Testimony

• Mr. Paul Misener

  Vice President, Global Public policy

  Amazon.com
  Read statement

  Testimony

  Mr. Paul Misener

  Good morning, Chairman McCain, Senator Hollings, and members of the Committee. My name is Paul Misener. I am Amazon.com’s Vice President for Global Public Policy. Thank you very much for inviting me to testify today; I respectfully request that my entire written statement be included in the record of this hearing. Thank you also – and, in particular, thank you Senators Allen and Wyden – for your leadership on the issues we will discuss this morning. Mr. Chairman, on behalf of our customers and company, Amazon.com supports extending the Internet Tax Freedom Act moratorium; Congress adopted this shrewd policy five years ago, and there is no good reason to deviate from it now. We also support the decision to split consideration of the moratorium policy from the entirely separate and intricate constitutional matter of remote sales tax collection, on which Amazon.com has been working cooperatively with the States for several years. The Internet Tax Freedom Act Moratorium Should be Extended Mr. Chairman, Amazon.com believes that Congress made the correct policy choice in 1998, when it established the Internet Tax Freedom Act’s moratorium on state and local taxes on Internet access; bit taxes; and new, multiple or discriminatory taxes on electronic commerce (the “Moratorium”). At that propitious moment – when the World Wide Web was but half its current age – ecommerce was widely celebrated but little understood and, thus, there was significant potential for state and local authorities to make uninformed decisions with respect to Internet taxation. Although the Moratorium does not affect Amazon.com directly, it has been very beneficial to American consumers, including Amazon.com’s customers, by protecting them from onerous taxation. Many statistics – including the fact that the percentage of Americans who use the Internet increased from 33% in late 1998 to 54% by the fall of 2001 – help confirm the wisdom of Congress’ decision. The Moratorium also has given companies that provide ecommerce infrastructure and services the certainty of tax policy they needed in order to make the substantial nationwide investments necessary for building the Web into the ubiquitous, reliable, and affordable medium it is today. Moreover, the Moratorium gave the States time to become familiar with the Internet and its myriad benefits. Whereas the Internet five years ago may have been seen as a novel source for extra government revenue, today it is accepted as an essential societal good undeserving of additional layers of taxation. Indeed, unlike some activities that policymakers often discourage by additional taxation, it now is widely recognized that Internet use should not be intentionally reduced in this way. We think it somewhat unlikely, therefore, that states would now, were the Moratorium to expire, choose to heap layers of tax burdens on the Internet. Yet, because allowing states to do exactly that would be the only reason for discontinuing the Moratorium, we support maintaining it. And, because we foresee no reason for the extant national Moratorium policy to change, we support making it permanent – subject, of course, to subsequent Congressional repeal if currently unforeseeable circumstances were to render the policy unsound at some point in the future. Sales Tax Collection is an Entirely Separate and Intricate Constitutional Matter Mr. Chairman, the issue of whether and how Congress should permit states to require out-of-state sellers to collect tax on sales to in-state consumers is often confused and conflated with the ITFA Moratorium policy. It is, however, a completely separate matter. And, unlike the policy choices Congress made to establish, then extend the Moratorium, the remote sales tax collection issue simultaneously presents Congress with the gravity of a fundamental constitutional right and the nearly mind-numbing detail of state sales taxation. For these reasons, Amazon.com supports considering remote sales tax collection separately. Please allow me to elaborate. The Commerce Clause of the United States Constitution establishes an essential protection that bars the States from encumbering interstate commerce without specific Congressional approval. No less an authority than James Madison, the Father of our Constitution, opined that the most important negotiation at the Philadelphia Convention involved this protection. On the matter of state sales taxation, the Supreme Court has held – in the 1968 Bellas Hess and 1992 Quill decisions – that the Commerce Clause bars states from requiring out-of-state sellers to collect taxes on sales to a State’s residents unless these so-called “remote sellers” have “substantial nexus” with that State. Otherwise, held the Court, the current sales tax regime is so complicated that a collection requirement would impose an unconstitutional burden on remote sellers. Thus, a fundamental constitutional protection, not some prior policy choice, currently bars states from requiring remote sellers without nexus to collect sales tax, and the present debate is fundamentally about whether remote sellers will continue to be afforded this protection. Not only is the separate issue of remote sales tax collection at base a grave constitutional matter, it also involves important yet nearly mind-numbing detail. Nationwide, today there are over 7500 active local sales tax jurisdictions that include not just states, cities, and counties, but also school, transportation, and mosquito abatement districts. Each of these jurisdictions has its own tax rates, rules, and basic definitions; and their geographic boundaries are often vague or virtually unknowable for anyone outside the locality. The issue also involves interstate compacts and ongoing governance mechanisms; combined audit processes; the creation of a national database of jurisdictions and rates; vendor compensation; sales tax holidays; and the bundling of goods and services. Put bluntly: details matter. In addition to these grave and detailed constitutional considerations, the remote sales tax collection issue involves a few associated policy matters, such as whether remote sales (which tend to use fewer local services, cause less pollution, and save citizen time) should be taxed the same way as local sales, especially when brick and mortar retailers regularly receive local tax abatements and need only collect at the tax rates and rules of their stores’ locations, not their customers’ homes. The Gravity and Intricacy of the Sales Tax Issue Necessitate Thorough Deliberation Mr. Chairman, the remote sales tax collection issue is so constitutionally grave and intricately detailed that thorough Congressional hearings and deliberations are absolutely essential. Indeed, for Congress to consider overturning two Supreme Court decisions on such a fundamental constitutional protection, the Senate and House of Representatives must be presented all the salient facts and opinions on the matter. Amazon.com has been working cooperatively with the States on this issue for several years. Unlike the stridently anti-tax position incorrectly ascribed to our company on occasion, we long have maintained that we would be willing and able to collect tax on remote sales so long as the relevant state codes are actually simplified. In other words, if the unconstitutional burden found in Bellas Hess and Quill is truly removed, we would not oppose Congress overturning the Supreme Court decisions. Not surprisingly, therefore, we have been working constructively with the States to ensure that their efforts lead to true simplification. Gary Locke, Governor of Amazon.com’s home State of Washington and a strong proponent of sales tax simplification and eventual mandatory collection by remote sellers, appointed Amazon.com to be one of Washington State’s two private sector representatives to the Streamlined Sales Tax Project (“SSTP”). Based on our experiences in this collaboration with the States, and as the largest online retailer in America, we look forward to sharing the details of our knowledge and ideas with Congress at upcoming hearings. Upcoming Hearings Will Reveal that the States Have Not Yet Simplified Adequately Mr. Chairman, in just a brief preview of what undoubtedly will be discussed in great detail at upcoming hearings, please recognize that the States have not yet simplified their tax codes in a constitutionally meaningful way. You may have heard, or soon will hear, the claim that some large number of states (the Streamlined Sales Tax Implementing States – “SSTIS” – which approved the SSTP’s work) have adopted the Streamlined Sales and Use Tax Agreement (the “Agreement”) and, thus, the long-awaited simplification has occurred. This claim is misleading on three fundamental points. First, the simplifications included in the Agreement are modest, at best, and certainly are not adequate for Congress to overturn the Supreme Court’s decisions. The States have thus far avoided the tough choices that would produce true simplification. For example, they have not solved the thorny problems of vendor compensation, sales tax holidays, or the bundling of goods and services or of physical and digital goods. Nor have they developed an interstate compact with an ongoing governance mechanism, a combined audit process, or a national database of jurisdictions and rates. In sum, and as surely will be revealed in detail in upcoming hearings, the Agreement simply is not yet ready for prime time. Second, key states have failed to adopt key provisions of the Agreement. For example, some of the largest states in the Union – California, Texas, Illinois, and Washington – have longstanding rules that tax goods at the source of the sale, and they have no plans to change these rules as is required by the Agreement. Under Texas law, a Houston consumer who buys a lamp from a Dallas seller must pay both a state sales tax that is remitted to Austin and a local sales tax that is charged at the Dallas rate and remitted to the Dallas city government. This is the so-called “sourcing” approach to sales taxation. But the Agreement is fundamentally based on a “destination” approach, whereby sales are taxed at the consumer’s – not the seller’s – location. If Texas were to adopt the Agreement, the sale of the lamp by the Dallas seller to the Houston consumer suddenly would be locally taxed at the Houston rate and the proceeds would be sent to the Houston city government. The redistribution of tax assessments and revenue among cities, counties, legislative districts, and other areas within sourcing states would potentially be enormous, and at best unpredictable, with various in-state winners and losers. Key sourcing states in the SSTP – Texas and Washington, for example – have recognized this huge economic and political problem and each has deferred adoption of the destination approach pending future studies that, in Texas, are not due until the end of 2004. And, of course, another key sourcing state, California, has not participated in the SSTP and, if it does participate in the future, faces the extant destination-based Agreement, which may be amended only by supermajority vote. Thus, not only have state tax representatives collectively avoided the hard choices necessary to meet constitutional strictures; state legislatures have individually balked at even the modest changes the SSTP has proposed. Third, to make matters even worse, in many states, the modest changes in the Agreement that actually have been enacted are not set to take effect until the middle of next year, or even as late as the end of 2005. Progress is, indeed, inadequate, inconsistent, and often postponed. Future hearings also will reveal that the seemingly innocuous proposal to exempt small businesses from any remote sales tax collection requirement actually serves as a disincentive to the States in their simplification efforts. Such an exemption – often proposed for companies with less than $5 million annual revenue – would create an obvious sales tax collection loophole for large companies whose revenue sources are divided into many hundreds or thousands of small components. More fundamentally, a small seller exemption also removes states’ incentive to simplify their sales tax codes, because only the big sellers would need to comply. But if a seller with yearly sales of $4.9 million (or even one fiftieth that amount) cannot figure out the collection system, it certainly is not simple. Put another way, a truly simplified sales tax collection system should be manageable even to businesses annually making one hundred thousand dollars. Lastly, although reasons behind actions or inactions are inherently difficult to divine, hearings may also expose why the States have not yet simplified adequately. There probably are two essential reasons. First, the SSTP was not clearly chartered as an effort to simplify tax codes enough to have Congress overturn the Supreme Court. It began instead as a collegial effort by the States to improve their tax systems merely for the sake of improvement. In such circumstances, any progress is good and welcome. But, at some moment last year, the SSTP almost imperceptibly metamorphosed into an effort to convince Congress that it should overturn the Court, with or without real simplification. One prominent governor, addressing the SSTP in a speech last April, said, “We want to keep Congress from over-thinking on this issue . . ..” Hopefully, this view is rare, for Congress deserves to receive all the relevant information and opinions. The second key reason why states have not yet made the tough choices may be the fact that the potential revenue is so modest. In contrast to some of the outlandish estimates of huge online markets and potential sales tax revenue that you may have heard a few years ago or even recently, the forgone revenue on ecommerce sales is currently at most a meager $2.4 billion per year nationwide. We certainly wish the potential tax revenue were higher – because our sales would be proportionately larger – but it is not. Suggestions that, because the States are in a budget crisis, Congress must act very quickly to allow the States to require remote sellers to collect tax are well-meaning but unfounded: State budget shortfalls dwarf potential tax revenue from remote online sales; there is plenty of time to get simplification right. Conclusion In conclusion, Mr. Chairman, Amazon.com supports extending the Internet Tax Freedom Act Moratorium. Congress adopted this shrewd policy five years ago, and there is no good reason to deviate from it now. We also support the decision to split consideration of the Moratorium policy from the entirely separate and intricate constitutional matter of remote sales tax collection, and we hope to have the opportunity to testify at a subsequent hearing on the details of this topic. Thank you again for inviting me to testify. I look forward to your questions. * * * * * * *

• Mr. Billy Hamilton
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  Testimony

  Mr. Billy Hamilton

  Mr. Chairman, Members of the Committee, good morning. My name is Billy Hamilton, and I am Deputy Comptroller of the Texas Comptroller of Public Accounts, a position I have held for 11 years. I am also a member of the Executive Committee of the Multistate Tax Commission and a past president of the Federation of Tax Administrators, on whose behalf I appear today. The MTC is an organization of state governments that works with taxpayers to administer, equitably and efficiently, tax laws that apply to multistate and multinational enterprises. Forty-four states and the District of Columbia participate in the Commission. The FTA is an association of the principal tax administration agencies in each of the 50 states, the District of Columbia and New York City. I am here today to discuss a proposal to extend the moratorium on state taxation of Internet access charges. The Internet Tax Freedom Act was implemented in 1998 as a temporary means of allowing a new form of technology to gain a foothold in the mainstream of American life without the encumbrance of taxes. The authors of the original law highlighted their hope that keeping Internet access free from taxes would allow more Americans to be able to afford basic access to the Internet. The “fledgling industry” argument is no longer relevant. The purchase or supply of Internet access services in the states that tax services has not been adversely affected and use of the Internet continues to grow exponentially. Electronic commerce is now a mature sector of the U.S. and international economy, and while we wholeheartedly support its continued expansion as a fast and efficient avenue of commerce, continuing the preemption from taxation simply provides a special position for this particular communications medium that ultimately leads to discrimination among firms in the Internet access and communications sector. Thus, it may be time to re-examine the intent of the original Act to determine whether the special tax treatment of Internet access is still necessary or whether an alternate solution should be put in place. I think a more fundamental point is that the states’ attempt to exercise common sense in most instances when it comes to taxing business and commerce. Taxation of Internet access is a state issue, which Texas—and every other stateasks that it be allowed to address as a state. I do not believe that there was ever a threat of highly discriminatory taxes on the Internet by the states. Rather, many states have sought to provide a tax-advantaged home for Internet companies as an economic development strategy. I do not believe, for example, that the Texas Legislature would be inclined to pass special taxes in this area, even if strictures were lifted tomorrow. Members of our legislatures understand and value the unique qualities of the Internet as a means of commerce, but they also understand that it should not be treated differently than other businesses operating in their states, many of whom pay state and local taxes and are in every respect good citizens of their communities. While the MTC and FTA maintain a neutral position on congressional action on the original Internet Tax Freedom Act and its successor, the Internet Tax Nondiscrimination Act, both organizations have provided Congress several recommendations with regard to specific provisions of the Act should Congress to choose to extend the law. I would like to discuss those recommendations with you and also provide you with a bit of background on a unique solution that the state of Texas has implemented. First, let me highlight the recommendations from the MTC and FTA. 1. We recognize that many in Congress have differing views on whether the current moratorium should be extended permanently or for a short period of time. On this point, we recommend that if Congress chooses to extend the Act that it should do so for no more than two years. Further, if the Act is extended Congress should undertake a thorough review of its impact on state and local revenues and the presence of unintended consequences due to changes in technology. The changing nature of Internet technology and its use in business operations means that the economic and fiscal impact of this Act will change over time. For this reason, a temporary—rather than permanent—extension may be appropriate. 2. The MTC and FTA believe that any extension of the current law should preserve the grandfathered ability of the limited number of states that currently impose a tax on charges for Internet access. Currently, nine states impose taxes that are protected. Repealing the grandfather clause would disrupt the revenue stream of these states at a time when nearly every state is struggling to balance its budget. Our Legislature recently completed work on a balanced budget that involved literally billions of dollars in spending reductions and no increase in taxes. We are struggling at the most fundamental level to make our revenues and spending match. If these states wish to continue to impose these taxes, they should be permitted to do so. 3. The definition of “Internet access” contained in the Act should be rewritten to insure equity among various types of access providers and among types of communications services. It should also eliminate opportunities to bundle otherwise taxable content into a single package of Internet access in a manner that would prevent states and localities from imposing their taxes on the otherwise taxable content. This last point is particularly important in insuring that an amended definition avoids an unintended erosion of state tax bases. 4. Any extension of the Act should not be accompanied by provisions or separate legislation that grants more favorable state and local tax treatment to commerce conducted electronically over commerce conducted by other means. 5. The definition of discriminatory taxes contained in the legislation should be amended to insure that it does not allow a seller through affiliates to avoid a tax collection obligation in a state even though the seller has a substantial nexus in the state. These provisions in the original Act were intended to insure that merely accessing products of an out-of-state seller via an in-state service provider would not be considered to create nexus for the out-of-state seller. When the law was written these provisions were not considered problematic. However, as the electronic commerce industry has evolved, the potential for this issue to arise has grown and should be examined carefully. The MTC and FTA believe these changes and considerations must be addressed to maintain an adequately functioning law on the taxation of Internet access—and both organizations are available to assist Congress in analyzing this issue as the debate goes forward. Now, I would like to turn your attention briefly to how the Texas Legislature addressed the issue of taxation of Internet access—and why this is a unique solution that deserves consideration by Congress for possible nationwide implementation. By 1997, Internet access was already being utilized by some Texas businesses and was, at that time, classified as taxable “information services” by the Comptroller. In the course of heated debate over proper state and federal taxation of the Internet that surrounded the 1998 Internet Tax Freedom Act, Texas’ tax policy drew some criticism. In response, the Comptroller at that time convened a broad based working group of industry leaders, traditional businesses which extensively use Internet services, and legal and accounting professionals both inside and outside the Comptroller’s office, to suggest and formulate potential techniques to address Texas’ taxation of Internet transactions. Our working group concluded that Internet access was taxable under the statute, and made various recommendations. One of the recommendations was to repeal the tax on Internet access, but if that was not feasible, the working group recommended that we seek clarification and simplification from the Texas Legislature. This clarification did occur at our next legislative session in 1999 when our Legislature upon further review and in recognition of its expanded use by both individuals and businesses, determined that charges for Internet access were separated from the category of “information services” and classified them separately as “Internet access” in the Texas Tax Code. By this time, numerous Internet Service Providers had established customer accounts in Texas to provide Internet access to Texas residents and businesses. However, the Legislature and Comptroller were mindful of the benefits of this new technology and the desire to insure that every Texas resident was able to obtain tax-free basic access to the Internet. To achieve this goal, in 1999, the Texas Legislature passed Senate Bill 441 (Tex. Tax Code Sec. 151.325) that exempts from taxation the first $25 of Internet access charges. Our state law—and our tax rate on Internet access—has not changed since its enactment. We still provide the first $25 of Internet access charges tax-free to Texas residents—and hundreds of thousands of Texas residents have taken advantage of this tax-free option for basic Internet access. In 2000, at Comptroller Carole Keeton Strayhorn’s request, the Electronic Commerce and Technology Advisory Group (E-TAG) was formed to review policies concerning E-commerce issues facing Texas and make recommendations that would support expansion of Internet access to people and areas currently without adequate access while ensuring that Texas remained competitive in the marketplace in comparison with other states. Comptroller Strayhorn took the group’s advice and came out with several recommendations. One was to seek an increase in the Internet access exemption from $25 to $50. However, due to budget constraints, the Texas legislature was unable to increase the exemption at the present time. My purpose in providing a brief background as to how Texas obtained its solution to provide clarification and simplification in 1999 and our continued effort to improve our policies related to Internet access and other related transaction is to demonstrate that our solution was not a one-sided decision. It was a solution that was created by the Comptroller’s office working closely with representatives of a cross-section of industries and other professionals. The Texas Legislature’s inability this year to increase the exemption from $25 to $50 does not in anyway undermine the widespread support from both taxpayers and businesses to the solution that we have implemented—and have found the growth-rate for access to the Internet in the state of Texas to be on par with that achieved in other parts of the country. The “Texas solution” is unique, but we believe it is one that Congress should seriously consider as it analyzes the need for extending the current law and tries to deal with competing requests for changes in the definition of Internet access. It provides a simple—but fair—method of insuring that citizens have tax-free access to basic Internet services while immediately resolving many questions that Congress continues to wrestle with regarding purported differential treatment of Internet service providers and bundled content. I hope the information I have provided is helpful to the Committee and the Senate as it continues its debate on this issue. I would be happy to answer any questions you may have.

• Mr. Joseph Ripp
  Read statement

  Testimony

  Mr. Joseph Ripp

  Mr. Chairman, Members of the Committee, thank you for inviting America Online, Inc. to provide its perspective on the Internet Tax Non-Discrimination Act (S. 150 & S. 52). AOL strongly supports enactment of this legislation to make permanent the moratorium on state taxation of Internet access under the Internet Tax Freedom Act. AOL’s Experience Since 1985, AOL has been the leading pioneer in providing a package of services that allow access to the content and other services offered over the Internet as well as access to proprietary content it and others have created. This is what constitutes Internet access services under the Internet Tax Freedom Act. AOL’s members now number over twenty-five million in the United States, more than any other online or Internet service provider. Our experience in this field has taught us several things about our industry and our members. First, Internet access services, and the services and software that make access practically useful and navigable for people in their homes and offices, are still changing continuously to reflect growing knowledge of consumer interests and priorities, as well as ever evolving technology. Our entire industry is constantly developing new and faster transport technologies, more powerful and less expensive computers and personal communication devices, and Internet access services that are effortless and fulfilling, always with the interest and benefit of the member in mind. These advances occur against the backdrop of economic upheaval for the companies involved in the industry both directly and indirectly – not just online and Internet service providers, but also dot-coms and telecommunications, cable and satellite companies that service our industry. We are all familiar with the wave of bankruptcies, divestitures and acquisitions in these sectors in recent months. Second, broadband rollout remains critical to the expansion of Internet access services. Broadband rollout remains a high priority throughout the industry and for government at all levels. Why? Because the Internet has completely transformed the way Americans work, play, shop and gather information. A new wave of Internet accessibility, the availability of broadband (high-speed) access, has the potential to be as revolutionary as the first wave. Broadband access, through Digital Subscriber Lines (DSL) or cable modems allows users to send and receive enormous quantities of data, audio, video and voice communication. However, every technological revolution brings with it the possibility that some will be left behind. Third, about half of the American people currently have access to Internet access services. That is an excellent record of achievement in a decade. But it means that we are only half way to our goal of providing these services to virtually all Americans. Certainly AOL and thousands of our competitors believe it is in our best business interests, the interests of individual people, and the national interest to make Internet access services as common as a television in the homes of America – not just as entrepreneurs but also because we believe the service we provide is critically important to full realization of an Information Society and the empowerment of individual people. Empowering individuals is the cornerstone of a democratic government. Fourth, we know something about those Americans who do not yet have these services. They tend to be disproportionately poor, less affluent, less educated, elderly, ethnic minorities, or live in rural communities. AOL has been working hard to reach out to these groups through such initiatives as prepaid arrangements, where members purchase a fixed amount of time online without further commitment. AOL also offers a new client to the Hispanic marketplace – one that prompts a prospective member to choose instructions in English or Spanish, somewhat akin to what many ATM screens do today. Once these subscribers are logged in, they will receive a Welcome Screen that includes special AOL Latino content. AOL has also recently launched “AOL Black Focus,” a comprehensive new area on the AOL service that combines content and information from an African American perspective with an engaging online community. These new efforts demonstrate how AOL recognizes that it cannot speak to its 25+ million members in the same voice . . . we have to reflect our diverse membership. Fifth, we believe several factors will play a critical role in reaching this remaining 50 percent of Americans: (1) technological enhancements that make access and hardware less expensive and more ubiquitous, (2) keeping online services and Internet access affordable for average consumers, and (3) constant upgrading of basic services to make each person’s online experience more practically useful, safe and entertaining. National tax policy will directly impact our industry’s ability to achieve the objectives I have outlined. It will have a substantial financial impact on the tens of millions of American consumers who already are logged on. It will also have serious implications for our ability to reach the 50 percent of Americans who are not logged on. And it will impact our industry directly and significantly as well as the quality of the service we provide. The Cost of Tax Compliance By way of background, AOL began as a small company providing online services only to users of IBM, Apple and Commodore computers as early as 1985. In the following years, AOL’s explosive growth caused it to emerge as a national dial-up provider of Internet access services . We quickly gained members from every state and virtually every city in America. By 1997, AOL had over seven million members in the United States. All of these members gained entry to AOL’s services through AOL’s data centers located in northern Virginia, which they generally accessed through computer modems and their telephone lines. Reflecting on this history, AOL has been both a small online service provider and a nationwide provider of Internet access services, with the respective challenges and benefits of each, within a relatively short time frame. Also by 1997, several state and local governments had begun to enact differing taxes on online and Internet access services. Tacoma, Washington, for example, implemented a plan to tax these services as a telephone utility in September of 1996. Chandler, Arizona began imposing a local utility tax on these services. The State of Connecticut, on the other hand, started to impose a 6% sales tax on Internet access service on the theory that it constituted a “computer and data processing” service. A handful of other states, sometimes through their legislatures but much more often through administrative interpretations of tax administrators, also began to enact or consider new taxes on Internet access services. The enactments and debates, however, involved tax theories, tax rates and compliance and reporting regulations that varied greatly from state to state. The prospect of hundreds or even thousands of disparate taxes, tax rates and systems being heaped upon online and Internet service providers and their customers presented a real dilemma. Because some states’ tax administrators mistakenly equated these services with telecommunications, online and Internet service providers faced the specter of potentially filing over 55,000 different tax returns each year across thousands of jurisdictions, just like a national telephone company. Thousands of online and Internet service providers, many of them small entrepreneurial operations, determined that they could not practically comply with thousands of state and local tax regulations, much less manage the purely practical function of collecting taxes from each customer and then remitting the taxes to state and local governments. It was no different for AOL, particularly during the rapid membership growth of the mid- to late 1990’s. Even for a major national provider like AOL, the prospect of complying with thousands of state and local tax regimes was daunting. The tax rules varied greatly from jurisdiction, to the extent any meaningful tax rules had been published at all. Furthermore, many of these rules based the amount of taxes and the fact of taxation on customer location, a fact that is often impossible to determine for members using the most popular dialup access method. While these rules may have had some applicability to telephone companies, which have years of experience complying with public utility regulation, they are burdensome and inapplicable to a company such as AOL. These costs and difficulties would continue today. We estimate that taxes on the full amount of the basic monthly dial-up subscription service for typical members would increase its cost by approximately $2 to $3 per month on basic dial-up service. For higher cost broadband service, the cost could be an additional $5 to $10 per month. The cost and practicalities of tax compliance would have to be figured into each new technological and service enhancement and, in some cases, would alter our decisions. These costs do not even account for the burdensome and costly litigation that AOL has been forced to undertake to defend against multimillion dollar tax assessments by several states claiming to be grandfathered under the ITFA. While a large, national company like AOL might be able to muster the resources to comply with a panoply of tax regulations, it would come at great cost. The cost of compliance would negatively impact our customers, our shareholders, and drain resources from technological and service enhancements. But even with tremendous effort, no dialup ISP can reliably identify customer location at the time of use, a common feature of state tax rules. At a time of transition in the industry, no company needs this sort of additional burden and cost, without providing any benefit but simply greater fees, to its customers. Benefits Achieved Under the Internet Tax Freedom Act In 1998, Congress passed the Internet Tax Freedom Act to halt the proliferation of state and local taxes on Internet access services. In the beginning, the act of federal preemption of state taxation was controversial. Accordingly, Congress acted carefully and incrementally:
  (1) Congress enacted a moratorium to prohibit taxation for a period of three years;
  (2) Congress “grandfathered” states that already had enacted some form of tax on Internet access services to provide them time to alter or reverse their policies (or see if Congress might eventually reverse itself); and
  (3) Congress established the Advisory Commission on Electronic Commerce to study Internet tax policies comprehensively and report back to Congress during the three-year moratorium period.
  The ITFA passed overwhelmingly in 1998, and President Clinton signed it into law. Subsequently, the Advisory Commission on Electronic Commerce (ACEC) studied Internet taxation for a year. AOL – as well as Time Warner – participated actively through their separate seats on the ACEC (at the time, AOL and Time Warner had not merged). The ACEC encountered significant controversy on certain tax policies, but one issue never proved to be controversial: the moratorium on taxation of Internet access services. No one ever articulated a justification or defense of allowing thousands of state and local tax jurisdictions to burden Internet access service by taxing it. Access taxes were never debated and the Commission’s final Report (April 2000) included, by a clear majority, a proposal for Congress to permanently extend the moratorium on Internet access taxes and to make it national in scope. In 2001, Congress again overwhelmingly passed a two-year extension of the moratorium, and President Bush signed it into law. Through Treasury Secretary Snow’s letter of May 14, 2003, the Administration has signaled its continued support for this legislation. We have operated under a national policy that prohibits state and local taxes on Internet access for five years. During that time, several states have abolished or significantly curtailed the taxes they had enacted on Internet access services. For example, Connecticut, Iowa, and the District of Columbia eliminated the taxes they claimed were due on these services. A state court in Tennessee recently ruled that Prodigy’s online services were not subject to the telecommunications tax assessed by the Department of Revenue. South Carolina has voluntarily followed the federal moratorium. The Washington State legislature overturned the City of Tacoma’s tax. We have made great strides in the past five years at improving online services, expanding service to more places and increasing the number of people logged on the Internet. In the process, we also have been successful in extending digital opportunities to more Americans of poorer means, less education and less affluence. Indeed, I can say unequivocally that we would not have as many Americans logged on today, through a diverse array of providers and ISPs, had the Congress never enacted the ITFA. However, as I mentioned earlier, the 50 percent of Americans who are not logged on still are disproportionately of harder to reach demographic groups, and they are the most likely to be hurt by additional tax costs. Moreover, the quality and nature of Internet access services would be significantly different today had ITFA never been enacted. The ITFA has been beneficial in terms of expanding and improving Internet access service. And most significantly, while I cannot speak for all state and local government lobbies, I am confident in observing that a general consensus appears to have emerged among most interest groups, industries and ideological sides of the debate that a national tax policy prohibiting a panoply of state and local tax burdens on Internet access services is prudent and constructive. The Internet Tax Non-Discrimination Act That brings us to today’s hearing and this Committee’s consideration of the Internet Tax Non-Discrimination Act (S. 150 & S. 52). Passage of the Internet Tax Non-Discrimination Act will have several key benefits:
  q Passage of S. 150 & S. 52 will promote digital opportunities for the 50 percent of Americans who do not currently have Internet access services. Taxes would only increase their costs and frustrate the national goal of providing these services for all Americans.
  q It will protect American consumers and online and Internet service providers from the additional costs that would be necessary to comply with a multi-jurisdictional tax system involving thousands of different and conflicting state and local tax rates, regulations, collection and remittance requirements, audits, administrative costs and litigation. Moreover, taxes on online and Internet services are inherently difficult to administer because dialup customers can log on from any location, and their location is often impossible to determine.
  q S. 150 & S. 52 will promote competition in the industry. High tax compliance costs would disadvantage small online and Internet service providers and diminish competition. States and localities have imposed inconsistent tax regulations, increasing the cost of multi-jurisdictional compliance for online and Internet access service providers. Onerous compliance costs will inhibit full roll out of competitive Internet access services to all Americans, especially in rural areas. Small independent and rural online and Internet service providers will be at a competitive disadvantage in complying with complex multi-jurisdictional tax regulations and will find it cost-prohibitive to expand services to additional states or localities.
  q S. 150 & S.52 will promote innovation in information technologies. Tax costs will necessarily divert resources from innovation and service to regulatory compliance. Taxes also will increase the price of any service enhancements. Left free of widespread taxation, online and Internet service providers can innovate and expand services without the distorting economic effects of taxation.
  q Passage of S. 150 & S.52 will stimulate the technology sector of the economy by (1) preventing tax increases on consumers and businesses, (2) promoting Internet access services, and (3) stimulating investment in the industry.
  q S. 150 & S.52 promote U.S. competitiveness in digital content and online software and services. America currently dominates the world market in digital content, services and software. The Internet Tax Non-Discrimination Act promotes U.S. competitiveness in the world marketplace by providing broad tax and regulatory protection for Internet and online access and related software and services that make Internet access services accessible for average Americans. The more accessible these services become, domestic production of online content and services increases. By comparison, the European Union now imposes VAT taxes on Internet access and online content and services. Already the EU policy has negatively impacted consumers' use of online and Internet access services in European countries. If you want our industry to continue as the world leader in this industry, then America should resist the EU paradigm. By contrast, failure to extend to the moratorium will result in several harmful consequences:
  q State and local governments will inevitably impose new and complex taxes on each consumer’s monthly Internet access service charges;
  q Such taxes could amount, in some states, on some high-end broadband services, to as much as $5 to $10 per month, or as much as $60 to $120 per year. According to the Information Technology Association of America (ITAA), failure to pass the Internet Tax Non-Discrimination Act will raise the cost of Internet access services (for the providers as well consumers), and thereby suppress demand for broadband and network-enabled innovations at "the edge of the network."
  q Many consumers will face double taxation on Internet access services – on the service itself as well as the telephone line so often used to connect to the provider;
  q The cost of providing Internet access services will increase because of the administrative costs necessary to collect, remit and comply with tax regulations; and
  q The price of taxes as well as the business cost of tax and regulatory compliance will profoundly impact, in ways obvious and subtle, virtually every aspect of the provision of Internet access services – the cost of service delivery for providers, price for each consumer, resources available for investment in further technological enhancements, the ability of access providers to expand service into new tax jurisdictions, and the cost-benefit analysis of certain service enhancements – tax policy affects each of these market facets. In short, AOL urges Congress to pass the Internet Tax Non-Discrimination Act for all of the reasons I have mentioned. Amendments That Have Been Discussed in Public Debate During the current consideration of S. 150, S. 52 and the companion bill in the House, H.R. 49, AOL has sought actively to maintain the broad industry support for prompt enactment of this legislation. This interaction has identified two additional critical points. First, experience under the existing language of the Internet Tax Freedom Act has shown that some states have sought to interpret its language in ways that deny protection from taxation based on the use of certain types of new technology to provide Internet access services. We can expect to see continuing changes in the technologies used to provide Internet access services in the coming years, if not months. Securing the objectives of the moratorium on state taxation, namely stimulation of a vibrant and broadly available group of Internet access services, requires that the moratorium be technology neutral. AOL would support technical changes to the existing language of the Internet Tax Freedom Act that ensure such technology neutrality. Second, some state tax administrators and others have argued that the scope of the tax prohibition should be modified to expose the basic software and content services provided as part of Internet access services to taxation while granting tax freedom to only a minimalist notion of Internet access service. This proposal would fundamentally shift the status quo in the industry, where a variety of online and Internet service providers offer a range of software, content and services as most appropriately suits their membership. To consumers, they all fall under the conventional understanding of Internet access services. Furthermore, all of the benefits and detriments of tax policy outlined above apply regardless of whether an ISP must tax all of its service or only half of its service. And the practical problems inherent in such a “partial-service tax free vs. partial-service taxed” system should are obvious. For example, determining the fee attributable to different aspects of these services would be arbitrary and expensive, fundamentally an exercise without any other business purpose and indeed contrary to the very purpose of the ITFA. Similarly, some businesses would like to amend the scope of the tax prohibition so as to advantage the business models they currently employ or that they intend to employ in the future. Such proposals typically involve narrowing the moratorium to produce state taxation of other business models. AOL urges the rejection of all such proposals. The success of a given approach to commercializing Internet access services should depend only on whether the approach meets the current needs of Internet users. Such success should not result from other approaches being burdened by state taxation. Therefore, AOL urges that the moratorium remain broad in scope, as it has been since the original 1998 enactment. Third, some people have suggested that the moratorium not be permanent or national in scope. AOL would urge the Senate to resist amendments to simply extend the moratorium for another period of years requiring the issue to be continuously lobbied for what is generally considered a widely accepted idea. Moreover, during the last five years of temporary moratoriums, nobody has ever articulated a time when exposing Internet access service to a complex and regressive multi-jurisdictional tax system would be beneficial for interstate Internet access service and the tens of millions of Americans who use them. Therefore, the consumers of America and access service providers deserve a national and permanent moratorium. Conclusion In closing, let me add that AOL and our industry are proud of the contributions we have made to national productivity, economic growth, technological innovation and the empowerment of individual people and improvement in the quality of their lives. National tax policy that promotes these achievements is sound. Accordingly, the moratorium extension contemplated by S. 150 and S. 52 should receive prompt favorable action by this Committee and the Senate as a whole. There are many controversial tax policy issues now before Congress, but the moratorium against taxes on Internet access services is not one of them. Thank you. -end-

• Mr. Mark Beshears
  Read statement

  Testimony

  Mr. Mark Beshears

  Thank you Mr. Chairman, and members of the committee, for the opportunity to provide testimony for the record to the Senate Commerce Committee’s hearing on the proposed extension of the current moratorium under federal law on Internet taxes and on the discriminatory and multiple taxation of e-commerce transactions. I am Mark Beshears, Assistant Vice President of State and Local Tax for Sprint Corporation. Prior to joining Sprint in 1992, I served as Secretary of Revenue for the State of Kansas. Sprint is a global telecommunications company with over 72,000 employees and annual revenues of approximately 27 billion dollars. As one of the nation’s premier telecommunications companies, Sprint is a provider of local, long distance, wireless telecommunications, and Internet access services. In addition to representing the views of Sprint, I am here on behalf of the United States Communications Association (USCA), United States Telephone Association (USTA), Cellular Telecommunications & Internet Association (CTIA) and 14 telecommunications companies that contributed to and support my testimony. A list of these supporters is attached as an Appendix to this testimony. We strongly support the goals of the Internet Tax Non-Discrimination Act, and we commend this committee’s leadership in creating and maintaining the national policy goal of encouraging businesses and individuals to connect to the Internet by pre-empting state and local taxation of Internet access. Now that this committee and the Congress are considering a permanent extension of the moratorium, it is imperative that the intent of the Act be clarified. We believe that the moratorium cannot be made permanent unless the concerns outlined in this testimony are addressed. Our primary concern is the current law does not accommodate the technological changes that have occurred since the Internet Tax Freedom Act was enacted back in 1998. Internet access was much different than it is today. High-speed Internet access – DSL, “3G” wireless, cable modem, and direct satellite – either did not exist or were in their infancy and not broadly available to consumers. The language in the 1998 Act is causing problems today. Congress wanted to ensure the moratorium language could not be used to pre-empt existing taxes on traditional telephone services. Language was added to the Act to exclude telecommunications service from the definition of Internet access. Five years later, telecommunications companies are major providers of high-speed Internet access through DSL and wireless web technologies. Yet because of the telecommunications service exclusion, some states have asserted that our service is subject to taxation while competing cable modem and direct satellite Internet access are tax exempt. Our proposal has two parts. First, it would eliminate the disparity in tax treatment between different Internet access providers. Second, it would create a uniform way to address the tax treatment of Internet access that is sold in a “bundle” with other taxable services. Cable modem and direct satellite providers compete directly with DSL and “3G” wireless providers as means of accessing the Internet. Because of certain rulings by states and the FCC, these providers sell Internet access tax-free. However, some states have asserted DSL includes both Internet access and taxable telecommunications service. As a result, customers that choose DSL service may be charged tax when competing services are not taxed. These state rulings are particularly damaging to telecommunications companies that sell Internet access because of the very high rates of taxation that are applied to telecommunications services by state and local governments. A study by the Council on State Taxation found that the average state and local effective tax rate on telecommunications to be 13.9%, compared to 6% for other goods and services subject to state and local sales taxes. Tax rates like these have a measurable impact on customer purchasing decisions. This disparity clearly violates the intent of the Internet Tax Non-Discrimination Act. Our proposal makes the act technology-neutral by clarifying the “telecommunications exclusion” does not apply to telecommunications service used to provide Internet access to users, nor does it apply to telecommunications service purchased by an Internet access provider when that telecommunications service is used to provide Internet access to users. Our proposal would have no effect on cable modem, direct satellite, or other technologies that are currently exempt. With our proposed change, all Internet access providers would be treated the same. The second part of our proposal would ensure that Internet access is not automatically taxable when sold with other telecommunications services. Currently, most states require that when taxable and non-taxable goods are sold together, or “bundled”, the entire “bundle” is taxable unless the seller separately states the exempt item on the customer’s bill. Some states also apply this same logic to services. The “bundling” provision would allow companies that sell Internet access and other taxable services as part of a “bundle” to collect tax only on the taxable portion if they can reasonably identify the non-taxable Internet access in its books and records kept in the regular course of business. Our proposal does not affect federal, state, or local taxes and fees on any telecommunications services that are not used to provide internet access to users or that are purchased and directly used to provide Internet access to users, including federal USF charges imposed by the FCC. Telecommunications services that are not related to Internet access remain excluded from the definition of Internet access. The following are “real world” examples of the issues addressed in this testimony. · Retail sales of Internet access Currently, the retail sale of Internet access is often subject to varying treatment from state to state. For example, states are all over the map regarding whether a charge for DSL service represents a charge for telecommunications or a charge for Internet access. Alabama and Kentucky have opined that charges for Internet access via DSL are taxable as telecommunications service. On the other hand, Louisiana and South Carolina have opined that similar charges are exempt Internet access. States have also given different opinions on the taxability of Dedicated Internet access services. Florida and Illinois have opined that charges for Sprint’s Dedicated Internet access are subject to tax as charges for communications service. The scope of these opinions included not only charges for the dedicated access line, similar to a DSL line, supporting the access; but also separately stated charges for each user’s Internet Protocol (IP) Ports. These IP Port charges are Sprint’s retail charges to each customer for their ability to access the Internet. The purpose of the service is the provision of high-speed, “always on” Internet access, yet these states have opined that such charges represent charges for both telecommunications service and Internet access. Consequently, Sprint is collecting tax on sales of Dedicated Internet Access Service to users in these states. On the other hand, Texas and Massachusetts have opined that the very same charges represent charges for Internet access. These examples of the varying tax treatment of residential DSL and Dedicated Internet access services have resulted from the outdated language of the current Act. · The Wholesale sale of Internet access The language of the current moratorium is also unclear as it relates to the sale of IP backbone, or bulk Internet access from IP backbone providers to other Internet Service Providers (often referred to as the “Wholesale” sale of Internet access). The language of the current Act does not specifically address this transaction, consequently, the scope of the moratorium has been interpreted differently by both states and carriers alike. Florida, Illinois, and Missouri have opined that Internet Service Providers (ISPs) that make charges for Internet access cannot purchase underlying communications services for resale. Thus, sales of IP backbone, or “bulk” Internet access, from Sprint to an ISP is subject to tax as charges for telecommunications service. This is in spite of the fact that the ISP is purchasing dedicated access to the Internet backbone for subsequent sale to an end user. Other states, including Texas, have opined that while a portion of this transaction is a sale of telecommunications service, at least some portion of the sale is to be treated as access to the Internet. · Taxation of Wireless Internet access: The provision of Internet access via wireless services is an emerging and rapidly growing area of concern. Third generation wireless (“3G”) Internet access and wireless networking (“Wi-Fi”) services are experiencing significant growth in both users and revenue. Because these services are new, there is little, if any, guidance regarding how such services should be taxed. These services are essentially Internet access service, the only difference being that they are provided via a wireless, rather than wireline, medium. As these wireless Internet access services are deployed, such services will be subject to the same inconsistent and confusing treatment unless Congress clarifies the Act. These services are at a critical phase of development, and the same protection that led to the passage of the original ITFA should be extended to these services to foster their development. · Bundling: A recent and growing trend in the telecommunications industry is to offer a package of services for a single price. For example, a company may offer wireless service, local exchange access and high-speed Internet access for a single monthly price. Under the moratorium, no tax may be imposed upon charges for Internet access. However, general sales tax theory and most state laws with respect to sale of property dictate that when taxable and non-taxable goods are offered for a single “bundled” price, the entire charge is subject to tax. The clash of these concepts seems to have been misunderstood by some states, who subject the whole “bundle” to tax despite the federal pre-emption of tax on Internet access. This has created substantial confusion within the industry. Nineteen states have adopted statutes similar to our proposal (tax only the taxable services). One additional state has adopted the provision by rule. These states allow Internet Access to remain tax-free as long as the provider can reasonably identify the tax-exempt portion in their books and records. Recently, the state of Florida has proposed a regulation that encompasses a similar principle. Alabama and Kentucky have taken the opposite position and ruled that the entire charge was taxable unless the bill itself separated the charge for Internet access from the charge for communications services. As one can discern from these examples, this issue must be addressed and clarified at the federal level in order to ensure that Internet Access remains tax-free even when it is sold as part of a bundle of services. As Congress seeks to make the Internet Tax Non-Discrimination Act permanent, it is imperative that the Act be clarified so that all providers of Internet access face the same tax treatment. Our proposed changes would make the Act provider-neutral and technology neutral, so that price, quality of service, and customer service – not state and local tax considerations – would determine which provider or type of technology that customers choose for their Internet access. Thank you again for the opportunity to present testimony.