MINUTES

Advisory Commission on Electronic Commerce

June 21-22, 1999

Williamsburg, Virginia

The following members were present: The Honorable James S. Gilmore (Chairman); Mr. Dean F. Andal; Mr. C. Michael Armstrong; Mr. Joseph H. Guttentag; the Honorable Paul C. Harris; Ms. Delna Jones; The Honorable Ron Kirk; The Honorable Michael O. Leavitt; Mr. Gene N. Lebrun; The Honorable Gary Locke; Mr. Grover Norquist; Mr. Robert Novick; Mr. Andrew Pincus; Mr. David Pottruck; Mr. John W. Sidgmore; Mr. Stanley S. Sokul; and Mr. Theodore Waitt. The following members were absent: Mr. Robert Pittman and Mr. Richard Parsons.

June 21, 1999

Governor Gilmore called the meeting to order, welcomed Commissioners and guests to Williamsburg and called for a motion for election of a chair. Mr. Armstrong nominated Governor Gilmore as chair; Mr. Harris seconded the nomination, and it was unanimously approved.

The Chairman administered the Oath of Office and called for each member of the Commission to sign an Oath of Office Appointment Affidavit.

The Chairman then spoke about the challenges faced by the Commission and commented on the appropriateness of the Williamsburg setting as the kick-off location for a body that would write another chapter in the history of the United States as a free nation.

The Chairman thanked the members of the Commission for their confidence and trust and spoke of the diversity of backgrounds from which Commission members came and their expertise and experience. He also spoke of his commitment to Comissioners and the American people to be fair and thorough.

The Chairman then moved to administrative and housekeeping issues and noted that he had taken the liberty of seeking an appropriate person to be the Commission's Executive Director. He then introduced Heather Rosenker and called for unanimous consent for approval of her appointment.

Governor Leavitt asked if there should be deliberation among the Commissioners about an Executive Director. He then moved to adopt Ms. Rosenker as the interim Executive Director with the Chairman to review the issue and make recommendations by mail ballot, or adoption at the next meeting concerning making her appointment permanent.

Mr. Andal suggested that the hiring and firing of personnel should be left to the Chairman and offered a substantive motion to approve the recommendation by the Chairman of Ms. Rosenker as the permanent Executive Director.

The Chairman spoke to clarify the role of the Executive Director. He said the Executive Director is not a policymaker, but would help with the direction and movement of paper and the handling of arrangements and the coordination of people. He noted that he would not foresee any staff person foreclosing any single member of the Commission in any way.

Mr. Guttentag suggested deferring a decision on making a permanent staff commitment until funding had been determined for the operation of the Commission and the payment of salaries.

The Chairman agreed and sought concurrence for deferring further discussion about the Executive Director until the Commission took up the matter of the budget. Hearing no objection, he moved to a discussion of the proposed Commission Charter.

A motion was made by Governor Leavitt to adopt the Charter. It was unanimously approved.

The Commission then took up the matter of the Operating Rules.

Mr. Armstrong asked if the April 21, 2000, deadline for the Commission's report to Congress was a hard commitment.

The Chairman indicated he didn't believe there was flexibility in the date, but he noted the Commission could seek to petition the Congress for an extension. He further noted that the work plan that he envisioned would get the Commission to its conclusion by the deadline.

Governor Leavitt made a motion that the Commission go through the latest draft of the Operating Rules section by section.

The Chairman asked Governor Leavitt to indicate which parts he had concerns about.

Governor Leavitt, recommended the language in Section IVA relating to proxy voting be stricken inasmuch as he believed it was inconsistent with the "no proxy voting" guidelines of the Commission.

Without objection, the Chairman ordered the words "unless the procedures for votes by proxy are followed" be stricken from the Operating Rules.

Governor Leavitt questioned language in Section IVA pertaining to quorums and voting procedures that requires "proper notice to the Chairman" for members to call for a vote on a motion. Further discussion indicated that this language refers to a 30-day notice requirement for such motions.

Mr. Andal moved to strike the requirement for proper notice. Mr. Armstrong seconded the motion, and it carried unanimously.

Governor Leavitt recommended alteration of a section of the rules that calls for the Chairman to determine "whether substantive findings and recommendations to be included in the final report are to voted individually or in bloc." Governor Leavitt moved to permit the Commission to have the latitude to make that judgement. Mr. Andal seconded the motion, and it passed unanimously.

Governor Leavitt stimulated a discussion concerning the role of the Executive Director as specified in the Operating Rules. At the conclusion of the discussion, the Chairman recommended that the language remain as in the draft. There was no objection.

Mr. Andal then moved that the Commission approve the Operating Rules with the provision that the next meeting would be an opportunity for amendments. Governor Leavitt seconded the motion, and it was passed unanimously.

The Chairman then moved to a discussion of the budget. He noted that the commonwealth of Virginia had placed $150,000 cash into the Commission's account. He then introduced the Commission's Counsel, Thomas Griffith, of Wiley, Rein & Fielding, for a discussion of the gift acceptance provisions in the statute that created the Commission. The Chairman then proposed that the organizations Commission members represent consider contributing not more than $150,000 each to fund the Commission. He further proposed that a subcommittee be created to raise additional funds from the community in general if funding from the businesses, governments and associations represented by Commission members was insufficient to fund the Commission.

Further discussion ensued concerning funding sources and the likely ability of different organizations to make contributions, the propriety of business funding all or the majority of the Commission's work and other related issues. The Chairman summarized the comments of Commissioners. He then proposed a five-member subcommittee consisting of himself, Mr. Armstrong, Ms. Jones, Mr. Sidgmore and Mr. Norquist that would meet and have a proposal for the Commission to consider at its meeting the following day.

The Chairman then called on Mr. Griffith, to speak concerning the oath Commissioners took. Mr. Griffith spoke of the responsibilities and protections the oath carried with it and noted that Commissioners were public officials of the United States and were subject to statutes governing the conduct of public officials. He also noted that Commissioners were not subject to financial disclosure requirements so long as their work took fewer than 60 calendar days over the next year.

The Chairman noted that a press conference was scheduled the next day, and he encouraged all Commissioners to participate.

The Chairman and other Commissioners then discussed future meeting dates and locations and the availability of various Commissioners. The Chairman agreed to take up the issue of meeting times and dates later in the session after Commissioners had had time to check their schedules.

The Chairman then called for other issues, and Governor Leavitt asked the Chairman's advice on how to proceed with the issue of the Executive Director. The Chairman indicated he had intended to present that issue the next day as the budget was resolved, however he said he would entertain a motion to adopt the Chairman's appointment of the Executive Director. Mr. Andal so moved and Mr. Norquist seconded the motion.

In discussion of the motion, Governor Leavitt and Messrs. Norquist, Guttentag and Armstrong raised issues relating to the advisability of a permanent appointment of an Executive Director prior to resolution of funding issues. The issue of defining the duties and expectations for the Executive Director was also discussed, and Mr. Andal amended his motion to approve the appointment of Ms. Rosenker, subject to available funds. Mr. Norquist seconded this amendment to the motion.

The Chairman spoke to the motion and encouraged Commissioners to approve the appointment of the Executive Director, subject to funding inasmuch as various Commissioners had indicated their satisfaction with her work and the need for the Commission to move ahead to substantive issues. Mr. Andal commented that he thought a proposed duty statement might be helpful in specifying the duties of the Executive Director.

Governor Leavitt then suggested, in a substitute motion, that a position description be created for ratification by the Commission.

The Chairman clarified the motion to be that of accepting the appointment of the Executive Director, subject to funding, with the Commission to approve a job description at the next day's meeting.

Mayor Kirk then asked that the motion be amended to require that the Commission be apprised of a breakdown in staff salaries.

After more discussion about the advisability of conducting a vote prior to consideration of a job description and funding, Mr. Lebrun moved to table the motion until the next day. Mr. Armstrong seconded the motion, and the Chairman called for the question. Both ayes and nos were heard, so a show of hands was called for. The Chairman counted 10 in favor, noted that that was an absolute majority and tabled the motion until the next day.

After discussion of scheduling matters relating to evening activities, the meeting was adjourned at 6 p.m.

June 22, 1999

The Chairman called the meeting to order, acknowledged the Commissioners and others present and commented on the tasks that lay before the Commission.

The Chairman introduced the President of the College of William and Mary, Dr. Timothy Sullivan, for remarks.

Dr. Sullivan welcomed Commissioners on behalf of the staff, students and faculty of the college.

The Chairman then commented on the rich history of the area and the college and noted that the future of commerce in America was at stake in the Commission's deliberations, not just concerns of taxing technology. The Chairman recounted statistics concerning the impact and reach of the Internet and noted that the U.S. Internet economy, by itself, was the 18th largest economy in he world. The Chairman called for all points of view to be heard and said that that the Commission had an opportunity to reinvigorate America's founding values. He said it had the choice of accepting the challenge to be the forefathers of the information age or engaging in comfortable approaches or turf battles, preservation of the status quo, or squabbling.

The Chairman then invited each Commissioner to share his or her vision for the outcome of the Commission's work. Mr. Sidgmore began with an overall, sum-up presentation of his views of the Commission's work, and each Commissioner provided brief introductory remarks, the full texts of which are in the verbatim transcript of the Commission's deliberations.

A recess was taken following which the Chairman introduced a series of presentations on electronic commerce issues.

Andrew Pincus, a Commissioner, is the General Counsel for the U.S. Department of Commerce. Mr. Pincus spoke on "The Emerging Digital Economy." He spoke about the definition of electronic commerce; quantification of the use of the Internet and its growth; how the Commerce Department has been measuring the digital economy; the impact of electronic commerce on the U.S. economy; and how electronic commerce impacts U.S. global competitiveness. The full text of Mr. Pincus' remarks, along with those that follow, is in the verbatim transcript of the meeting.

The next presenter was Peter Merrill, a partner with PricewaterhouseCoopers. Mr. Merrill spoke of electronic commerce as a way of doing business and communicating that has become a sector of the economy. He noted that more than 80 percent of electronic commerce is now business-to-business, and this percentage is forecast to rise to more than 90 percent. He also said that only 1.3 percent of all remote sales are Internet sales. Mr. Merrill concluded by suggesting four principles for the Commission's consideration: neutrality; simplicity; free trade; and technological efficiency. He noted that the tax system is not hemorrhaging and that the healthy development of eCommerce does not depend on a perpetual tax moratorium.

Following these presentations, Commissioners questioned Messrs. Pincus and Merrill on issues related to:

1) The impact of state-to-state taxing inconsistencies on the U.S.' ability to advocate for consistent international policies;

2) The extent to which the Internet economy has a ripple or spillover effect into the rest of the economy;

3) The impact of tariffs on consumers;

4) Education and preparedness for work in the electronic economy as a national imperative; and

5) Whether the Internet will remain a small slice of eCommerce, or grow quickly in a magnitude hard to imagine.

The next presentations on the implications of eCommerce for the global economy and international tax and tariff issues were made by Commissioner Joseph H. Guttentag, Senior Advisor to the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, and Don Abelson, the Assistant U.S. Trade Representative for Industry.

Mr. Guttentag discussed income or direct taxes; consumption or indirect taxes (which include sales taxes); and tax administration issues. He said that the Organization for Economic Cooperation and Development (OECD) has been and should remain the international forum in which global consensus is sought. Internally, OECD has agreed that taxation should seek to be neutral and equitable among forms of eCommerce and between conventional and eCommerce. He said the OECD recognizes the need for worldwide acceptance of established principles in order to obtain necessary certainty as to the avoidance of double taxation. He suggested that the Commission should consider adopting guiding basic principles, such as were adopted by the OECD as a way of moving forward. The OECD has said that any taxation of the Internet and electronic commerce should be clear, consistent, neutral and nondiscriminatory.

Mr. Abelson spoke on the Clinton Administration's duty free cyberspace initiative, which dates to the release of an electronic commerce report in July 1997. He noted that in the U.S. schedule of tariffs, there is no reference to electronic transmissions and that no country was seriously contemplating trying to impose border measures on electronic transmissions. He noted, when he raised the issue of making permanent the duty free cyberspace initiative with his colleagues, that they raised the issue of internal taxation with concerns of revenue maintenance.

Following the presentations, Commissioners questioned Messrs. Guttentag and Abelson and had a general discussion on the following issues:

1) If electronic transmissions and software are not subject to duty, how can the correct value on which duty is due be determined in the case of a dutiable computer that comes loaded with nondutiable software?

2) What is the duty of a remote seller to collect legitimately imposed taxes? And, are there statistics to indicate how much more use tax could be collected if it were collected at the point of generation rather than at the point of consumption?

3) Are there alternate, automatic ways of collecting taxes on electronic transactions that involve or do not involve actual transfers of tangible goods — such as the sale of software that takes place electronically from one computer to another and is paid with a credit card? Presently, there is no customs duty assessed anywhere on such transactions.

4) Other countries look at the issue of making the duty free cyberspace initiative permanent with concern about their revenues. They have been told to wait until the U.S. deals with this issue and use its conclusions as guidance.

After lunch, the Commission reconvened, and the Chairman introduced five presenters.

Dr. William Fox of the University of Tennessee spoke about sales taxes as revenue sources in the cyber economy with specific reference to the history and theory of sales and use taxes, the revenue generated by taxes and the varying tax system structures. Dr. Fox listed four goals for what he called a good tax system: neutrality; equity; businesslike operation of state and local governments; and ease of administration and compliance. He suggested that, should there be taxation of electronic commerce, it should involve such issues as simplification by state and local governments in terms of rates and structures. Dr. Fox concluded by suggesting four alternative scenarios for the future related to states and taxation of remote commerce. 1) If states are not able to tax remote commerce, revenue growth will slow, but it will not be devastating; 2) As the tax base has narrowed, states have raised rates, thereby creating a greater differential between tax and nontax items; 3) The states could look to the federal government to supplement their revenues, but, historically, the federal government has not been a growing source of revenue for state and local governments; 4) Local governments can raise other taxes, such as property taxes.

Dr. Austan Goolsbee of the University of Chicago School of Business discussed the impact of taxation on Internet sales. He concluded that, if Internet taxes were imposed now, they would have a fairly significant impact on the Internet economy in that people appear to be fairly price responsive. Secondly, he indicated revenue losses from not enforcing Internet taxation are small in the near term and only become larger in future years. His policy recommendation was that a viable compromise position might be to say that to nurture the Internet without losing too much revenue and without violating neutrality, an explicit moratorium on taxation ought be imposed for a few years with a relatively small revenue cost. A stated, explicit end date would be specified after which Internet transactions would be treated like other visible forms of retail.

Mr. Walter Hellerstein of the University of Georgia School of Law noted that most state sales taxes are limited to transfers of tangible personal property. He spoke about the impact this limit has on the application of current state sales tax laws to electronic commerce. He noted at the outset that distinctions between goods and services regarding taxation were largely historical and not supported by principles of tax policy. He also indicated that presently states seek to tax only a small portion of what is regarded as eCommerce. Mr. Hellerstein also discussed the issue of nexus or presence as regards a state's legal ability to claim tax obligations from merchants doing business in a state. The court case known as "Quill" was also referenced in that it rested the physical presence requirement of nexus for use tax collection purposes entirely on the commerce laws, thereby permitting Congress to alter them. Mr. Hellerstein summarized his comments thusly: states have the power to tax eCommerce subject to the limited restraints of the Internet Tax Freedom Act; states have generally only exercised their authority with respect to tangible versus digital products and services; states lack the Constitutional power to require a nonphysically present seller who sells tangible or digital products under the Internet to collect taxes even though the purchaser has a legal obligation to pay such a tax; and Congress has broad Constitutional authority to expand, restrain or otherwise prescribe the rules governing state taxation of eCommerce.

Dr. Charles McLure of the Hoover Institution spoke about why the Internet should be taxed and how to do it. He began by specifying that neutrality was a key concept and indicated he believed eCommerce and telecommunications should be taxed like all other commerce, but cautioned that it could not be done if doing so was so complex that business could not deal with it. Dr. McLure also noted that the Commission's assignment for neutral taxation of eCommerce and non-eCommerce would be impossible unless there were a fundamental reform of state sales and use taxes, which, themselves, are systematically nonneutral. He concluded by saying a decision to exempt eCommerce beyond the immediate future would be a mistake that would not easily be overturned despite its lack of fairness and adverse economic effects. The Commission should propose a system that provides neutrality in eCommerce, non-eCommerce and telecommunications, Dr. McLure said.

The Honorable Orson Swindle, Commissioner, Federal trade Commission, was the final speaker of the meeting. He began by asking if a Depression-era tax system should be applied to the 21st century. He said the Internet is inherently susceptible to multiple and discriminatory taxation in a way that traditional commerce is not. He urged the commission to take on the issues of On-line privacy and the protection of sensitive financial and medical records. He noted that since more than one-third of current Internet usage is by Americans, imposing new taxes on the Internet will disproportionately affect U.S. consumers.

The Chairman then called for a break and advised Commissioners that Dr. McLure and Mr. Swindle would be available for questions during the break.

After the break, the Chairman indicated that the Commission would again take up housekeeping. He then called on Mr. Armstrong for a report on a meeting of the Funding Subcommittee.

Mr. Armstrong presented a five-point program recommended by his Subcommittee:

1) The business members of Commission have agreed to put forward about $50,000 each for interim financing. (The businesses represented are AT&T, Charles Schwab, MCI Worldcom, Gateway, Time Warner and America Online.)

2) All Commission members with flexibility would be asked to consider what contributions they could make for interim financing.

3) The Subcommittee would draft a fund-raising strategy that would include a letter asking Congress to assist, if not completely fund, the Commission's operations.

4) In coordination with the staff, the Subcommittee would publish for comment an interim budget.

5) The Subcommittee would like the opportunity to review the proposed budget in detail with an eye toward identifying areas where in-kind contributions could substitute for proposed spending. The subcommittee would also look at funding for Williamsburg meeting expenses.

Mr. Norquist moved that the Commission accept the Subcommittee's strategy. Mr. Andal seconded the motion, and it was unanimously approved.

The Chairman then raised the issue of the Executive Director and discussed the need for her to have been appointed several weeks prior to move the work of the Commission forward. He detailed the work that Ms. Rosenker had done and indicated that a position description had been drafted. The Chairman then called for the Commission to approve the appointment of Ms. Rosenker as the Executive Director. Mr. Andal seconded the motion.

Governor Leavitt then moved that the Commission convene in executive session for the purpose of discussion of the motion on the floor. Mr. Sokul spoke at length and urged that the motion not be seconded inasmuch as the Operating Rules call for the Commission to automatically convene in executive session if a motion to do so is seconded. Mayor Kirk then seconded the motion, and the Chairman indicated the Commission would go into executive session. He noted, for the record, that he opposed the Commission going into executive session for the purposes of the discussion of the approval of the appointment of the Executive Director.

Governor Leavitt then suggested that the Commission waive the Operating Rule that calls for the Commission to go into executive session when a motion to do so is made and seconded. Mr. Andal so moved, and Ms. Jones seconded the motion. The Chairman asked Ms. Rosenker to call the role for a vote on this motion. The motion carried unanimously.

Governor Leavitt then called for a vote on the motion for the Commission to go into executive session. A discussion ensued related to parliamentary procedures and whether debate should be permitted on the motion for the Commission to go into executive session. The Chairman ruled that the vote should be taken and that it was not debatable.

The Commission voted 14 no and 3 yes, indicating discussion of the approval of the appointment of the Executive Director would take place in open session.

Governor Leavitt raised issues related to the in-kind donation of office space by the Electronic Industries Alliance and noted that Ms. Rosenker's husband was an executive with that organization. Governor Leavitt questioned whether there were conflict of interest issues that the Commission should consider in light of Mr. Rosenker's employment with the Alliance and positions that may have been taken by the Alliance. Lengthy discussions ensued regarding these issues, the desired qualifications of an Executive Director and the degree to which the Executive Director is in a position to affect policies and reports the Commission might create.

Governor Locke then called for the question to be posed to the Commission regarding its readiness to vote on the motion of approval of the appointment of the Executive Director. The Commission voted unanimously to proceed to voting on the motion.

Governor Gilmore then called for a vote on the Chairman's appointment of the Executive Director, taking into consideration the comments of Mr. Pottruck and others. (Mr. Pottruck recommended that the Commission vote to confirm the appointment of the Executive Director and delegate to the Chairman the responsibility for making checks concerning appearances of conflicts of interest.)

The Commission voted 16 in favor of the motion and one opposed.

Governor Leavitt then commented on his vote in opposition and noted his support for the Executive Director and the Chairman. He further indicated that he believed it would have been better to have had the discussion about the Executive Director in closed session. He said that Commissioners could talk among themselves openly about such issues, but he believed that there were times when such issues should be discussed privately. Having made those points, Governor Leavitt moved that the Commission adopt, on a unanimous basis, Ms. Rosenker as the Executive Director. Mr. Andal seconded the motion, and the Chairman indicated that, without objection, Ms. Rosenker would be unanimously adopted as Executive Director. There were no objections.

The Commission then moved to a discussion of meeting dates and times. Mr. Pincus moved that the New York meeting be held on September 14 and 15, 1999. The Commission voted unanimously to set those dates.

Mr. Pottruck moved for the December meeting to be held in San Francisco rather than in Silicon Valley. Mayor Kirk seconded the motion. The Commission voted unanimously to hold its third meeting in San Francisco on December 14 and 15, 1999.

Mayor Kirk moved that the Commission's final meeting be held in Dallas. Mr. Lebrun seconded the motion, and the Commission voted unanimously to hold the meeting in Dallas.

The Chairman then took up the matter of a work plan. He noted that a general work plan had been created by memorandum of June 21, 1999, which was intended to enumerate potential issues as designated within the statute. The Executive Director would then contact each Commissioner to identify issues for consideration and also review those issues being considered by other commissions meeting on the subject of eCommerce. A consensus work plan and consensus agenda would then be developed for the New York meeting. The Chairman then called for adoption of that approach, and Mr. Andal seconded the motion.

Following discussion concerning this motion, Mr. Pottruck offered a substitute motion that called for following the work plan and creating a Work Plan Subcommittee that would meet by teleconference to make as much progress as possible prior to the New York meeting. Mr. Andal seconded the motion. The Commission voted unanimously to adopt the motion.

The Chairman then indicated that anyone who wished to do so could serve on the Work Plan Subcommittee.

The Chairman concluded the meeting by thanking all Commissioners and presenters for their participation. He indicated there was much work to do before the Commission could get to a recommendation, and he pledged that the Commission would operate openly and inclusively so that its recommendations would have credibility with the Congress.

The meeting was concluded at 5:30 p.m.