6 for expansion of the opportunities of our
7 citizens internationally.
8 GOVERNOR GILMORE: Delna, thank you.
9 The next member of the Commission is the
10 Governor of the great state of Utah, Governor
11 Mike Leavitt.
12 Mike.
13 GOVERNOR LEAVicT: Thank you, Mr. Chairman.
14 I would also like to join in the
15 celebration that is being expressed in this era,
16 this Internet era, this powerful union, economic
17 expansion, and I desire to see it assisted in
18 any way.
19 I want to make it clear I do not believe
20 the Internet should be taxed. There should be
21 no bandwidth tax, no discriminatory taxes. We
22 ought not to be taxing access. We ought to be
23 building it.
24 However, those who choose to do
25 transactions over the Internet should be treated
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1 with equality. I think that point has been
2 made. Taxation should not depend on how people
3 buy.
4 I would also like to deal with what I feel
5 are three realities of our work: The first is
6 that we must, as has been stated, limit our
7 scope. If we attempt to revamp the entire sales
8 tax system in this country, that is a task
9 beyond our capacity.
10 However, we can undertake, at least in the
11 area of remote sales, a radical simplification
12 that is an absolute must if eCommerce is going
13 to be a vital engine that is required for the
14 21st century.
15 Time is our enemy. There is time in the
16 life of every problem when it's big enough, you
17 can see it, but small enough, you can still
18 solve it. I believe that's precisely where we
19 are right now.
20 We have to deal with this problem now. If
21 we wait three years or five years, the course
22 will be set, and we will be left to deal with
23 the consequences that will shape themselves.
24 Lastly, I would like to point out that
25 given we are going to have to look at specific
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1 problems, we need to give them context but
2 realize we're not going to come up with the
3 perfect solution.
4 We should move forward looking for progress
5 as opposed to perpetually deferred perfection.
6 Thank you.
7 GOVERNOR GILMORE: Thank you very much,
8 Mike.
9 While we have heard an opening lecture from
10 John Sidgmore, I assume you also want John to
11 present his three minutes on the views and
12 issues before the Commission.
13 So John Sidgmore, the Vice Chairman and
14 Chief Operating Officer of MCI Worldcom.
15 MR. SIDGMORE: Thank you.
16 I am open-minded with respect to most of
17 these important issues. I have to say, I'm a
18 pretty big fan of the Internet. I don't think
19 anyone on earth wants it to succeed more than I
20 do.
21 Having said that, I really believe the
22 Internet and Internet commerce is going to
23 proliferate without artificial help from the
24 government. I think it's actually way too late
25 to stop us.
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1 Tax systems are not and tax advantages are
2 actually not what is allowing the Internet to
3 grow. I do think it was wise to implement the
4 moratorium. It gives us time to think.
5 We have a new technology that is really
6 going to change the world. I think we need to
7 think about that new technology before we
8 implement new laws and taxes and things like
9 that that have a negative potential.
10 I don't know the foreseeable long-term
11 effects of taxing one form of commerce rather
12 than the others, to be honest. There are a
13 myriad of problems to overcome if we do want to
14 collect taxes for the Internet or for Internet
15 transactions. There are ways to get through
16 many of the issues, both systemic and technical.
17 Massive changes, I think, are going to be
18 required to current state and local government,
19 if we want to do it, to eliminate the
20 complications that are possible to overcome.
21 Whether or not we want to enact sales taxes at
22 all is an entirely different debate.
23 I do think Internet commerce additionally
24 expands the economy. I don't think this is a
25 Saracen game. I don't think it only subtracts
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1 from Main Street commerce. I don't believe it
2 is reasonable to tax mail order business over
3 Main Street transactions or Internet
4 transactions.
5 I am not proposing any new taxes or new
6 additional tax revenue from the Internet. I
7 certainly do not support any tax on the basic
8 access to the new technology for everyone.
9 I do think we need to examine all of the
10 pieces together. If we really want to make this
11 work, we could probably come up with ways to do
12 it economically and otherwise.
13 Thank you.
14 GOVERNOR GILMORE: John, thank you very
15 much.
16 The next member of the Commission is
17 Mr. Joseph Guttentag. He's the Senior Advisor
18 in the office of tax policy for the United
19 States Treasury, and he is the delegate on this
20 Commission for the Secretary of Treasury.
21 Mr. Guttentag?
22 MR. GUTTENTAG: Thank you, Mr. Chairman.
23 I bring you greetings from Secretary Rubin
24 and Deputy Secretary Summers, as well as best
25 wishes for every success with our important
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1 assignments.
2 Five years ago the Treasury began a review
3 of relevant tax laws impacting the new
4 technologies, including the Internet. We
5 focused on their international application to
6 determine the tax law impact on this burgeoning
7 industry.
8 The first result was a 1996 Treasury paper
9 discussing some of the more significant
10 electronic commerce tax issues and establishing
11 some basic principles.
12 We learned early on that discriminatory
13 taxation or even the fear of discriminatoiry
14 taxation has the potential to slow significantly
15 the growth of the Internet and electronic
16 commerce.
17 It is the position of the Treasury
18 Department that tax neutrality and
19 nondiscrimination should be the fundamental
20 principle guiding the development of tax policy
21 with respect to electronic commerce,
22 domestically and internationally, nationally and
23 locally.
24 We are also cognizant of the legitimate
25 revenue concerns of the states and localities.
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1 We must not allow the Internet to become a tax
2 haven that drains the revenues from the
3 government's need to provide the services its
4 citizen demand, such as the education of our
5 children and the safety of our neighborhoods.
6 As the President stated, the Act takes into
7 account the rights of consumers, the needs of
8 businesses, and the overall effect of taxation
9 on the development of Internet commerce.
10 At the Treasury we see our role as helping
11 the Commission and all interested parties
12 achieve the objectives of the Act.
13 We keep in mind that, as the President has
14 stated, we must be committed to listening to the
15 concerns of the governors, the mayors, and other
16 officials of businesses, and to achieve a
17 consensus that will establish rules that are
18 nondiscriminatory and will provide appropriate
19 revenue as our communities need to meet vital
20 public purposes.
21 We should forge a consensus within this
22 Commission for neutral taxation of the Internet,
23 electronic commerce, and economically similar
24 transactions.
25 In the international area with our trading
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1 partners in the business community, we are
2 helping to develop an international consensus
3 based on the concepts of neutrality and
4 nondiscrimination through the Organization for
5 Economic Cooperation and Development.
6 I can assure you, as Chairman of the Fiscal
7 Committee of the OECD, that the electronic
8 commerce project is receiving the highest
9 priority.
10 In general, the approach has been that the
11 basic principles of our international tax rules
12 remain sound and well-suited to deal with new
13 transactions with some tweaking and with some
14 agreed new interpretative guidelines.
15 Mr. Chairman, I suggest that this
16 Commission may also, in addition to working on
17 state and local tax, consider reviewing and
18 endorsing the work and the work plans of the
19 OECD in this area.
20 Thank you, Mr. Chairman.
21 GOVERNOR GILMORE: Joe, thank you very
22 much.
23 Next member of the Commission is an
24 independent consultant for the Association of
25 Interactive Medium. That is Stanley Sokul.
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1 Stan?
2 MR. SOKUL: Thank you, Governor.
3 First, let me briefly introduce the trade
4 association I represent here, the Association
5 for Interactive Medium, A-I-M, or AIM.
6 AIM consists of the men and women all
7 across the country doing business on the
8 Internet. AIM is a reflection of Internet
9 commerce. Its members include some big
10 companies, but its heart and soul are small
11 businesses, mom and pop Internet operations.
12 AIM members are part of the innovation and
13 dynamics of the web so often discussed by
14 economic analysts. That dynamics and energy
15 does not exist in the abstract but exists
16 because of people, regular folks, in urban
17 areas, suburban areas, and rural areas, who
18 think they have a good idea and trying to make a
19 living for themselves and their families.
20 As AIM members struggle every day in the
21 Internet economy, they understand that the
22 issues before us come down to power, how the
23 power of government is going to be applied to
24 the Internet and thus to them.
25 In that regard, AIM believes governments
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1 have no inherent right or duty to tax an
2 activity just because it occurs.
3 This is particularly true when states and
4 cities seek to impose tax obligations on people
5 and businesses outside of their borders.
6 When AIM members are told in the name of
7 fairness that they must collect taxes for all 50
8 states and maybe for thousands of counties and
9 cities because local merchants collect taxes for
10 one, they have trouble seeing the equities.
11 AIM wants to see this Commission do its
12 mission. The Commission was given instructions
13 on what to study, but the caliber of
14 appointments strongly signals that Congressional
15 leadership expect a high caliber report.
16 Our mission is not to produce a restatement
17 of conventional wisdom and current thinking.
18 We're not here as tax collectors for the current
19 tax regimes. We are called upon to produce a
20 visionary report that helps Congress deal with
21 the changing world.
22 It's appropriate that our first meeting is
23 in the Colonial setting of Williamsburg. The 13
24 colonies' first attempt at government collapsed
25 because the states parochial revenue motives led
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1 to the imposition of state import duties on
2 interstate commerce.
3 The states' present desire to gain national
4 taxing authority is the modern day equivalent.
5 We should not impose an Articles of
6 Confederation framework on our 21st century
7 economy.
8 AIM knows that our Constitution limits the
9 rights of states on interstate commerce to
10 important regions, and the American people
11 expect more from us than a report recommending
12 that the states be allowed to place
13 unprecedented affirmative burdens on interstate
14 Internet commerce. Congress expects more from
15 us as well.
16 On behalf of AIM, I'm excited to help work
17 toward meeting these expectations.
18 GOVERNOR GILMORE: Stan, thank you very
19 much.
20 The next speaker of the Commission is the
21 Chairman and the CEO of Gateway, Incorporated,
22 Mr. Ted Waitt.
23 Ted?
24 MR. WAITT: Thanks, Governor. It's a real
25 honor to be here today and be part of this
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1 Commission. I think there have been some great
2 points already made by a lot of my fellow
3 Commissioners.
4 Gateway is in somewhat of a unique position
5 out in the industry today. Our heritage has
6 been selling products over the phone. We were
7 the first company to really sell a PC over the
8 Internet. We have a catalog operation. We have
9 web merchants. We're also a retailer because we
10 build stores. We're also an Internet access
11 provider.
12 We're somewhat in a unique position. We
13 really come to this Commission with an open
14 mind.
15 The current environment for sales tax
16 really doesn't even deal with mail order sales
17 properly, much less the environment for the
18 Internet.
19 We're dealing with some pretty complex
20 issues. No matter what we do here, it needs to
21 be simple. It needs to be very clear. It needs
22 to be uniform and provide a level playing field.
23 The Internet and eCommerce, as John talked
24 about earlier, is going to grow. It does not
25 need advantages to grow dramatically. But also
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1 it can't be held back by any government
2 innovation.
3 We're dealing with some complex issues.
4 Hopefully, we can work together with an open
5 mind to come up with some very common-sense
6 solutions to these larger issues. I'm happy to
7 be here.
8 Thank you.
9 GOVERNOR GILMORE: Ted, thank you very
10 much.
11 The last member of the Commission to make a
12 presentation is the General Counsel of the
13 United States Trade Representatives, the
14 delegate for Ambassador Charlene Barshefsky.
15 In my recent travels to South America, I
16 noticed and was informed that people from across
17 the world are watching very closely the tax
18 position that this Commission recommends and
19 that Congress ultimately adopts, and may very
20 well adjust themselves accordingly.
21 On that position, it may be, that over-
22 dependency on this Commission, there can be no
23 stronger or more important voice in this
24 discussion than the General Counsel of the
25 United States Trade Representative, Foreign
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1 Ambassador Charlene Barshefsky.
2 That gentleman today is the General
3 Counsel, Mr. Robert Novick.
4 Mr. Novick?
5 MR. NOVICK: : Thank you, Governor. Thank
6 you and your staff for convening this first
7 meeting. It's already been a great success.
8 The issue we're here to address is complex.
9 The Internet is an emerging technology whose use in
10 the future is hard to predict. The ultimate
11 goal of our work is clear.
12 The President stated it succinctly when he
13 signed this law. He said, "We cannot allow
14 30,000 state and local jurisdictions to stifle the
15 Internet, nor can we allow the erosion of the
16 revenue that state and local governments need to
17 fight crime and invest in education. Achieving
18 that goal is our challenge, and succeeding will yeild
19 real rewards at home and abroad."
20 The domestic tax policy work of the
21 Commission has important parallels for
22 internationally. Governor Gilmore is quite
23 right. Foreign governments will be watching the
24 progress of this Commission closely.
25 They, of course, seek electronic commerce
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1 that yields the most benefits for their nations.
2 Many are also concerned about the possible
3 effects of electronic commerce on their revenue.
4 Our ability to make progress in the months
5 ahead thus has very real consequences for
6 America's interests worldwide.
7 As an agency whose responsibility is solely
8 in trade, USTR is not directly
9 involved in tax policy. However, the taxes the
10 Commission will address have significant
11 implications for our ability to address the
12 international aspects of electronic commerce.
13 In particular, the President has directed
14 the USTR to secure a permanent
15 moratorium on the imposition of tariffs on
16 electronic commerce.
17 Ambassador Barshefsky succeeded in May of
18 '98 in winning an agreement among more than 130
19 members of the World Trade Organization to
20 impose an interim standstill on the imposition
21 of tariffs. Today, therefore, in trade terms
22 the Internet is pristine.
23 No member of the WTO considers electronic
24 commerce imports subject to customs duties.
25 This duty-free treatment should include
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1 electronic transactions on the Internet.
2 We are now working to make that interim
3 standstill permanent as we look forward to
4 hosting the third WTO meeting this November in
5 Seattle.
6 If this Commission can work towards a
7 consensus in a transparent and constructive
8 fashion, we will reduce the temptation by other
9 countries to display their revenue concerns in
10 the form of tariffs.
11 I would be remiss in mentioning the WTO
12 meeting if I didn't acknowledge the work of
13 Governor Locke and his office in helping us plan
14 this unique and most significant trade event in
15 the 20th century.
16 In closing, the world community is looking
17 for the United States' leadership on electronic
18 commerce issues. This Commission offers a
19 unique opportunity and serious responsibility.
20 As Governor Gilmore accurately stated in
21 one of his letters to each of the Commissioners,
22 our success will be measured about how well we
23 are able to strike a balance between the
24 legitimate interests of Federal, state and local
25 governments with the concerns of the merchants
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1 and entrepreneurs in the business community.
2 I couldn't agree more and look forward to
3 working with each of the distinguished members
4 of this Commission in a process that strikes
5 that proper balance.
6 Thank you, Governor.
7 GOVERNOR GILMORE: Thank you very much.
8 Ladies and Gentlemen, we are on time. But
9 at the same time, I think we can also see from
10 the breadth of the 17 presentations that there
11 is a great diversity of opinion on this panel
12 and a great diversity of point of view, a very
13 difficult task, it seems to me, to achieve
14 consensus.
15 It may be that Congress gets the benefit of
16 the views of the members of this Commission in a
17 final report, or perhaps as the months go on and
18 we listen to our presentations, a more
19 consistent approach will emerge.
20 I don't think there is any obligation that
21 that occurs, but I think that we should
22 hopefully try to reach towards bringing together
23 people's ideas to the greatest extent that we
24 can.
25 We will begin our first presentation with a
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1 member of the panel who is going to make that
2 first presentation. The agenda calls for us to
3 make a 15-minute break. I can use one. I
4 certainly believe we all could.
5 Let's come back in 15 minutes. Thank you
6 very much.
7
8 (Recess taken.)
9
10 GOVERNOR GILMORE: The meeting will now
11 come to order. It's now time to hear from some
12 of the invited speakers.
13 Yesterday we had some housekeeping
14 discussions. We will have some more of that a
15 little later on this afternoon. But we have
16 some speakers who are set to go.
17 If we stay with these speakers, I believe
18 we can get a general idea of a wide ranging
19 number of issues and facts and education
20 involved with those, so that we can continue to
21 work in beginning to draw together our ideas.
22 I have deliberately selected these speakers
23 in order for us to each be on the same page
24 regarding these kinds of issues. We have a
25 variety of presentations.
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1 The members of the Commission come at this
2 with a broad range of knowledge and information.
3 These speakers will begin to give us some common
4 ground from which to work as we go from there to
5 the different points of view we have on these
6 issues.
7 The first issue that we're addressing is
8 the implications of electronic commerce for U.
9 S. domestic economy and U. S. international
10 competitiveness.
11 Now, the first speaker on this issue is
12 Andrew Pincus, the General Counsel for the U. S.
13 Department of Commerce. His presentation is on
14 "The Emerging Digital Economy."
15 This is a report produced by the department
16 last year, but I understand that you have a new
17 version of it, Andy, as well. We want to thank
18 you very much for giving us your presentation
19 now. Thank you. Please proceed.
20 MR. PINCUS: Thank you.
21 As you mentioned, Governor, last year, in
22 an effort to catalog and examine what was
23 happening to our economy, Secretary Daley issued
24 the Commerce Department's first report on "The
25 Emerging Digital Economy."
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1 Later today we will be issuing our second
2 report. We have put a copy on each of the
3 Commissioners' desks. It's embargoed until
4 the end of the day today when it's coming out
5 formally.
6 It contains an update of the issues that
7 you asked us to address, trying to measure this
8 phenomenon and a little bit of the discussion of
9 its impact on various aspects of our domestic
10 economy and international competitiveness.
11 I thought what I would try to do today is
12 try to summarize some of those developments
13 quickly and then be available to answer
14 questions or discuss any issues in depth.
15 I'm going to try to address five issues
16 quickly: First, what is eCommerce that we're
17 all talking about? Is there a definition we can
18 all use to have a common ground?
19 Second, a little bit of discussion of facts
20 and figures on the use of the Internet and how
21 it's growing.
22 Third, measuring the digital economy, what
23 we at the Commerce Department have been doing to
24 try to address the measure in question, which
25 has been raised more often lately.
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1 Then the impact on our domestic economy.
2 What does this mean for growth and what does it
3 mean?
4 Several of the Commissioners said in their
5 three-minute statements, clearly technology in
6 general, eCommerce in particular, is having a
7 tremendous impact on our growth.
8 And finally, the discussion on how
9 eCommerce impacts on our global competitiveness,
10 which, as everyone has mentioned, this is a
11 global marketplace, and increasingly companies
12 of the United States will be competing not just
13 with their fellow domestic competitors but with
14 companies around the world.
15 Let me start by talking about what is
16 eCommerce. Our colleagues in USTR last year in
17 Geneva, in advocating a standstill on tariffs on
18 the Internet, arrived at a definition we think
19 is a good one.
20 ECommerce involves both products that are
21 bought and paid for over the Internet but
22 delivered physically, as well as the increasing
23 number of products that are delivered as
24 digitalized information.
25 We really have those two categories to deal
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1 with now. Obviously, paying for goods and
2 having them physically delivered is very large.
3 But as John discussed in his presentation, as
4 bandwidths grow, we will see increasing delivery
5 of digitalized products.
6 We look at that as the universe of things
7 we're dealing with when we're talking about
8 eCommerce.
9 Next, some facts and figures on Internet
10 access, which is clearly a key measure for
11 different countries in how they are able to
12 access and participate in this medium.
13 As you can see, the United States is on the
14 lead in percentage of population with Internet
15 access. You can see the distribution goes down
16 from Canada, Australia, and jumps down to
17 Europe. This is a percentage of population.
18 The next chart cuts the numbers a little
19 differently in terms of total people with
20 Internet access and, divided by region, shows
21 how U. S. and Canada is really tremendous in the
22 lead over the rest of the world with Internet
23 access, which means not only is our public more
24 familiar with this new medium, more able to use
25 it, but entrepreneurs are able to think about
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1 creating new kinds of services and goods that
2 can use the Internet.
3 Access is growing tremendously, as everyone
4 has mentioned. A few numbers increased. Access
5 is up 55 percent from '98 to '99. New address
6 registrations are up 137 percent. Hosts are up
7 46 percent.
8 One thing that is interesting about these
9 numbers is other countries are beginning to
10 catch up. We have had a tremendous lead for a
11 long period of time, but other countries are
12 beginning to grow faster in Internet access
13 usage and beginning to catch up to us, which is
14 only natural as technology becomes more
15 disseminated around the world.
16 The next issue, measuring digital economy.
17 Measurement is difficult now because there
18 really is no authoritative source of numbers.
19 We have got private estimates of Internet access
20 and size that vary from each other.
21 We have got private estimates of sales and
22 use that vary because everybody uses different
23 sample sizes, different definitions, different
24 methodologies.
25 I think, although the absolute numbers may
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1 differ, there is no debate that, as John showed
2 in his presentation, it doesn't matter what you
3 label the chart, everything is going up like
4 that. I think that is something that no one is
5 debating.
6 One of the things we're trying to do in the
7 Commerce Department is begin to adopt our
8 national accounts to collect this kind of data,
9 because, as with everything else, we have a
10 collection of statistical measures that were
11 really developed for a different kind of economy
12 and don't take account of the new economy we're
13 developing.
14 So we had a conference earlier this year to
15 collect expert opinion on how to begin to
16 measure the digital economy, how to adopt our
17 GDP numbers and other numbers so that we can
18 capture all this economic activity.
19 Because most people believe, even though
20 our GDP numbers and other measures show
21 tremendous growth, they are underestimating the
22 growth of economy because we're not fully
23 capturing this data.
24 We have announced we're going to begin to
25 separately collect in our retail sales those
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1 results. Unfortunately, because of the lag
2 time, this will not be published until early
3 2001.
4 What Secretary Daley has directed
5 our data collection people to do is to look at
6 all the data collection efforts, to work with
7 the people that we collect data from, to look at
8 new, quicker on-line methods of collecting data
9 and broader data collection methods so that we
10 can have better data measurements of this
11 phenomenon.
12 What we have done in this report, and this
13 is what we did last year, is to collect from the
14 private sector measures of eCommerce.
15 This chart is business-to-consumer
16 eCommerce. As you can see, it starts out with
17 some very small numbers in '97 but really jumps
18 up projected growth to anywhere from 15 times to
19 35 times as large in 2002.
20 I should say one thing about these
21 estimates. They have all proven to be too low
22 when the actual evidence comes to pass. In
23 early 1998 there was an estimate that on-line
24 consumer commerce would be about 7 billion
25 dollars by 2000. Actually, that 7 billion
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1 dollars was exceeded last year.
2 I think, again, if there is anything we
3 know about these numbers, even though they
4 project a tremendous growth, they are probably
5 underestimating the growth trend of this
6 element.
7 Most eCommerce still is business to
8 business. Business to -- I'm sorry, this is
9 total retail trade.
10 Business-to-consumer eCommerce is still a
11 very small percentage of the U. S. retail trade,
12 less than 1 percent, but the information that we
13 have seen indicates that that percentage is
14 growing.
15 In other words, business-to-consumer
16 e-commerce is growing at a greater rate than total
17 retail trade. So the percentage of retail sales
18 that is on eCommerce will grow as we move up and
19 will exceed that eCommerce growth line.
20 As I was saying, however, in terms of gross
21 eCommerce, business-to business is way ahead of
22 business-to-consumer just because businesses
23 have been much quicker to put their operations
24 on line.
25 And so I think this chart makes it very
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1 clear that business-to-business is still a very,
2 very large chunk of the commerce that happens on
3 the Internet right now, and it's projected to
4 continue to be in the foreseeable future.
5 As I said, take these estimates with a
6 grain of salt, because they will probably be
7 surpassed.
8 I thought it might be worth just mentioning
9 a couple of examples of things we documented in
10 the report, just to talk about the huge growth
11 that some of these eCommerce businesses have
12 shown.
13 Travelocity, which is a travel agent site,
14 you can see the numbers there, 156 percent
15 increase in sales. On-line brokerages is again
16 a tremendous increase in the first quarter of
17 this year. And Quicken Mortgage, the first
18 quarter number of '99 is almost equal to double the
19 numbers of '98. I think that documents
20 the growth rate, respectively.
21 It's been mentioned before, I think it's
22 worth noting again quickly, the reason why
23 eCommerce has revolutionized the way we do
24 business is because it provides consumers with
25 more choices, lower prices, and more
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1 competition, and much faster service. That's
2 what people like.
3 Switching gears a bit to talk about the
4 impact of eCommerce on the domestic economy, one
5 of the things we found in our last report was
6 the tremendous contribution that the IT
7 producing industries are making to our economic
8 growth.
9 We found, again, that if you look at '95 to
10 '98, they contributed more than one-third of our
11 total economic growth, which is already a
12 phenomenal number.
13 The other interesting thing is the
14 declining prices is not only a big segment in
15 our growth but contributing to keep the
16 inflation down. The declining prices brings
17 overall inflation down by .7 percent.
18 Because of its big contribution to our
19 domestic economy and also because we lead the
20 world in IT, you can see in that last bullet
21 that the share of our economy is going to
22 continue to increase in 1999 from IT industries.
23 This is just a graphic representation of
24 the growing importance of these industries to
25 our economy.
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1 The President in 1997, when he issued the
2 framework for electronic commerce, identified
3 the issues that have to be addressed in order
4 for electronic commerce to grow. I think it is
5 worth just taking a minute.
6 We're dealing here principally with
7 taxation. But just to put it in context, there
8 are a number of other policy issues that are
9 being grappled with by the Executive
10 Branch, on the Hill, and the states and
11 internationally in various forum questions about
12 ensuring privacy on the Internet.
13 How do I know if I shop at a site my
14 information will be protected and not just sold
15 to the highest bidder? Consumer protection.
16 How can I be sure that a site is safe to
17 shop on if I'm a consumer and I buy something,
18 after I send them my credit card and never get
19 the good I ordered and have no remedy because
20 they are in cyberspace and not a store I could
21 go back to and bang on the door and demand my
22 money back?
23 There's not a store at the end of my
24 transaction that I can take my goods back to.
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1 Authentication. If I engage in a contract
2 with someone, how can I be sure that the person
3 on the other end of the e-mail is the person
4 whose name is typed on the contract? How can I
5 identify that?
6 Security. How can I be sure that bad
7 people don't get my credit card number and other
8 information and use it for bad purposes?
9 A lot of these issues are reflected in the
10 legal framework of contract law. Intellectual
11 property protection, very important on the
12 Internet. And issues we're dealing with here,
13 taxation.
14 As John mentioned in his presentation,
15 critical to realizing the potential of the
16 Internet is making sure that everybody has the
17 bandwidth to get these tremendous new services
18 that are being developed delivered to them, and
19 not being the inexperienced one in a hotel room
20 waiting to download and see their e-mail and
21 taking a long time.
22 How can we be sure that every American has
23 access to a higher performance of the structure
24 and an infrastructure where they are competing
25 to make sure that we have a full measure of
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1 competition to stimulate choice and low prices?
2 That's something the Commerce Department
3 and the rest of the administration has spent a
4 lot of time on right now.
5 On the international front, as Bob
6 mentioned in his presentation and several others
7 did as well, one of the unique aspects of the
8 Internet that it's global. All of the issues I
9 just mentioned we're grappling with domestically
10 have effects internationally.
11 If we realize one of the great potentials,
12 which is, for someone in Virginia who has a
13 great idea of a service to sell or good to sell,
14 wishes to sell on the Internet, not only to sell
15 it to Virginia but the rest of the world, we
16 have to make sure we have a legal system, tariff
17 system, tax system that allows that kind of
18 commerce to take place.
19 As Bob mentioned, the tariff issue is very
20 important. We're very concerned that other
21 countries adopt rules that don't discriminate
22 against people in the United States, and, as Joe
23 Guttentag mentioned, the jurisdiction and tax
24 aspects arise as well.
25 This report and all of the information
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1 about the three Federal government participants
2 in this Commission will be available on our web
3 site, www.ecommerce.gov.
4 If people who are watching us on-line have
5 questions or comments they want to convey to us,
6 there is a place on that site to log in and
7 send us the questions, and we'll answer them.
8 GOVERNOR GILMORE: Thank you. I appreciate
9 this very much. I hope everyone has taken some
10 notes. We want to have some extensive questions
11 and answers.
12 Since both of the presenters are on the
13 same topic or similar topics, I would like to
14 ask the next presenter to go forward, and then
15 we'll have a block of time at the end for the
16 questions of the panel, if that's all right with
17 you.
18 Our next presenter is Peter Merrill of
19 PricewaterhouseCoopers in Washington, D. C.
20 Mr. Merrill is going to give us a perspective of
21 multinational corporations doing business using
22 eCommerce, value added taxes abroad -- and I
23 fully admit I don't understand -- and how U. S.
24 corporations are impacted with taxes and
25 tariffs.
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1 So Mr. Merrill, thank you very much.
2 MR. MERRILL: Thank you, Mr. Chairman, and
3 members of the Commission. My name is Peter
4 Merrill. I'm a partner with
5 PricewaterhouseCoopers in Washington, D. C.
6 Though I'm not speaking to you today on
7 behalf of any organization, I have for the last
8 three years worked with the Electronic Commerce
9 Tax Study Group, a group of 15 U. S. companies
10 interested in the international tax aspects of
11 electronic commerce.
12 Three of the study group's papers
13 expressing its views on these matters to the
14 Organization for Economic Cooperation and
15 Development, the OECD, have been provided to you
16 by the Commission staff.
17 The issues that the Commission has been
18 chartered to address are not new, nor are they
19 easy to resolve.
20 We're reminded today as we sit here in
21 historic Williamsburg that our country's war of
22 independence was fought, in part, over England's
23 jurisdiction to tax remote sales in the
24 colonies.
25 While I do not have any simple solutions to
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1 offer the Commission, I will make my remarks
2 today to provide some perspective on the size
3 and the nature of the tax issues raised by
4 eCommerce and suggest some principles to guide
5 the Commission's recommendations.
6 The topics that I have been asked to
7 address are similar to Mr. Pincus', so I will go
8 over some of those quite quickly.
9 The first, what is eCommerce? I think it
10 is useful to distinguish the kind of eCommerce
11 that has been prevalent in the business
12 community for over two decades.
13 This is the type of commerce that takes
14 place over value-added networks, bands,
15 proprietary networks, also referred to as
16 electronic data interchange.
17 Every time you use a credit card or debit
18 card, you are engaged in electronic commerce.
19 Every time you use an ATM machine, you're
20 engaged in electronic commerce.
21 That technology is quite old. It involves
22 computer applications where transactions are
23 conducted electronically across business
24 boundaries.
25 A narrower definition of electronic
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1 commerce, I think the one that this Commission
2 is focusing on, might be called I Commerce,
3 Internet Commerce.
4 Internet, as distinguisheded from
5 electronic data interchange, EDI, takes place
6 over an open network using open protocols. This
7 allows the type of commerce that we're seeing
8 today by households. This is business to
9 consumer, often called B to C.
10 So the business to consumer, the commerce
11 over the Internet, is scarcely four years old,
12 whereas the broader definition of eCommerce has
13 been going on for two decades.
14 There are many interesting and exciting
15 types of this business-to-consumer commerce that
16 are taking place because of the open network
17 Internet format.
18 Retail, obviously, is the closest analog to
19 bricks and mortar, but many, if not most, of the
20 types of goods and services being provided over
21 the Internet are, in fact, intangibles, services
22 rather than goods.
23 And so many of the kinds of sites we see
24 today, people conducting auctions over the
25 Internet, buying cars over the Internet, buying
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1 airline tickets, so on and so forth, are types
2 of services where state taxes, for example,
3 don't apply typically, and in many cases the
4 consumer is not actually paying anything to get
5 the service.
6 The service is being provided in exchange
7 for advertising revenues. So, obviously, the
8 service provider is not charging anything for
9 the services using their site. No sales tax is
10 actually implicated.
11 The history of eCommerce is a little bit
12 hard to read. It began, as was mentioned by
13 John in his presentation, 30 years ago. It was
14 the Defense Department that was concerned about
15 having a secure network in the event of nuclear
16 attack. This was a cold war development.
17 And so it was government money initially
18 that created the concepts which then, as I said,
19 only four years ago, with the development of the
20 browser, has allowed commerce, business-to-
21 consumer-type commerce, to take off.
22 If you look at eCommerce, I believe you
23 will conclude that it is really more a way of
24 doing business, a way of communicating, than it
25 is truly a sector of the economy.
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1 As Andy Grove has said, in five years there
2 won't be any Internet companies because they
3 will all be Internet companies, otherwise they
4 will die.
5 So this type of technology, like the
6 telephone before it, like the telegraph before
7 it, is something that every company in America
8 will need to adopt in order to be more
9 efficient.
10 Now, clearly, business-to-consumer commerce
11 is getting all the headlines. The stock market
12 capitalizations, as was pointed out earlier by
13 John, are just phenomenal.
14 But the business-to-business segment is
15 where all the dollars are. That was pointed out
16 earlier in Andrew's presentation.
17 Business-to-business transactions -- this
18 is just over the Internet, I'm excluding now the
19 ATM interchange, ATM electronic transfers, and
20 so forth -- just over the Internet, the open
21 network, 85 percent or more of the transactions
22 in 1999 are business-to-business.
23 This is significant, because typically
24 sales taxes don't apply to business-to-business
25 transactions.
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1 Moreover, the business-to-business segment
2 is projected by Forrester to grow much faster
3 than the business-to-consumer segment.
4 Why? Because many of these type of
5 business-to-business transactions, procurements,
6 supply chain, inventory management, so forth,
7 are moving from these private networks, which
8 are very expensive, to the open network.
9 Electronic data interchange, EDI, is moving
10 from the proprietary network to the Internet and
11 producing a huge growth of business-to-business
12 transactions over the Internet.
13 This slide, from Forrester data, shows the
14 percentage of all of the Internet commerce that
15 is business to business versus percentage that
16 is business to consumer.
17 You can see that the business-to-consumer
18 percentage is actually projected to drop from
19 about 18 percent down to 8 percent, where the
20 real growth is in the business-to-business
21 applications.
22 So eCommerce, if we define it as
23 business-to-consumer space, is actually quite a
24 small share of the total Internet commerce.
25 It's actually a tiny share of direct market
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1 sales.
2 Internet sales to consumers are less than 3
3 percent of all the direct market sales to
4 consumers. This is data that comes from the
5 Direct Marketing Association. It includes sales
6 that take place by catalogs, by telephone
7 marketers, by television, by radio, by
8 newspaper, by magazine.
9 These are all forms of remote commerce that
10 have been around for a long time. The Internet
11 is about 3 percent of that today.
12 If we look at sales over the Internet
13 relative to all personal consumption
14 expenditures in the United States, that is about
15 4/10 of 1 percent.
16 This chart simply compares the amount of
17 business-to-consumer sales over the Internet
18 with the total direct market sales to consumers.
19 So we can see that in 1998 Forrester says
20 about 8 billion of Internet sales was to
21 consumers. That compares to over 600 billion
22 dollars of remote sales through mail order,
23 telephone order, catalogs, and so forth.
24 If you look into the future, you will see
25 that the Internet grows, but it is still a very
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1 tiny percentage of all remote sales.
2 So if this Commission is concerned about
3 the taxation of remote sales and wishes to do
4 something about it, it should keep in mind that
5 the Internet is a very, very tiny percentage of
6 all the remote sales.
7 On the income tax side -- So far we have
8 been talking about sales tax. On the income tax
9 side, although there are still tremendous market
10 capitalizations --
11 I did an experiment. I took 15 household
12 named sites, Internet merchants, and took their
13 revenue for 1998 or the most recent year for
14 which they had published financial statements.
15 They reported 5 billion dollars of revenue.
16 Yet, their reported net income was actually
17 negative .4 billion.
18 So right now there is not a whole lot of
19 income on the net. So you have to put into
20 perspective the fact that while the sales are
21 huge, the amount of income that is being
22 generated today is still quite small.
23 Now, international revenues potentially
24 will be significant. These are some sites that
25 are getting somewhere between 25 to 35 percent
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1 of their sales internationally. Overall, this
2 is still a very small percentage.
3 Estimates are typically under 100 million
4 for eCommerce exports from the United States.
5 Clearly, this will be a promising area of growth
6 for the United States doing eCommerce
7 internationally.
8 Currently, the United States is very
9 dominant in electronic commerce. It accounts
10 for about 80 percent, according to Forrester
11 estimates, of all electronic commerce in the
12 world. However, this is projected to decline to
13 about 60 percent in 2003.
14 There are various high and low estimates,
15 but they all show the U. S. dominance will
16 decline. This is something that other
17 countries, presumably, need to keep in mind.
18 Right now it looks like the United States
19 has sort of all of the action there is in
20 Internet commerce, but this will change as
21 penetration of Internet service providers,
22 telephone access, and so forth, spreads around
23 the world. And we saw some numbers from Andrew
24 earlier that show this is spreading more
25 locally.
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1 ECommerce is certainly contributing to
2 U. S. productivity. One estimate from the OECD
3 is just in the business consumer model of the
4 costs being taken out of the marketing
5 distribution by the use of this technology.
6 Estimates, for example, of airline tickets
7 being able to be sold over the Internet for $1
8 instead of $8, reducing inventory because we
9 have much greater ability to control our costs.
10 These are estimated to increase U. S. GEP
11 growth by about 1/2 to 2/3 of 1 percent. So
12 instead of growing at 2 1/2 percent a year, the
13 U. S. economy might grow at 3 percent as a
14 result of these technologies. This is an
15 important element.
16 There are many other costs that are being
17 taken out of the supply chain procurement side
18 that are not accounted for here. There are some
19 tax policy implications from these facts and
20 figures.
21 I think, first, some have advocated a very
22 radical tax reform and used eCommerce as a
23 pretext to advocate that.
24 I think we can see that, one, remote sales
25 has been with us for 100 years, certainly since
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1 the Sears & Roebuck catalog, and the Internet is
2 a tiny share of all the remote sales that exist
3 today. This is definitely not a new issue.
4 Second of all, the tax system has coped
5 fairly well with fairly radical changes in
6 communication technologies in the past, which
7 comes from the 1869 tax court case in which it
8 had to resolve whether a telegraph signature
9 was, in fact, equivalent to pen and ink for
10 legal purposes.
11 So these kinds of issues have been
12 addressed in the past and will continue to be
13 addressed.
14 Revenue losses certainly from the state and
15 local government today are very small. I think
16 you have a paper in your package from Austan
17 Goolsbee who estimates that sales revenues that
18 will be lost potentially might be 1/4 of 1
19 percent of all sales tax revenues in 1998.
20 It would be even less if, in fact, these
21 Internet sales are, in fact, displacing mail
22 orders rather than replacing Main Street sales.
23 This, I would view, is a high estimate, and
24 we'll talk about that later.
25 It is, however, the case that our current
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1 tax system does have a number of anomalies and
2 weaknesses and have become outdated in a number
3 of respects, and should, in fact, be reviewed
4 and updated as necessary.
5 Certainly, the Federal and state
6 telecommunications taxes, as has been mentioned
7 by a number of the Commissioners, they are
8 certainly out of date, particularly as we look
9 at deregulation and convergence of different
10 technologies that are taking place today in
11 communications.
12 Second, the current tax system is, indeed,
13 far too complex. We have over 30,000 tax
14 jurisdictions, really making a tremendous
15 imbalance for small and medium enterprises
16 trying to do business over the Internet.
17 A recent VAT case, Forecia, really
18 highlights the nonneutrality that is taking
19 place under sales tax regimes abroad.
20 In Forecia we saw a company that produces
21 information on exchange rates. It sells a
22 newsletter physically. It will mail it to you.
23 It can also sell it to you by fax or over the
24 web. You can buy it either way.
25 You buy a hard copy, the VAT rate is 0. If
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1 you buy it through a fax or over the Internet,
2 you're subject to the standard rate of VAT. I
3 believe it's approximately 17 1/2 percent.
4 The judge had to conclude that the law
5 provided differential taxation based on the
6 method of delivery. They said they had no
7 choice. That's what the law says. They said
8 this is the wrong answer.
9 I think clearly we need to have neutrality,
10 and tax laws need to be reviewed that
11 distinguish between different methods of
12 delivery. And certainly, jurisdictions need to
13 coordinate to make sure we don't get double
14 taxation.
15 So I think there is a positive side. I
16 call it old issues with new and tremendous
17 opportunities. I think there are tremendous
18 opportunities to simplify tax administration,
19 what has been called tax service, by the OECD.
20 There are, certainly, many opportunities to
21 use the technology to simplify tax
22 administration, tax filing, tax payment,
23 distribution of tax information, and even use of
24 software to calculate tax liabilities in its
25 many jurisdictions.
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1 Some of the tax administrators that we have
2 talked to in the OECD from other countries are
3 very concerned with the growth of the Internet
4 electronic commerce, there will be more
5 electronic records.
6 They have been concerned that electronic
7 records can be deleted without a trace, altered
8 in ways that are harmful to tax authorities.
9 We have found in a report that is included
10 in your package, a report that we submitted to
11 the OECD written by PricewaterhouseCoopers,
12 that, in fact, electronic records, the
13 experience at least to private auditors, are
14 actually more secure and more reliable than
15 old-fashioned paper records.
16 We believe we have convinced the OECD of
17 that, and, in fact, the OECD has formed a panel
18 to work with private auditors to understand the
19 techniques of information risk management and
20 information security and auditing of electronic
21 records.
22 We believe that tax authorities, certainly,
23 should not hold back this new technology and
24 protect the old ways of doing business, because
25 that would only harm the productivity growth
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1 that can be attained from the use of Internet
2 commerce.
3 We also believe that other tax authorities
4 ought to recognize U. S. dominance in the sector
5 is declining, and they do not need to impose
6 various types of extra territorial tax on
7 U. S. economies.
8 We believe that neutral application of
9 these tax rules is extremely important in the
10 tax sphere but also in the regulatory sphere.
11 In concluding, I would suggest to the
12 Commission four principles. A number of the
13 Commissioners have already mentioned the first
14 two of the principles I wish to discuss:
15 Neutrality, simplicity, free trade, and
16 technological efficiency or technological
17 neutrality.
18 Neutrality. ECommerce, Internet commerce,
19 should not be taxed at higher rates than other
20 forms of doing business. As a corollary, bit or
21 special taxes should not be applied to Internet
22 commerce.
23 We also believe that electronic commerce
24 should not be held to a higher and more
25 expensive standard of compliance than
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1 traditional forms of Commerce.
2 Obviously, no system of tax administration
3 is perfect. We don't get 100 percent compliance
4 in any media or format that is conducting
5 business, so we're looking for a rule of reason.
6 And to the extent that privacy is protected
7 in traditional commerce, we believe the same
8 privacy protection should exist with Internet
9 commerce.
10 Simplicity. That has been mentioned by a
11 number of the Commissioners. There is obviously
12 much more difficulty in use of technology to
13 gain compliance with the tax laws if the tax
14 laws are very confusing and complex across
15 jurisdictions with different definitions of what
16 is taxable, multiple rates, multiple
17 jurisdictions.
18 So we really believe that as part of this
19 effort to consider applying tax more broadly to
20 electronic commerce in a neutral fashion, that
21 simplicity go hand in hand with that.
22 Free trade. Obviously, this is a global
23 issue. Many other countries are looking at this
24 issue sometimes with greater concern because the
25 U. S. is the leader. We believe, that is,
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1 administration believes, eCommerce should not be
2 subject to duties. We should maintain that
3 current situation is the goal of the United
4 States and reduce duties and barriers to free
5 trade.
6 We believe that -- Principals in our
7 agency believe that Internet exports should be
8 taxed no more heavily than domestic production.
9 This will certainly in the short term benefit
10 the U. S., because we're a major exporter. We
11 have a lead export position today.
12 Technological efficiency. This simply
13 means, the needs of tax administrators should
14 not force technology. There is a tremendous
15 interest among vendors to know who their
16 customers are and the customers to know who
17 their sellers are.
18 There are developing techniques of
19 individual signatures, probably attorneys, so
20 forth, that will change the way this is
21 conducted. There will be a whole variety of
22 Internet intermediaries that will come into
23 play.
24 We believe that technology will allow tax
25 administrators to effectively collect taxes in a
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1 neutral manner, and they should ride on the back
2 of this technology, not seek to force the
3 direction of technology by premature
4 specifications and compliance laws.
5 In conclusion, I do not find any support
6 for what might be called the Chicken Little
7 claims that the tax system is hemorrhaging. In
8 fact, I think all the evidence suggests that the
9 tax system is not hemorrhaging.
10 This is something that is perhaps a future
11 issue, but there is plenty of time to deal with
12 it in a sober way.
13 On the other hand, the healthy development
14 of eCommerce does not depend on a perpetual tax
15 moratorium. I think John Sidgmore expressed
16 that view as well.
17 I think the Commission should, in
18 conclusion, seek neutral taxation of different
19 methods of conducting business, that the way
20 that the transaction is completed, the method of
21 delivery, should not change the tax result.
22 Certainly, simplification, that has to go
23 hand in hand with this because there are many
24 small players that will now be doing business
25 across all the 50 states, as well as
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1 internationally, where before it only dealt with
2 one single tax jurisdiction in the past.
3 Finally, this technology offers tremendous
4 ability to simplify the tax administration
5 process. The business to tax administrator
6 communication can be greatly simplified.
7 Thank you.
8 GOVERNOR GILMORE: Mr. Merrill, Mr. Pincus,
9 thank you-all very much.
10 We have ample time for questions from the
11 panel or any discussion that anybody would like
12 to make. Are there questions from the panel?
13 Mr. Andal?
14 MR. ANDAL: I have two questions, one of
15 Mr. Pincus or Mr. Merrill. You gave us some
16 insight into what the argument is between the
17 United States and Europe and the rest of the
18 world over taxation policies, especially
19 relating to tariffs.
20 I tend to agree, as a free trade advocate,
21 that keeping those tariffs down, especially on
22 products we're dominant in now, is in the
23 interests of the U. S. but later on will be in
24 the interests of Europe and the other countries
25 with developing interests.
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1 It's remarkable we're talking about both
2 international tax and state sales tax here.
3 While America may be advocating reduction of
4 tariffs, these are products we sell outside of
5 the United States.
6 There is a significant part of this panel
7 and other folks in this country who don't see
8 the link between that and state-to-state tax.
9 It seems to me like it would be difficult
10 for you to go to these international forums
11 representing our country's advocating for
12 tariffs when inside America from state to state
13 we have, in effect, no tariffs on products sold
14 from state to state.
15 How do we have an inconsistent practice
16 state to state versus an international policy,
17 and what kinds of service would we have?
18 MR. PINCUS: Let me make a few comments,
19 and then Bob Novick, who has the other countries
20 and knows more about these issues, may want to
21 chime in.
22 I guess I would make an observation that
23 our duty-free proposal that we put forth in
24 Geneva and was adopted, there was a proposal to
25 maintain the current practice in the world which
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1 makes electronic transmissions duty free.
2 That's a different question from each
3 country's internal taxation regimes, which
4 relates to, as Barry mentioned, in Europe
5 especially, VAT model sales taxes were
6 considerable in parts of countries and states
7 here are revenue-based depending on revenue
8 taxes.
9 You have a question whether a sale
10 completed in a different medium should be
11 treated differently for tax purposes. It's
12 actually two different kinds of things.
13 I might add, and Bob will probably say more
14 to this, one of the concerns in the world about
15 maintaining and making permanent our tariff-free
16 proposal is that countries are concerned, if
17 that also were to mean tax free and that they
18 couldn't collect their VAT taxes, there would be
19 considerable, considerable opposition to that
20 proposal.
21 Countries are waiting to see as part of
22 this Commission -- in meetings I have been in,
23 they have talked about a VAT drain on revenues.
24 If they can't prevent that from happening and
25 reorganize their domestic VAT systems to ensure
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1 the revenue base stays the same, they are
2 prepared to think seriously about putting
3 tariffs in effect so they don't see a big
4 revenue drop.
5 MR. MERRILL: I think it's important to
6 distinguish between tariffs and internal taxes.
7 Tariffs are inherently discriminatory. They are
8 taxes imposed on an import into the country that
9 are not imposed on the domestic production in
10 that country. So they fundamentally fail the
11 principle of national treatment, and they are
12 discriminatory.
13 It is possible to impose sales taxes in a
14 neutral fashion so that cross order sales are
15 subject to the same tax as domestic sales.
16 That's the general principle that is used in the
17 value-added tax countries.
18 I think the concern is that if states or
19 any other jurisdiction were to seek to impose
20 discriminatory internal taxes -- we see that a
21 bit in the Forecia case potentially where U. S.
22 digital products are sent into Europe,
23 particularly those products like books and so
24 forth that get low rates under the VAT
25 systems -- if those are taxed as services
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1 subject to the full rate, then there would, in
2 fact, be discriminatory local taxation. It
3 would not be national treatment, in effect. The
4 local tax would act like a tariff.
5 So I think our main concern was to make
6 sure that states and other jurisdictions don't
7 impose discriminatory forms of taxes that act
8 like tariffs.
9 MR. ANDAL: I would like to pursue that
10 further, but there is no time.
11 Mr. Merrill, on the issue of what the size
12 of potential revenue is, I agree with what was
13 put forward. I want to question a piece of it.
14 It is not true in California that
15 business-to-business transactions are taxed --
16 If a business buys a product from an
17 out-of-state business, we do tax. It's called a
18 use tax, a parallel tax. That has been very
19 effective for our tax in leveling the playing
20 field between the Main Street businesses and
21 others. Obviously, the tax collection moves
22 from retailer to customer.
23 Business-to-business transactions, we
24 argue, get most of that because most of
25 businesses on the purchasing end are subject to
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1 audit for all kinds of tax purposes within
2 California. Once we conduct an audit, we apply
3 the use tax and most of that is paid.
4 The question of how much of electronic
5 commerce is pursued in business-to-business is a
6 huge question. If it's 89 percent, it's likely
7 to stay that way.
8 We don't really have a problem. We're
9 collecting that tax as it is, and it's not going
10 to harm us in any way. I think that is showing
11 up in our revenue statistics.
12 I'm looking for your insight on whether or
13 not you think that's likely to continue, that
14 percentage.
15 The second question --
16 It doesn't look like we're real ready to
17 pursue that, in any event.
18 On this question of Internet sales versus
19 direct mail sales. Direct mail has been around
20 a long time. I'm wondering whether or not
21 Internet sales actually are eating away at those
22 sales. Instead of having to send your catalog
23 order in the mail, you click on it. So it's a
24 very similar activity.
25 I'm interested in both of your thoughts on
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1 this.
2 MR. MERRILL: I have not seen any careful
3 analysis of the extent to which Internet sales
4 are displacing mail order sales. It certainly
5 stands to reason that there should be a certain
6 significant amount of displacement.
7 In fact, there are many cases where
8 companies have both a web site and a catalog,
9 and the customer can choose which method to do
10 business.
11 Sometimes they are on the Internet and they
12 see something they want, and instead of putting
13 their credit card over the net, they just call
14 up and order it over the telephone.
15 Sometimes they are looking in the catalog
16 and they see the web site, they say "Gee,
17 instead of sending by check or calling up, I'll
18 use the Internet."
19 So to me, they are very close substitute
20 ways of doing business, the catalog model and
21 Internet model.
22 I would imagine there is, in fact, while
23 we're seeing tremendous growth of Internet
24 sales, I would imagine that some of it is simply
25 expansion of the market.
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1 I know in my own household, the volume of
2 book purchases over one of the well-known web
3 sites has grown astronomically. We seem to get
4 a book every week or two now. I'm sure those
5 who have used the Internet consider it a great
6 thing. But also, certainly, some of it is
7 substitutional.
8 In both cases, there is no revenue loss.
9 If we're expanding the market, obviously more
10 sales are taking place. It's not a revenue
11 loss. If we're taking it out of mail order,
12 which in many cases it is not subject to tax,
13 there is no loss of tax there.
14 MR. PINCUS: I'm not aware of any numbers
15 on the cannibalization question, as Mr. Merrill
16 said.
17 Although, I think John's presentation with
18 reference to what the financial markets are
19 betting on on a number of these sites, some of
20 which are services, many of which are tangible
21 goods, people believe the total pie is going to
22 be a lot bigger than those companies that are
23 going to be participating.
24 I guess I have the same reaction to your
25 first comment about business to business or
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1 business to consumer. It's a question of the
2 denominator.
3 If the denominator is growing as fast as
4 these numbers indicate, even if the number is
5 low, it is growing pretty substantially, 35
6 times over a 5-year period. Clearly, at some
7 point that gets to be a substantial amount of
8 money.
9 GOVERNOR GILMORE: Question? You wish to
10 come back to them at a later time?
11 MR. ANDAL: I think one follow-up. On the
12 question of cannibalization, if we're going to
13 argue the pie is getting bigger, and we're
14 talking about the rate of equals, and rather
15 than starting with a fixed pie, would argue that
16 the state and local government revenues may be
17 affected in that they won't have a substantial
18 increase in the new pie, the new pieces of the
19 pie and not a revenue decline from their
20 existing bench marks, do you agree or disagree
21 with that?
22 MR. PINCUS: I think I disagree. The pie
23 that I was talking about was on-line sales. The
24 bets that are being placed in the financial
25 markets are bets on companies that are going to
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1 be in the on-line business.
2 I think the bet is that that pie is not
3 just going to be taking current mail order and
4 plopping some or all of it into the on-line
5 sales category but a pretty dramatic growth of
6 on-line sales.
7 If on-line sales are, per se, off limits to
8 state and local taxation, then I guess the next
9 question is: How much of those are coming not
10 from direct marketing catalog sales but how much
11 are coming from Main Street sales, as
12 Mr. Merrill is going to Amazon.com instead of
13 going down to the local book store and buying
14 them? I think that is clearly an important
15 question.
16 But a related question is, the fact is that
17 as the economy grows, this part of it is
18 reflected in increased burdens on the services
19 that the state and local governments have to
20 perform.
21 One question would be: Why do those
22 necessarily have to be off limits in some way?
23 GOVERNOR GILMORE: Mr. Sokul, you had a
24 question?
25 MR. SOKUL: Yes, I do. I would just like
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1 the comments on the question, to what extent
2 Internet economy has a ripple effect or
3 spillover into the rest of the economy.
4 I ask that because I think it's pretty
5 clear there is a split among some members on a
6 sales tax, use tax, collection issue, and the
7 concern among the cities and states and counties
8 they will lose more money as more sales go out
9 of state.
10 The more fundamental question seems to me,
11 and maybe one you can work on building a
12 consensus on, is will the states and cities and
13 counties, in light of the Internet, Internet
14 economy, have sufficient revenue to meet their
15 needs? That's the most fundamental question.
16 If the Internet sellers are driving a
17 spillover of the traditional economy, the old
18 economy, that is causing the current state
19 surpluses and local surpluses, I think that's an
20 important factor that we should know, and if you
21 don't have comments, we should invest in getting
22 an answer.
23 GOVERNOR GILMORE: Do you have any comment
24 on Mr. Sokul's statement or inquiry or
25 wonderment?
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1 MR. PINCUS: I think clearly, as I said in
2 the presentation, the Internet economy, at least
3 as reflected in the IT elements of it, are
4 having an impact on the growth of our economy as
5 a whole.
6 I think the question seems to me that
7 you're posing, I don't have the answer to, is
8 how much of that economic activity falls within
9 the current tax paradigms.
10 And, therefore, as I said, as the economy
11 grows, it seems to be a logical thing, the
12 services that have to be provided are growing.
13 I think we certainly know, as someone
14 pointed out, the challenge of preparing young
15 people to be workers in the economy puts an
16 economic burden on our educational system,
17 because, clearly, technology is the key to jobs
18 in the future, and we may not have the key to do
19 that.
20 MR. SOKUL: I'm not sure that is the role
21 of the Commission.
22 MR. PINCUS: If that economy also imposes
23 new or different burdens on the government in
24 question, the question is: Are the revenues
25 there to perform those functions.
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1 GOVERNOR GILMORE: Mr. Armstrong?
2 MR. ARMSTRONG: Mr. Merrill, I didn't
3 disagree with anything you said, except there
4 was one thing, that the Internet is an
5 interaction between two computers.
6 I would suggest that you maybe agree that
7 the Internet is part of a digital communications
8 revolution, with the Internet protocol, that
9 devices, in fact, would be transparent over time
10 and potentially the telephone wired or wireless
11 or even the TV set might be an active
12 participant in this network.
13 And maybe the reason that's important is
14 how we measure access activity and the impact
15 alone it would have in trying to figure out tax
16 policies. We may want to understand that.
17 GOVERNOR GILMORE: Any response?
18 MR. MERRILL: I certainly concur. I
19 mentioned the convergence of technologies taking
20 place as one of the things that obviously is
21 creating some need to take another look at a
22 telecommunications tax in this country.
23 GOVERNOR NORQUIST: Pat Buchanan doesn't
24 quite understand this, but tariffs are taxes.
25 And the question of whether they are
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1 discriminatory, a tariff at the American border
2 raises the prices for goods not only for
3 Japanese steel, because they are a tax, but from
4 a consumer standpoint, it raises the cost of all
5 steel, even domestic-related steel.
6 A tariff doesn't discriminate. It hurts
7 all consumers. It hurts consumers of Japanese
8 steel by having a tax to the government on the
9 steel economy and hurts the consumers of
10 domestic steel by having a higher price than the
11 market would allow that the steel manufacturers
12 walk away with. The consumer loses in both
13 cases, doesn't see any discrimination, just sees
14 higher prices.
15 I want to commend our current
16 administration and some of the people on this
17 panel for their leadership in trying to keep
18 tariffs down, because that keeps prices for
19 consumers down and taxes down.
20 I hope we can also look at domestic
21 tariffs, domestic taxes, and try to keep those
22 down, as they are a dead weight cost on
23 commerce. We need to keep it to a minimum.
24 GOVERNOR GILMORE: Mayor Kirk?
25 MAYOR KIRK: Very briefly, Mr. Chairman. I
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1 want to respond to one issue, the impact of
2 education. We don't have time to address all
3 the issues of the American educational system.
4 We're here to address the impact of taxes
5 on this industry and come up with solutions that
6 would be best neutral and not impede progress.
7 Just from talking with different members
8 and listening to them, I think most of us
9 understand whether a good is taxed or not
10 shouldn't depend on where you saw it. It
11 shouldn't in also talking with the industry
12 leaders.
13 I do have a real concern. I don't know how
14 to address it. I think the greatest threat of
15 this incredible industry is not whether somebody
16 pays sales tax, it's whether they can go to work
17 for them.
18 I think it's a national imperative, the
19 policy of mayors aside, that we spend a lot of
20 our time and efforts on education. This is an
21 important issue to us. It's a fundamental lack
22 of preparedness for people not going to work in
23 this industry. We can't have an industry that
24 is this dynamic continue to improve without all
25 of our talents. Look at India and Asia and
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1 others.
2 All you have to do is go to a graduation
3 ceremony of any American University in the Ph.D.
4 engineering, math, and physics department and
5 look at the number of students that happen not
6 to be American. I think you would be scared to
7 death.
8 I understand that is an element that we can
9 address, that we need to nationally focus on,
10 how to prepare young people to come out of
11 school with more than a little, modest amount of
12 interest in math and sciences. I think that's
13 the greatest growth of this industry.
14 GOVERNOR GILMORE: I think we have time for
15 one more question, and then we're going to do
16 some other presentation. There will be a time
17 at the conclusion of that presentation for more
18 discussion before we break for lunch. I do want
19 to try to keep us fairly close.
20 MR. POTTRUCK: Thank you, Mr. Chairman. I
21 just wanted to respond to the statistics we saw
22 earlier that might suggest that this is a small
23 issue.
24 I know that the Internet today is a
25 relatively small piece of our eCommerce, but if
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1 we had looked at the brokerage industry a few
2 years ago, it would have looked very similar to
3 the very small percentage of our on-line
4 business that was 15 or 20 percent of our
5 business, and it's 80 percent today. It's a
6 business that has more than doubled over that
7 period of time.
8 It's a much larger percentage of a much
9 larger pie, and it's hard for any of us to
10 imagine how fast this thing grows.
11 The fact it's such a small slice today, we
12 shouldn't presume that it won't be a dominant
13 slice within a very short amount of time. So
14 the significance of what we're doing here is not
15 trivial by any means, either now or -- It's
16 important right now.
17 Thank you.
18 GOVERNOR GILMORE: There will certainly be
19 other questions. I'm wondering if we end up
20 depriving the presenters of any opportunity to
21 make any presentation.
22 Do we have other questions that cannot wait
23 until the end of the other presentations? If we
24 do, I'm trying to give a lot of latitude. We
25 will have another Q and A and more opportunities
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1 here within the next 45 minutes.
2 Thank you very much. We appreciate this.
3 We're now ready to hear presentations on
4 the implications of electronic commerce for
5 global economy and international tax and tariff
6 issues.
7 One is a member of this panel, Joseph
8 Guttentag, a Senior Tax Advisor for Tax Policy,
9 U. S. Department of Treasury. Mr. Guttentag
10 will discuss international taxes and policy and
11 implications.
12 And then, of course, we also have a
13 representative following him immediately from
14 the office of the U. S. Trade Representative.
15 First, Mr. Guttentag.
16 MR. GUTTENTAG: Thank you, Mr. Chairman. I
17 feel I'm interrupting a most important and
18 useful discussion. I know we're going to
19 continue. It's really an honor to be before
20 this distinguished group to discuss
21 international taxation of electronic commerce.
22 In his recent book "The Lexus and the Olive
23 Tree," Tom Friedman describes the need to relate
24 new technologies to traditional issues which
25 will remain with us as we go into the next
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1 millennium.
2 For this purpose he compares a state of the
3 art automobile factory in Japan with the
4 century's old olive tree in the Middle East.
5 Well, if I had written a book like this, I
6 might have called it "The Internet and
7 Bethlehem." We remember from our Bible, in the
8 Gospel according to St. Luke, that almost 2,000
9 years ago Joseph and Mary went to Bethlehem, and
10 their purpose in going there was to pay their
11 taxes to the Roman tax collector.
12 So we do have a long tradition of tax
13 collection. I actually have been working on tax issues
14 for about 50 years. And my premise here is that
15 it's essential that our worldwide tax systems
16 must be preserved and integrated with our new
17 technologies while we are enjoying the benefits
18 which they provide.
19 The international tax issues, which I will
20 briefly describe, are difficult, no question
21 about that. Through foresight, hard work, and
22 with the full cooperation of the affected public
23 and industries, the administration has these
24 issues well at hand.
25 By this I mean, the major issues have been
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1 identified and either resolved or a process for
2 resolution has been established.
3 Almost four years ago, Treasury identified
4 many of the important international tax issues
5 raised by the Internet and new technologies and
6 began a process for their resolution.
7 Some we can deal with unilaterally, but it
8 was clear that multilateral cooperation was
9 required.
10 There was an early coalescence by the
11 affected industries and the governments around
12 the Organization for Economic Cooperation and
13 Development, the OECD, as the forum best suited
14 to consider these tax issues, as well as several
15 other issues raised by these new developments.
16 We recognize clearly that all of the
17 problems have not been solved, and that
18 significant difficult work remains to be done.
19 However, we have in place within the OECD
20 the conditions upon which the tax framework can
21 be constructed based upon agreed basic
22 principles, such as neutrality, efficiency,
23 certainty, simplicity, fairness, and
24 flexibility.
25 I should note two other points upon which
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1 the OECD was able to achieve agreement, namely,
2 that existing tax principles can and should be
3 applied to electronic commerce, and that there
4 should be no new discriminatory taxation of
5 electronic commerce.
6 Only by adhering to the principle of
7 neutrality can we assure that electronic
8 commerce achieves its proper share of global
9 economic activity and that the conditions
10 essential to maintaining global economic health
11 are preserved.
12 I will describe some of the actions taken
13 by the OECD at the conclusion of my remarks.
14 Let me turn to the specific issues and how we're
15 addressing them.
16 While globalization and the new borderless
17 world creates challenges for our tax
18 administrators, the new technologies also
19 provide the opportunity for the use of new tools
20 to assist both taxpayer and tax administrators.
21 As you will note, as I begin to discuss the
22 tax issues that each raises, many of the issues
23 are not new or profound but have been around as
24 long as we have had taxes.
25 The issues can be divided, albeit with some
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1 overlap, into three categories, that is, our
2 income or direct taxes, the consumption or
3 indirect taxes, which include sales taxes, and
4 tax administrative issues.
5 With respect to direct taxes, in order to
6 understand these issues, it is necessary, I'm
7 afraid, to give a brief summary of the way in
8 which the U. S. taxes income from cross
9 border activities and most of the other OECD
10 countries have a similar system.
11 We impose a tax on the worldwide income of
12 our citizens and residents and corporations
13 incorporated in the U. S. We give a credit for
14 foreign income taxes imposed on income earned
15 abroad.
16 Foreigners who earn income in the United
17 States are taxed limited by our tax treaties.
18 We have such treaties with over 50 countries,
19 including our major trading partners and all 28
20 of the other OECD countries.
21 Passive type income is taxed with
22 relatively low rates, depending upon how it's
23 characterized: royalties, services, interest,
24 and so forth.
25 Business income is taxed only if the
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1 taxpayer has a permanent establishment in the
2 United States, generally a physical presence.
3 Many of the countries with which we do not
4 have tax treaties are tax havens, which impose an
5 increasingly difficult problem for tax
6 administrators as a result of new technologies.
7 In part, for this reason, the OECD has also
8 initiated a project to deal with tax havens and
9 other forms of harmful tax competition, and the
10 U. S. is a most active participant. We are
11 going to closely monitor the relationship of tax
12 havens to electronic commerce.
13 While I mentioned several technical terms
14 which create the issues which we have to deal
15 with, permanent establishment, source of income,
16 characterization of income, these are long-
17 standing concepts which we must integrate with
18 eCommerce.
19 But let me turn now to indirect taxes,
20 consumption tax. The ones we're most
21 familiar with here in the U. S., the state and
22 local taxes and use taxes.
23 The issues with which our subnational
24 governments and this Commission are dealing with
25 in this context are reflected overseas, as other
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1 speakers have mentioned, in the European Union,
2 as well as individual countries, many of which
3 apply similar taxes but at the national level.
4 For example, the value-added tax of VAT is
5 applied to most OECD member countries. A common
6 VAT is in place in all 15 member states of the
7 European Union.
8 Unlike with respect to income taxes, there
9 is no international network of agreements or
10 treaties that coordinate the imposition or
11 collection of indirect taxes, such as VAT and
12 sales tax.
13 Thus, there is a greater potential for
14 instances of multiple taxation or no taxation as
15 a result of inconsistent rules regarding issues
16 such as sourcing, crediting, and the stage of
17 imposition.
18 Possibly for this reason, there appears to
19 be general agreement that consumption tax
20 issues, including VAT and sales taxes, need to
21 be given priority, and the OECD and the EU are
22 doing so.
23 As Mr. Andal just noted a few minutes ago,
24 a major concern is with the business-to-consumer
25 sales as opposed to the business-to-business
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1 sales.
2 Based on the focus on consumption and
3 sales taxes, it is not accidental that the
4 creation of this Commission was triggered by
5 issues raised by state and local sales taxes.
6 The primary issues to be addressed with
7 respect to these taxes are jurisdiction to tax
8 and classification of digitalized products.
9 The issues, which I have just described,
10 will affect our determination of who gets to tax
11 what and in what amount. There are also issues
12 regarding how any tax due is to be collected.
13 These issues are important with respect to
14 the application of foreign indirect taxes,
15 such as the VAT, with respect to the export of
16 U. S. goods and services, and to the imposition
17 of state and local taxes on imported goods and
18 services.
19 Accordingly, our state and local tax
20 jurisdictions must deal with goods and services
21 brought into the state, both from other states
22 as well as from foreign countries.
23 Before turning to how the OECD is dealing
24 with these issues, let me raise a third area --
25 third principle area, that is, tax
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1 administration. What are the principle tax
2 administration issues?
3 First, intermediation. In general,
4 tax compliance in the United States is
5 facilitated by identifying key taxing points in
6 a transaction that maybe arise from tax, for
7 example, a transfer of funds through a financial
8 institution.
9 Electronic commerce now, and likely more in
10 the future, may eliminate the need for
11 intermediating institutions. Elimination of
12 these traditional checkpoints, however, may make
13 tax administration increasingly difficult.
14 The second issue is lack of verifiable
15 identity and location. Transactions occurring
16 through a web site cannot necessarily be
17 associated with a specific taxpayer, nor can the
18 taxpayer's actual geographic location be easily
19 ascertained.
20 Moreover, while web sites and e-mail
21 addresses may be associated with specific
22 individuals, the relationship of those addresses
23 to the physical world is not fixed.
24 Thus, even if a tax authority can track
25 activities or income to a web site or e-mail
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1 address, they may, nevertheless, not be able to
2 identify the persons or person behind the
3 electronic front.
4 Next we address message content.
5 Messages on the Internet, especially secure or
6 encrypted transmissions, which are necessary,
7 create opportunities for untraceable transfer of
8 assets and other activities that will hinder
9 audits of taxable activities.
10 We have mentioned electronic money. The
11 development of e-money that is value expressed
12 in digital form that parties agree to honor and
13 accept makes it easier to transfer unreported
14 funds. The Internet makes substantially easier
15 and more secure the opening of anonymous bank
16 accounts abroad.
17 These are, in brief, the primary
18 international tax issues raised by electronic
19 commerce.
20 What are we doing about them? Let me first
21 reiterate our guiding principles.
22 Any taxation of the Internet and electronic
23 commerce should be clear, consistent, neutral,
24 and nondiscriminatory.
25 By not imposing new discriminatory taxes on
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1 the Internet, we will facilitate the growth and
2 use of the Internet, which can result in a
3 growing economy and greater revenues from
4 existing taxes.
5 Neutrality and nondiscrimination must be
6 the fundamental principles that guide the tax
7 rules with respect to electronic commerce.
8 Tax rules must be consistent across
9 jurisdictions so as to minimize the possibility
10 of multiple or no taxations. The rules need to
11 be transparent and easy to administer.
12 We must reach a global consensus on these
13 principles underlying electronic commerce. In
14 the absence of global consensus, inappropriate
15 and stifling taxation may result.
16 The OECD is and has been, and should
17 continue to be, the international forum in which
18 we seek to reach this global consensus in which we work
19 together on developing reasonable and uniform international
20 tax rules.
20 The agreements within the OECD's Committee
21 on Fiscal Affairs on the broad framework
22 conditions and principles that I mentioned
23 should underlie the taxation of electronic
24 commerce, and that has been a substantial
25 achievement already by the OECD.
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1 Perhaps the most significant point of
2 agreement was that taxation should seek to be
3 neutral and equitable among forums of electronic
4 commerce and between conventional and electronic
5 forms of commerce.
6 Also important is the agreement that
7 existing tax rules can be applied to electronic
8 commerce.
9 The OECD commitment to consult actively
10 with the business community will help ensure
11 that the formulation of tax rules will be based
12 on full knowledge of their effects and will help
13 revenue authorities in their efforts to ensure
14 that business decisions are based on economic
15 rather than tax considerations.
16 We are also involving many nonmembers of
17 the OECD, as we recognize this has to be a
18 global consensus. We have formed small groups of
19 representatives from the private sector, OECD
20 governments, and non-OECD governments, to consider
21 these pressing issues.
22 We believe that the OECD project incorporates a
23 representative group of the major stakeholders
24 in the taxation of electronic commerce.
25 Several of the business representatives
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1 with us today are participating themselves in
2 this project.
3 The technical advisory groups created by
4 the Committee on Fiscal Affairs will report
5 within the next two years to our subsidiary bodies
6 and then finally to the OECD, itself. You can
7 follow the work of the OECD in this regard
8 through its web site.
9 The OECD recognizes the need for worldwide
10 acceptance of the principles established in
11 order to obtain the necessary certainty as to
12 the avoidance of double taxation.
13 The OECD is the forum to continue work on
14 international tax issues, Mr. Chairman. I will
15 reiterate my previous suggestion that the
16 Commission encourage the OECD to continue and
17 finalize its important work in this area.
18 Although the VAT system differs from our
19 state and local tax system, we can use the work
20 being done within the OECD to inform our own
21 deliberations.
22 And we should be aware that the OECD, the
23 European community, and others will be looking
24 closely at our work as they do theirs.
25 Perhaps, as a first step, the Commission
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1 should consider adopting guiding basic
2 principles as were adopted by the OECD to help
3 us move forward in the time that is left to us.
4 We have all benefited from a robust economy
5 during the past several years. Our present tax
6 systems at the national, state, and local levels
7 have enabled us to reduce or eliminate budget
8 deficits throughout the nation.
9 We should have the best tax system possible
10 at all levels of our government. Decisions
11 should be made in the usual democratic fashion.
12 We should choose taxes and administrative
13 systems which are best suited to raise the
14 necessary revenue in the fairest way possible.
15 We must ensure that this be done in a way
16 which creates the minimal administrative
17 problems.
18 This is not an easy charge. We must not,
19 however, permit new technologies to drive us to
20 less desirable tax systems.
21 I hope this brief explanation of how we are
22 handling our international tax issues will help
23 inform us as we tackle state and local tax
24 issues.
25 Thank you, Mr. Chairman.
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1 GOVERNOR GILMORE: Thank you,
2 Mr. Guttentag.
3 Mr. Abelson, can we give you about 20
4 minutes or so?
5 MR. NOVICK: May I please introduce our
6 esteemed colleague? Don Abelson is currently
7 the Assistant United States Trade Representative
8 for industry.
9 He has devoted most of his attention to
10 advancing the administration's eCommerce agenda,
11 and, in particular, Ambassador Barshefsky's
12 efforts to enforce duty-free cyberspace.
13 He leaves the UTS next week. It's our
14 loss. He will stay in the government where he
15 has been for 22 years as he moves to the FCC to
16 head that international division.
17 I thought it would be useful for everyone
18 to know what role he has played and why he is
19 here today.
20 GOVERNOR GILMORE: Mr. Novick, thank you.
21 Mr. Donald Abelson of the United States,
22 Office of the U. S. Trade Representative.
23 MR. ABELSON: Thank you, Mr. Chairman.
24 What I will be talking about with members
25 of the Commission is the administration's duty-
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1 free cyberspace initiative. This is an
2 initiative which we started when the Clinton
3 administration released its electronic commerce
4 report in July of 1997.
5 We found at that time trade negotiators
6 like myself were faced with a very interesting
7 fact, that is, electronic commerce is in many
8 ways free from trade barriers, and it certainly
9 is in this area that is not subject to customs
10 duties, when, in fact, trade negotiators have
11 been trying for years to create that kind of
12 environment.
13 We have found the environment of electronic
14 commerce is one that government regulation is
15 minimal, and that no one company dominates, and
16 thus there is vigorous competition, innovation,
17 and entrepreneurs.
18 The question faced by trade negotiators is
19 how to preserve the dynamic qualities of this
20 new marketplace, which, as Ambassador Barshefsky
21 of the United States Trade Representative says,
22 is a pristine environment in trade terms.
23 Now, in tackling this question, we looked
24 at the issue of custom duties, which, unlike
25 that of international taxes, the subject of your
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1 discussions in the next year, are duties or
2 tariffs that are imposed at the border.
3 It is absolutely true that they are
4 considered by economists as being taxes. And
5 one of the problems we have had is that both the
6 word "tax" and "tariff" start with "T."
7 And so, as we begin a discussion about
8 duty-free cyberspace, I want to make sure that
9 you are aware there is no confusion between the
10 two "T" words. I don't use either "T" word. I
11 use the word "custom duty."
12 Once again, these are measures imposed at
13 borders. They are not measures imposed once the
14 good or service has arrived at its point of
15 destination.
16 The issue of custom duties, of course, is
17 one that has dominated trade negotiations over
18 the past half a century. And it is clear, just
19 take a look at the text of the general agreement
20 on tariffs and trade, or, as we call it, the
21 GATT, G-A-T-T, which is one of the founding
22 documents of this new World Trade Organization
23 that was created some years ago.
24 The reason that we focus on customs duties
25 is that they have been traditionally used by
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1 countries as a way of protecting domestic
2 industries and thereby distorting trade.
3 Through customs duties, countries have
4 imposed differential burdens at the border which
5 have the effect of disadvantaging imports in the
6 countries to which they are sent.
7 Now, it has been U. S. policy for over 50
8 years, working inside the GATT originally, to
9 try to progressively lower these duties and to
10 eliminate other trade distortions, because we
11 are convinced that these reductions in duties
12 and in other barriers will benefit consumers
13 through cheaper goods.
14 It will benefit businesses because they
15 will be able to more freely operate in the
16 marketplace, and it benefits our overall
17 economy.
18 The growth of world trade and of consumer
19 welfare over the past five decades has
20 demonstrated the wisdom of this approach.
21 Given the trade-distorting effects of
22 custom duties in the conventional world, in the
23 real world, it was only logical, then, to focus
24 on distortions that might be brought into the
25 virtual world and to prevent that, to prevent
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1 the extension of these distortions into the
2 electronic world.
3 Thus, in May 1998, as you have heard
4 reference, guided by the wisdom of Ambassador
5 Barshefsky, 132 members of the World Trade
6 Organization agreed in a ministerial declaration
7 that they would not impose custom duties on
8 electronic transmissions.
9 In fact, what they recognized is, not a
10 single one of those countries currently imposes
11 a customs duty on an electronic transmission.
12 This commitment to not impose custom duties
13 is one that we hope to make permanent, or to
14 extend and make permanent when the ministerial
15 meeting of the World Trade Organization is held
16 in Seattle in December.
17 What does customs duty-free cyberspace
18 initiative really mean practically? Let me tell
19 you two things it does not mean.
20 It does not mean that when you order a
21 camera from Germany over the net and it is
22 physically delivered, that the camera comes into
23 the United States duty free. It does not mean
24 that.
25 If the camera is physically delivered to
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1 the United States, it crosses the border.
2 Whatever duty is appropriate for a camera would
3 be applied.
4 Nor does it mean that items ordered
5 electronically are exempt from internal taxes.
6 In fact, that, of course, is the issue that you
7 as a Commission will be debating over the next
8 period of time.
9 So these two facts should be very clear.
10 What we are talking about, therefore, is a
11 very narrow area of cyberspace trade, and that
12 is where there are electronic transmissions
13 which are coming in from overseas and are not
14 subject to customs border duties. That is
15 basically what we mean when we say duty-free
16 cyberspace.
17 It's very interesting to note, as I did,
18 that no country currently imposes a custom duty
19 on electronic transmissions.
20 Let me give you an example of how this can
21 be. In the United States we have a schedule of
22 our tariffs. It is a long document. It is
23 several hundreds of pages.
24 And in this document, which is the entire
25 compendium of U. S. custom duties, tariffs,
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1 there is not a single entry that says electronic
2 transmissions and gives you a duty rate.
3 Because these items, these things, are not
4 tariffed.
5 In fact, in a head note to the U. S. tariff
6 schedule, it is specifically written that
7 telephonic transmissions are free from duty,
8 interestingly enough, in that same category as
9 dead flowers and corpses.
10 What we are seeking at this point is for
11 other members of the World Trade Organization to
12 similarly adopt an approach to maintain this
13 environment, this cyberspace duty free.
14 Now, obviously, imposing custom duties on
15 electronic transmissions would add costs to the
16 final product, would restrict trade, and apart
17 from the direct financial burden on the
18 transmission, itself, is the cost of instituting
19 a mechanism to collect such duties and the
20 administrative costs of complying with such an
21 approach.
22 When we approached our colleagues in Geneva
23 about this initiative, it was a year ago. One
24 of the facts that convinced them that they
25 didn't want to go in the direction of imposing
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1 custom duties was the problem of how you would
2 actually enforce this measure.
3 Unlike the area where you are looking, we
4 are only talking about when transmissions cross
5 borders, and one can imagine how difficult it
6 would be to snatch out of the air a satellite
7 transmission or try to go into a wire or copper
8 cable or fiber optic cable to get out of it the
9 transmission.
10 What kind of Draconian measures would you
11 have to impose to try to catch those border
12 transmissions?
13 In fact, countries have recognized by
14 signing up to this duty-free cyberspace
15 initiative that you cannot stop transmissions at
16 the border, which is perhaps one of its greatest
17 benefits.
18 In reality, we also found that there was no
19 country that was seriously contemplating trying
20 to impose border measures on these
21 transmissions, because all countries are
22 interested in promoting the growth of electronic
23 commerce. As we have seen the value of it to
24 our economy, they want to see the value in their
25 economies.
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1 Now, as Mr. Pincus did point out, however,
2 every government is concerned about the issue
3 that you are addressing. So when I raise with
4 my colleagues the idea of extending permanently
5 this duty-free cyberspace initiative, they raise
6 with me the issue of internal taxes. They want
7 to know how are they going to maintain their
8 revenues.
9 Now, obviously, this is the issue you will
10 be looking at. How you consider this issue, the
11 ideas you come up with, will be vitally
12 important to the success of our initiatives in
13 Geneva and finally in Seattle.
14 We need, as the leader in eCommerce, if we
15 look at all the statistics you have heard about
16 this morning, to also lead in this area by
17 providing the world's officials with ideas,
18 suggestions, vision on how we can go forward in
19 this area of tax.
20 While your discussion is not directly
21 related to the issue of custom duties, because
22 they are border issues, your discussion is very
23 much related to the thinking that is going on
24 behind the officials who are sitting at the
25 table in trade negotiations.
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1 Because of that, of course, we at the U. S.
2 Trade Representative's office are very much
3 involved in your work.
4 Thank you.
5 GOVERNOR GILMORE: Thank you, Mr. Abelson
6 very much, also, Mr. Guttentag, for your insight
7 into this as well.
8 We have time for some questions and
9 answers.
10 Before we went to your presentation, I
11 thought I might have heard one or two additional
12 comments that wanted to be made. Was there a
13 comment from this end of the table that I
14 overlooked, or a question?
15 Again, I think Mr. Merrill is nearby.
16 Mr. Pincus is right here with us. We can ask
17 questions in this entire area.
18 Was there a question on this side of the
19 room?
20 Mr. Lebrun?
21 MR. LEBRUN: I had a question I think that
22 relates to what Mr. Abelson just said. If I
23 order a computer from overseas, that is a
24 tangible good. That, I assume, is subject to
25 customs duties.
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1 If that same computer comes loaded with all
2 kinds of software, which is information,
3 although the disk may be a tangible good, that
4 is meaningless, of small value, but the
5 information on it has substantial value, and the
6 price of the computer I ordered may be increased
7 because of the fact it has loaded on it, that
8 information, which is the software, which, to my
9 understanding, you're telling us is not subject
10 to the custom duty.
11 Am I correct on that? If not, where am I
12 in error? And how do you distinguish between
13 the value of a computer, which is a tangible
14 good, and the information which is loaded onto
15 it?
16 MR. ABELSON: Let me dispense with the
17 physical computer, itself, because obviously
18 there would be a tariff or duty when it came
19 across the border.
20 The United States, along with some of its
21 major trading partners, does not put a duty on
22 information. So whether the information,
23 software, is on a disk or transmitted
24 electronically, there is no duty collected in
25 the United States at the border for that
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1 purpose. You may have domestic taxes on it,
2 that's your own decision.
3 We at the Federal level do not duty
4 information. That's because of a fundamental
5 idea, which is, we want to get this information
6 to flow. We want it to flow as freely as
7 possible and, therefore, do not, in fact, try to
8 distort trade of that product, product being a
9 general term for things that are traded
10 internationally.
11 Not all countries follow this practice.
12 There is a 1984 decision in the General
13 Agreement on Tariffs and Trade to do this, but
14 it is not binding on all countries.
15 GOVERNOR GILMORE: Governor?
16 GOVERNOR LEAVITT: I thought your
17 description of the dilemma on internal taxes was
18 very helpful in defining our task of this
19 Commission.
20 As I understood you, if a person from the
21 United States, a person from Salt Lake City,
22 bought a camera in Germany, had it shipped to
23 the United States, the tariff was taken care of
24 at the border, the citizen in Salt Lake City
25 would have made an expenditure and would have,
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1 therefore, been subject to a tax because it was
2 a consumption tax, not a new tax.
3 The question you're raising is: What is
4 the duty of the person in Germany to collect
5 that tax. Now there is no duty, and we don't
6 expect we will resolve that.
7 The person has an obligation, at least in
8 our state and I think in 46 other states, to
9 write a check out for the use tax or sales tax
10 for whatever that is.
11 I was fascinated. There were 50,000
12 Utahans who wrote a check on their state tax
13 return for $510,000. So there are 51,000 honest
14 Utahans, but they were only $10 apiece.
15 I guess my point is, are we really talking
16 about not any new tax or any new tariff? We're
17 talking about coordinating a duty to collect a
18 simplified system. I think it's a very
19 important concept for us to think about.
20 GOVERNOR GILMORE: Other questions?
21 MR. ANDAL: I'm very interested in the
22 issues that you are facing on the international
23 scale and issues that we're trying to sort out
24 among the states.
25 I think most states at least are already in
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1 a position where we don't tax electronically-
2 delivered sales products.
3 In fact, I think about half of all the
4 Internet Commerce sales fall into two
5 categories: stock trades and airline ticket
6 sales, neither of which are taxed in most
7 states.
8 So we're left with this question of tax
9 neutrality. Some of us argue that a use tax
10 paired with a sales tax becomes a tax neutral
11 system. Obviously, the use tax has collection
12 problems that a sales tax does not.
13 Some people -- Utah is a state full of
14 honest people.
15 GOVERNOR LEAVITT: At least 51,000.
16 MR. ANDAL: And we have people who pay use
17 tax voluntarily every day in Colorado as well.
18 The question, though, is whether or not
19 we're going to impose some kind of a collection
20 duty on companies located in other states.
21 I would like you to apply that difficulty
22 to other countries. For instance, we really
23 don't expect, do we, to have Utah collecting
24 consumption taxes for Norway, or Belgium
25 collecting sales tax for California, do we? How
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1 do you guys chase down that round ball?
2 If you play this sort of argument all the
3 way out to the end, you're going to have these
4 relationships, because in America we don't have
5 a national sales tax. We have less than 50
6 state sales taxes.
7 If you want to have that kind of
8 government-to-government cooperation in
9 identifying tax obligations and tax sellers,
10 it's going to be Utah to other countries,
11 California to other countries.
12 I'm wondering if you integrated that
13 question into your pitch to these other
14 countries regarding international tax policies.
15 MR. GUTTENTAG: Well, these are the kinds
16 of issues, Mr. Andal, I mentioned that we are
17 struggling with at this time.
18 Let me add to the issues you raised some of
19 the thoughts that we have in looking at them and
20 that are being dealt with in the European
21 environment.
22 One that I point out, you appear to be
23 enforcing these strictly business-to-business
24 sales. If the law applies in that area, why
25 should it not apply to business-to-retail sales?
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1 Of course, those are both equally applicable
2 parts of your law.
3 MR. ANDAL: I don't mean to interrupt.
4 Business to business versus individual, the tax
5 obligations are the same.
6 Now, the extent to which we go to collect
7 as a governmental entity is different, based
8 upon the old Willie Sutton rule.
9 So it's true that business-to-business
10 transactions are more often audited where use
11 tax becomes more apparent, whereas with
12 individuals it's not necessary for the states to
13 pursue it.
14 MR. GUTTENTAG: I understand that. There
15 are other concepts, one of fairness among
16 taxpayers, and taxpayers should be treated
17 fairly.
18 If a taxpayer is subject to tax, we should
19 be looking at the issue of why that taxpayer is
20 not paying taxes. There are also economic
21 aspects of the trade aspect.
22 If we do nothing here, to what extent will
23 we be suggesting to consumers in California that
24 "The place to buy your goods is Norway," and to
25 consumers in Norway, that "The place to buy your
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1 goods is California"? How would we deal with
2 that issue?
3 One of the things being considered in the EU. Is whether to base this tax at theplace of consumption.
7 It could be placed at the base of origin of
8 the sale, so that Norway would collect the tax
9 on sales made in the U. S., and California would
10 collect the tax based on sales being made out of
11 California.
12 There are various alternative ways to do
13 it, but I think the principles which I suggested
14 of fairness to taxpayers must be considered.
15 We also want to consider the level of tax.
16 If we don't need any more revenue -- let's
17 suppose we have enough revenue from the Main
18 Street sale, so we don't need any more revenue
19 from electronic commerce -- one way to do it is
20 not to tax electronic commerce.
21 Another way to do it is to collect the tax
22 on electronic commerce and lower the tax rate
23 for everyone, so that the tax one pays, whether
24 it be an electronic commerce or Main Street
25 purchase, will be the same but at a lower rate,
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1 and that would benefit consumers, those
2 consumers who would prefer for some reason to
3 buy on Main Street.
4 These are issues, obviously, that I hope
5 that, Mr. Chairman, we're going to be addressing
6 in more detail and I think we will be discussing
7 after lunch.
8 GOVERNOR GILMORE: Indeed we shall. We
9 still have some time.
10 MS. JONES: I'm interested, do you have any
11 information or statistics as to the compliance
12 that would be increased in the revenue stream,
13 that would be increased if, in fact, the tax
14 that is currently considered a use tax were
15 collected rather at the position where the item
16 is generated instead of where it is consumed?
17 MR. GUTTENTAG: I don't have that data,
18 Ms. Jones. That is some of the data we're
19 hoping to collect, and I think the Commission
20 should be looking at that data. I think some of
21 that data is available.
22 We can look at how we monitor that
23 commerce, the taxation that is lost, and
24 multiply it times the sales tax rates. I think
25 we can come up with figures.
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1 As was mentioned previously, we should be
2 looking not only at what we are losing today, we
3 should be looking at what we are losing in the
4 future.
5 Please keep in mind that I'm very concerned
6 about the administrative problems. I'm very
7 concerned about imposing burdens on people
8 outside of the states collecting the tax, as
9 well as foreign countries.
10 MS. JONES: Because electronic sales are
11 not really brand new, we have been doing it in
12 other ways, as has been indicated, and we have
13 had catalog sales and so forth, so we do have
14 some history in relationship to foreign trade
15 being done in terms of other methods like
16 telephones or fax or whatever.
17 Do we now have the same system imposed
18 there? In other words, are foreign partners
19 participating the same way now that we have
20 electronic commerce?
21 MR. GUTTENTAG: No. What is happening now,
22 as I view it, is this explosion is not only an
23 issue resulting from the new technologies. We
24 have always had catalogs, and people could buy
25 from catalogs all over the world.
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1 Why is this now a problem? It's not only
2 the new technologies. There are several other
3 factors.
4 First is the work that has been done by our
5 USTR in coordination with the other 132
6 countries in the WTO to reduce or eliminate
7 tariffs. Those are now not a real obstacle with
8 respect to most goods traveling across borders.
9 Furthermore, we have reduced and eliminated
10 to a large extent restrictions on flow of funds
11 around the world, capital controls, exchange
12 controls, and so forth, so that funds can be
13 transferred very easily.
14 All of those factors have so encouraged
15 across-the-border transactions and have been so
16 valuable to the economy as a whole.
17 Now, tax authorities who used to rely a
18 great deal on customs inspectors, on exchange
19 controls for enforcing their tax laws, those
20 areas of enforcement now are disappearing
21 rapidly.
22 Really, we are looking into the future
23 here. We're looking into the future as to this
24 explosion that is happening. I think we can no
25 longer compare it to Sears & Roebuck catalog
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1 orders, at least that's what I understand from
2 the experts.
3 MR. ABELSON: I would also note that
4 services are distinct from digital goods that
5 are delivered electronically. Services have
6 never been tariffed under any foreign or U. S.
7 regime.
8 Increasingly, of course, services are
9 forming a mass part of what is being done on the
10 Internet or electronic commerce. They enter the
11 United States and always have duty free.
12 The ubiquitous nature of the net and the
13 instantaneous nature of it, and the fact that it
14 is more possible now to buy services, transact
15 with service providers overseas, is one factor
16 you have to consider as well.
17 GOVERNOR GILMORE: Let me ask you a
18 question, if I could, before I go back to the
19 panel, because I'm trying to work some of this
20 out in my own mind, too.
21 If we're dealing with international trade
22 and goods, you have a seller of, say, a camera,
23 which we used the example in Germany, and they
24 sell a good to someone in Utah, and you want
25 that to be taxed, then you have a choice, I
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1 suppose. One is to have the tax collected by
2 the seller, who is in Germany.
3 I mean, the state can agree or disagree
4 with a piece of this. I'm trying to work it
5 out.
6 I don't think we have any control or ever
7 have any control over the seller in Germany. So
8 we impose a tax at the place where it was
9 purchased, say, in Utah. Some are paying that.
10 Some aren't paying that.
11 Unless, of course, we get a handle on
12 transactions somehow electronically through the
13 Internet, a third-party collector of the tax, or
14 something like that.
15 Does anyone know whether that's
16 technologically possible? If it is
17 technologically possible, could someone from a
18 foreign country simply offer an alternative
19 means of transaction, not a credit card, maybe
20 some other form of purchase, which would allow a
21 purchaser to escape the consequences of the
22 transaction?
23 That is a complicated question. I think it
24 goes to the heart of some of the things we're
25 trying to address here, which is what is
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1 possible.
2 First, I will ask if the panel members have
3 an opinion. We can turn it over to the
4 Commission and go back to the questions.
5 MR. GUTTENTAG: In Europe, for example, the
6 customs inspectors who used to collect the
7 custom duty now serve a very important function
8 with respect to imported goods with respect to
9 collection of their value-added tax.
10 So when that camera comes in, if the camera
11 were going from the U. S. to Germany, when that
12 camera got into Germany, the customs inspector
13 would collect the value-added tax before it was
14 delivered to the customer, or make sure the tax
15 was collected in some way.
16 That, theoretically, could be done also in
17 the U. S. with respect to physical goods that
18 come into the U. S.
19 The biggest problem in the European Union
20 that we would face in the United States is with
21 respect to what is now an infinitesimal amount
22 of goods or services, depending upon how you
23 look at it, which actually are digitalized and
24 come in on the computer.
25 Our problem is when the German seller is
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1 selling a software program to someone in Utah,
2 assuming Utah would subject that program to a
3 tax, that program then goes from the computer in
4 Germany to the computer in Utah, and no one,
5 possibly, except the two of them, know about it.
6 Various proposals have been made using, for
7 example, the payment mechanism. Generally,
8 there is a payment mechanism very often through
9 credit cards, and some have made the suggestion
10 that the way to collect the tax is through the
11 payment system.
12 GOVERNOR GILMORE: So we are already clear,
13 we're not taxing computer-to-computer service?
14 So we're really focusing our attention on common
15 goods that perhaps would be going?
16 If the purchaser in Germany purchased an
17 American camera and it goes to Germany, you're
18 saying the customs individual, customs agent,
19 will intercept that and charge that tax.
20 Is that not discriminatory? Doesn't that
21 amount to a tariff?
22 MR. GUTTENTAG: The tax is the same tax
23 that would be applied if the German purchased a
24 German-made camera or a British-made camera.
25 MR. ABELSON: One of the things you're
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1 struggling with is the borderless nature of this
2 environment. I go back to my comments, which
3 remember, were, you can't stop these
4 transmissions at the border. It's not possible.
5 You may be able to get at them once they land.
6 So let's get rid of the camera, because the
7 camera is the real world. It's today's trade.
8 Nothing is different in that example of the
9 camera from 20 years ago.
10 You could have gotten on the phone, called
11 a company in Germany and said "Send me a
12 camera." That's not new.
13 What is new is when you can digitalize a
14 product, turn it into ones and zeroes, and send
15 it over some means of transmission, satellite,
16 wire, or wireless or whatever.
17 In that instance, it's not just computer to
18 computer, because it may end up being business
19 to consumer. That's the example of software.
20 There is no border there. It goes from one
21 server to a hard drive. And in that instance,
22 there is no customs duty assessed anywhere in
23 the world.
24 Now, you get into the issues you're looking
25 at. What do we do in that case? Maybe
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1 self-declaration of the consumer. "I purchased
2 this software. The sales tax is blank." That's
3 one way to do it. There may be other ways to do
4 it. That's what you're essentially addressing.
5 Let me show you the example of Argentina.
6 The Argentines are concerned about this. What
7 they have said is, it's the obligation of all
8 importers to declare the incoming transmission.
9 Now, they don't want this for custom duties
10 purpose. They want this for tax purposes. They
11 all want someone to say, such as the
12 self-declaration on the U. S. state income tax
13 forms, "I purchased this good. Here is the
14 tax."
15 You can't stop it at the border. I would
16 advise you not to look at that.
17 GOVERNOR GILMORE: You can't stop at the
18 border.
19 GOVERNOR LEAVITT: It seems that these kind
20 of problems that transcend political boundaries
21 are not unique to eCommerce, environmental
22 problems.
23 I'm guessing you dealt with the same
24 problem with negotiating a plan to clean up the
25 Grand Canyon, which involved U. S. states and
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1 Mexico.
2 The Mexican government found that a lot of
3 the pollution that comes over the Grand Canyon
4 comes from Mexico and has absolutely no control
5 over that.
6 There ultimately had to be some kind of
7 voluntary agreement that was arrived at. Part
8 of the negotiation was economic, not
9 environmental.
10 So I'm assuming that when we get into
11 solving these problems that transcend political
12 boundaries, we are going to have to find ways to
13 make them in the voluntary self-interests of the
14 jurisdictions to comply, and over time we'll see
15 those kinds of solutions.
16 Norway will be interested in having an
17 agreement with the United States because of the
18 economic interests to do so.
19 What is your assessment?
20 MR. GUTTENTAG: Certainly people are
21 talking about such agreements. As I mentioned,
22 we have a very broad network of agreements
23 dealing with direct taxes, income taxes, but
24 there are no such agreements presently existing
25 with respect to these value-added taxes.
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1 Certainly that is something that needs to
2 be considered, obviously, internationally, and
3 that's why -- one of the reasons we're working
4 in the OECD with all types of alternatives.
5 There have been no proposals. I want to make it
6 clear, the Treasury has not proposed an
7 international agreement to collect taxes or
8 assist foreign countries in collecting taxes.
9 We're looking at all the proposals now.
10 I do think, Mr. Chairman, that some of the
11 issues -- some of the questions which have been
12 raised, I think we're going to find a great deal
13 of expertise with respect to those issues in our
14 afternoon panel.
15 GOVERNOR GILMORE: Very good. We are
16 closing in on lunchtime, or actually a few
17 minutes past, not many. We still have time for
18 one or two more. There are at least three on
19 the panel.
20 Let's go to Mr. Sokul and come back here.
21 MR. SOKUL: I had a question for
22 Mr. Abelson.
23 First, I just wanted to say that I have
24 read an article before coming down here about
25 how French custom inspectors were now collecting
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1 VAT tax or opening packages in the French post
2 office when they come through the mail. That's
3 how they are determining whether it's taxable or
4 not.
5 One of the things we need to discuss, in my
6 opinion, is for our country, how much of an
7 enforcement structure will the American people
8 accept? That's a highly invasive enforcement
9 mechanism. I just throw that out for thought.
10 My question to Mr. Abelson is: At the
11 conclusion of your remarks, you discussed how
12 the administration and Ambassador Barshefsky has
13 made a decision that the moratorium should be
14 made permanent.
15 And you drew an analogy to our discussion
16 by saying countries are coming to you and saying
17 "But what about our revenue basis, and what
18 about our revenues?"
19 You didn't give an answer. I would like to
20 ask you what your answer is to that question. I
21 assume it's not "Okay, let's hold our noses and
22 walk the plank together," it's more on the lines
23 "What will rise will float."
24 MR. ABELSON: Since October of 1998, the
25 answer I have given to these officials is "Watch
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1 us. Watch what we do in the United States,
2 because we're going to solve the problem."
3 So I turn to you, 17 men and women, and say
4 "Help solve this problem so that we can get this
5 extension permanent."
6 You don't need any examples about
7 international trade. The United States is
8 enough of a microcosm, whether it's the 50
9 states and the other jurisdictions or the local
10 governments.
11 If you can come up with an idea of how to
12 work this problem in a voluntary, cooperative
13 way, as the Governor mentioned, than we can take
14 that and show it to the rest of the world and
15 say "This is how we have solved it. Check this
16 out."
17 GOVERNOR GILMORE: Mr. Pottruck?
18 MR. POTTRUCK: Thank you, Mr. Chairman.
19 This is actually directed to Mr. Guttentag
20 and Mr. Pincus as representatives of our
21 administration.
22 In July of 1997, the President and Vice
23 President stated that the administration was
24 concerned about moves by state and local
25 governments to target electronic commerce with
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1 taxation.
2 They said then there should be neutrality
3 between conventional and electronic commerce,
4 and no new taxes should be applied to electronic
5 commerce.
6 My question is: Does the administration
7 plan to come forward during our deliberations
8 and put some proposals on the table for us to
9 consider?
10 Are there active working groups within the
11 administration that will forward a specific
12 recommendation, ideas, or proposals that may
13 facilitate the work of our Commission?
14 MR. GUTTENTAG: The administration's
15 position, which you described, and the policy set
16 forth in the International Tax Freedom Act,
17 was to a moratorium on certain types of
18 taxation, and created this Commission.
19 As I explained, the Treasury role on this
20 Commission we view as one of attempting to bring
21 together the affected parties.
22 What we are dealing here in this area, and I
23 believe that's what you were referring to, is
24 the subnational taxes. In that area we are not
25 going to make proposals, other than to try to
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1 facilitate agreements between the various
2 parties as represented here on the Commission.
3 We believe these are issues which should be
4 decided by the parties involved, state and local
5 governments and the taxpayers involved.
6 If you're referring to Federal taxes, of
7 course the Act also referred to Federal taxes.
8 We will, of course, review them. We would
9 review all types of taxes, including excise
10 taxes, to determine whether they need any
11 adjustments to reflect these new technologies
12 and the convergence which has been described.
13 That would include, I think, both the tax
14 systems and the regulatory system, itself.
15 GOVERNOR GILMORE: Another response?
16 Governor Harris?
17 GOVERNOR HARRIS: Yes. I have a question
18 for Mr. Abelson. It relates to the borderless
19 nature of the Internet transactions over the
20 Internet.
21 My question is directed to what type of
22 legal framework are these transactions in the
23 taxes, the custom duties, et cetera, enforced
24 within? That's unclear to me.
25 You mentioned earlier, for example, that
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1 there is U. S. policy not to tax or to apply a
2 customs duty to software.
3 But, for example, if you had a computer
4 worth $1500, just the computer, and the same
5 computer with software was worth $2,000, and
6 someone in the United States purchased that
7 computer with the software from Germany, for
8 example, the customs duty would be on the
9 $2,000; is that correct?
10 So my question is: If I were an attorney
11 and I wanted to argue that you are, in fact,
12 applying a use duty to software in this case,
13 within what legal framework would that issue be
14 resolved, and how do you see those issues being
15 resolved in the future?
16 MR. ABELSON: Unfortunately, I'm going to
17 have difficulty in answering your question,
18 partly because I'm not an attorney, and partly
19 because the issue is very difficult.
20 We don't, as I mentioned before, put a
21 customs duty on the value of information. So I
22 question, but I would need to check with my
23 officials in customs law, whether it's U. S.
24 domestic customs law or the international
25 procedure, whether or not the computer would
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1 actually be valued for custom purposes at more
2 than $1500.
3 The issue is not the value of the computer
4 in the marketplace. It is the value for customs
5 purposes. There the value may be $1500 whether
6 loaded fully or not, in which case there is no
7 discrimination.
8 You have gotten yourself into a very, very
9 unique area of international and domestic law,
10 and that is customs law.
11 What we're doing is saying -- that's why I
12 was emphasizing the customs duty aspect of our
13 approach -- is that for customs purposes, I
14 should have added "and customs purposes only."
15 These transmissions are not duty. It is a very,
16 very unique area of trade.
17 Now, the concept that we have created which
18 we think is so important is the borderless
19 nature of these transactions. You don't stop
20 them at the border. Once they land, they are in
21 a jurisdiction, going to something you were
22 implying.
23 What about that? Once they are in a
24 jurisdiction, then, in fact, they are subject to
25 all of the rules of that jurisdiction for tax
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1 purposes, for regulatory purposes, et cetera.
2 Just because it's borderless does not mean
3 it's not subject to other rules.
4 GOVERNOR GILMORE: Last question,
5 Mr. Armstrong.
6 MR. ARMSTRONG: Mr. Abelson, you and I
7 participate in a thing called an International
8 Settlement Regime regarding communications.
9 Since I think everyone has spoken to the
10 globalization of the Internet, I think it's a
11 relevant subject.
12 You also defined taxes and tariffs as the
13 two "T"s. You like to call them duties when
14 they can apply across the border and said
15 services are not duty, yet I find that in
16 conflict with international settlements, if one
17 would define either duties, taxes, or tariffs as
18 fees imposed by governments that are not cross
19 based.
20 If we accept that, I say we have some real
21 problems going on in services.
22 MR. ABELSON: Perhaps. But I should
23 qualify the definition you just read as applying
24 to only government measures.
25 The settlement arrangements that you
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1 referred to are between private parties, and
2 therefore they are not government measures, and
3 they are not subject to these international
4 trade rules. They may look like taxes and
5 tariffs, but they are not. They are a business
6 deal you contracted with your colleagues.
7 MR. ARMSTRONG: They are a business deal I
8 contract with PTTs that are government regulated
9 and in many cases, as we know, government owned.
10 What looks like a duck, walks like a duck,
11 quacks like a duck, I often treat them like a
12 duck.
13 GOVERNOR GILMORE: Well, on that duck note,
14 we will break for lunch.
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