The New Republic Briefing

HEADLINE: THE NEW REPUBLIC BRIEFING
 
SUBJECT: "SALES TAX ON THE INTERNET? CONSUMER RIGHTS VS. GOVERNMENT REVENUE"
 
SPONSORED BY THE NETCHOICE COALITION
 
PARTICIPANTS: RICHARD PARKER, ASSOCIATE PUBLISHER, THE NEW REPUBLIC; STEVE DELBIANCO, EXECUTIVE DIRECTOR, NETCHOICE COALITION; SENATOR RON WYDEN (D-OR); JONATHAN CHAIT, SENIOR EDITOR, THE NEW REPUBLIC; ROBERT ATKINSON, VICE PRESIDENT, PROGRESSIVE POLICY INSTITUTE; DAVID BAKER, VICE PRESIDENT OF LAW AND PUBLIC POLICY, EARTHLINK; TOD COHEN, ASSOCIATE GENERAL COUNSEL OF GLOBAL PUBLIC POLICY, EBAY; MAUREEN RIEHL, STATE AND INDUSTRY RELATIONS COUNSEL, NATIONAL RETAIL FEDERATION; SCOTT PETERSON, CO-CHAIR, STREAMLINED SALES TAX PROJECT
 
LOCATION: 608 DIRKSEN SENATE BUILDING, WASHINGTON, DC

BODY:
RICHARD PARKER: Good morning. Thank you all very much for coming. My name is Richard Parker. I'm the associate publisher of The New Republic magazine. This is the second in an important series that we are hosting on Internet policy and taxation. We thank our sponsor, the NetChoice Foundation.

While people are still trickling in, we're going to hear a few words from Senator Wyden. We're very grateful for his participation today and we thank him for his time.

SEN. RON WYDEN: Thank you, appreciate it.

Well, it would be cruel and unusual punishment to give you a filibuster. You've got a great program here. And let me, if I might, give you a little bit of a sense of where we are and, Richard, congratulations on your timing because this is a week when there is a lot going on on the question of Internet tax policy.

This is essentially the fourth round that I have been involved with on Internet tax freedom law to ensure that our country would not face multiple and discriminatory Internet taxes. There are thousands and thousands of taxing jurisdictions, of course, in the United States and our concern always was that you would be creating a kind of crazy quilt of taxing jurisdictions across the country and if even a significant portion of them took a bite out of the net it would be a fairly painful exercise.

At the time when Congressman Cox and I introduced the legislation first and to some extent the second time, rate estimates of peril and Armageddon and disaster and calamity for the states and others, it was argued, would befall the country and just about everything but Western civilization was going to end.

It was really quite something to go back and look at some of the transcripts of the first hearings that were held on the Cox-Wyden legislation and then the Commerce Committee because you will really see the local jurisdictions saying that the skies are going to fall and the cows aren't going to get milked and schools won't have any money and there won't be any funds for repairing the roads and the like and, of course, none of this came to pass. This didn't happen and you did not see malls, for example, all across America empty out and suddenly no one was shopping anymore at bricks and mortar facilities.

So those two efforts, plus the resolution with respect to international e-commerce take us really up to the present time and there are going to be big developments essentially over the next week on this issue. The House will pass the most recent version of the Cox-Wyden legislation probably today. My sense is, depending on the House calendar, that will happen today. And over the last few days a number of senators on the Commerce Committee who have been part of this debate, particularly Chairman McCain, Senator Hollings, Senator Sununu, Senator Dorgan, Senator Allen and myself, have reached what I think is very close to an agreement to be able to go forward in the United States Senate. If you were to be sort of a football type you would probably say we're on the three-yard line and I'll describe what I think has us just sort of within the sight of the goal line.

And this, of course, would be for the first time a permanent ban on multiple and discriminatory taxes on electronic commerce. The main element of the Senate agreement, and as I say I think we're very, very close here, is to clarify the definition of Internet access. I strongly feel that Internet access is, in fact, Internet access. It is something that gives you access to the Internet and is not a telecommunications service, which, of course, has long been taxed under the various versions of the Cox-Wyden law.

The House bill is going to change nothing in terms of telecommunications taxes. The Senate bill would proceed as well.

Now, any states would tax telecommunications services the way they have for the last five years under the Internet Tax Freedom Act. Some states still felt that the language today in the House bill is really broad and would sweep up some telecommunications services into the tax protection afforded Internet access. That has never been our intent so what we have done is made a small change in the Senate agreement to reassure the states on the point.

The change in the definition of Internet access in this Senate kind of effort will make sure that DSL Internet access and wireless Internet access are not taxed at all and, of course, that is the wave of the future, DSL Internet access and wireless Internet access. And because, as I said, Internet access should be Internet access we wanted to make sure that it was laid out clearly in what we're talking about in the Senate that DSL Internet access and wireless Internet access would not be taxed.

The problem can be very well highlighted in two states, Alabama and Kentucky. In those two states they say a plain old dial-up Internet access costs $10 a month and DSL costs $40 a month and the $30 difference between the two must be related to telecommunications service and not Internet access, so you've got $30 as the added cost to the electronics and software that give the consumer a higher speed onramp to the net. The only purpose, of course, is to give the consumer quicker Internet access. The DSL and the dial-up Internet access run over exactly the same kind of phone line, a phone line, of course, that would be subject to telecommunications taxes, so to us it doesn't make any sense for a consumer to pay $40 to telecommunications services that otherwise would cost $10.

So we were concerned, as you might guess, that there would be some state authorities that were essentially trying to get their hands into what they saw as kind of a treasure trove of additional kind of tax revenue where they could go after consumers by charging more expensive DSL service and as I say this agreement is going to in the Senate protect DSL from Internet access.

The other area where there was a considerable amount of discussion involves bundling and this is again a fairly arcane kind of thing. As you get into Internet access -- how many of have been involved in this issue in the past? Well, you'll know then that this is sort of like prolonged root canal work and it is arcane kind of stuff.

But bundling involves essentially the practice where two items, one taxable and the other not taxable, essentially get combined and the recognized tax principle in this area is that when a company keeps separate charges on its books for the taxable items and non-taxable items, then, of course, the non-taxable items get protected from the tax. If the company doesn't keep separate track, then the taxable items taints the non-taxable item, making it subject to the tax.

The states wanted to make sure that this principle was clarified in the bill and because the law deals only with Internet taxes I believe the Senate agreement is going to include a provision making it clear that in this area of Internet taxes we're not trying to send the signal to the FCC with respect to state regulatory authority over regulatory issues, so we have essentially tried to help the states on that issue and on the bundling kind of question in an effort to try to reach common ground.

There is one issue, which is why I said we're sort of on the three-yard line, that could bring matters to a screeching halt at this point, and I don't think it's going to happen but I think it is worth, as you get into your day, of discussion of this arcane kind of matter, which, of course, is so complicated it would be useful for you to have.

What has really made it possible this time, that put us on the cusp of finally getting this issue resolved, is a general consensus that the question of what happens in terms of Internet taxes and the Cox-Wyden iterations now through all of these versions, should be kept separate from what the states have sought to do with respect to streamlining sales taxes. The states have said what they're concerned about is being able to collect taxes owed and to try to streamline the various sales tax approaches used by the states. I and others wish them well in this effort but think it is a very, very big hill to climb.

Again, you talk about the thousands of taxing jurisdictions in America, well you've got situations where some states tax a candy bar one way and a cookie another way. So as you try to get into this you will find that it is a really complicated effort.

So we thought, and I, when I talked with Senator Dorgan and others who have been involved with over the years, we said, you know, this time we'll let you go off and pursue streamlined sales taxes in any way that you wish and if, in fact, you can come back with something that allows people to collect taxes owed without creating bureaucratic water torture for small businesses in the United States we'll be interested in doing it. We think it's a big if but we will be interested in trying to be constructive and helpful to you.

So we have kept those things separate and that's why the Commerce Committee was able to go forward on a unanimous basis and why the senators that I've described to you have been talking among themselves and have got us now on the cusp I think of an agreement.

What we have to deal with, however, is some discussion, rumor, speculation about whether the Finance Committee is going to look at this and decide that in their pursuit of it they want to try to link those two issues, that they want to somehow tie streamlining the sales tax into the question of a permanent bag on multiple and discriminatory taxes.

If that was the case and, in effect, the Finance Committee as part of a sequential referral, and this is what could go forward, link the two, you could have a scenario whereby some in the Finance Committee would say let's use the sequential referral to basically overturn the Quill decision, the Supreme Court decision which in effect has gone to the heart of this whole debate. If that was done, that would sort of bring matters to a screeching halt because I and others would fight any effort to overturn the Quill decision on the floor of the Senate. We won that fight in the past. I think we would win it again. I think it would be very unfortunate if that happened. I don't think it's going to happen. I think there are going to be a number of us who are going to object if there is an effort to try to make it happen, but suffice it to say it remains a possibility.

Senator Dorgan and others who have led the effort for the states, to their great credit, have said they want to keep separate the question of Internet access and streamlined sales taxes. We have not heard from any Finance Committee senators that they're interested in something like this that really could bring the discussion to a halt. I hope it won't happen, but as you get into the day's work and the discussion it's worth knowing that some may still -- in the chests of some hope may still be for somehow blowing up this constructive work, and I wanted to pass that on.

So my hope is that within the next couple of months, the next 60 days a bill is going to get to the desk of the President of the United States to permanently ban multiple and discriminatory taxes, extend the moratorium on Internet access. My view is for small and medium sized merchants the law that Chris Cox and I put together in 1998 has been a lifeline. It has been a low-cost alternative for thousands and thousands of small businesses across this country to sell their goods and services for older people, disabled people, folks making modest incomes selling on the Internet, often through their home. At a time when the national economy has got a pretty serious case of the jitters, it would seem to me that making a permanent bag on multiple and discriminatory taxes and protecting Internet access is something that would give our economy a boost and that is why efforts have been so aggressive in recent months.

Why don't we just break it off at this point and maybe that's a long program. If anybody has any questions for me, softball questions are especially welcome in this area, if The New Republic is open, I can take a couple of questions and then I've got to get out the door and you can solve the world's problems here.

Yeah?

Q I think this is solvable. But what about differences between House and Senate with respect to the states that still have a little bit of Internet access tax left. Would it be grandfathered, do you think?

SEN. RON WYDEN: I think again what we hope to do, you know, we've got the House bill and the Senate bill, we'll hope to convince the House that the Senate approach is the way to go and I think that will strike the best balance.

Q -- It seems to me that the states actually are in very dire straits right now with revenue. Oregon has problems. There're cuts in schools all over the country.

SEN. RON WYDEN: It really hadn't, and let me be very specific on this case. This is a question of the states and their financial problems and the like.

The states, of course, have serious economic problems, and nobody is disputing that. But there is not a shred of evidence, not any, that the Internet Tax Freedom Bill has caused any of that problem.

And let me be very specific. Not one single local jurisdiction in America, not a state or a locality has produced any evidence that they have been harmed by their inability to discriminate against Internet commerce. That is all that Chris Cox and I have done really now for seven years. Our bill said you cannot have multiple and discriminatory taxes on the electronic commerce. All you've got to do is treat the online world like you treat the offline world. And when we proposed it I gave example after example of how the online world was being treated differently than the offline world. The example that was probably easiest for people to understand is when I proposed it in the Senate I pointed out that in several jurisdictions if you bought the Wall Street Journal's interactive edition you paid a big old tax, but if you bought the Wall Street Journal's snail mail then you paid no tax. You can't do that under the Cox-Wyden law. That is a discriminatory tax. You are singling out technology. And so all our bill said is you can't discriminate against online activity.

And over the years I would say to states who asked me the question, give me an example of how you have been hurt by your inability to discriminate against electronic commerce, and not one jurisdiction in America, not a state or a locality brought us one example of it.

Yes, the states are hurting and that's why I was one of the ringleaders in the effort with Senator Murray to double the amount of money that would be made available to the states for health and education services as part of the tax bill. We were unsuccessful; it came in 20 billion rather than 40 billion.

So there's no disputing the fact that states are hurting but there is also zero evidence that any of that predicament is linked to the Internet Tax Freedom Bill.

And the irony, of course, is that Internet sales are still a tiny fraction of all sales. It's still like 2 percent. I mean, go to the Mall of America during the holiday season and it as not as if you can find a parking place because suddenly the malls are empty because everybody is shopping online.

And, in fact -- a lot longer answer than probably you wanted -- is if you wanted my judgment about the single most significant trend since the original Cox-Wyden legislation, it has been the merging of bricks and clicks as we call it, and this whole notion that you've got a whole bunch of people like all the Retail Federation members, where all these guys run big old stores downtown and they don't have anything to do with the online world because they're busy shoveling the stuff out of their big old store in a building, I don't think that exists anymore. I think what we have seen is the commingling today of the economic facing America where the vast majority of significant people in Internet, you know, commerce, I guess Polo was about the last person to come on the program, but you've got all these operations with online components and bricks and mortar stores. That's been, unlike the question you raised about the states losing revenue, the single biggest change since our original law, has been the acceleration and the breakdown of this distinction between bricks and mortars and online stores.

Since I gave him a lot longer answer than he undoubtedly wanted, you guys are wise to move on with your erudite and thoughtful speakers, but we welcome your input. I'm glad you're doing this. It comes at exactly the right time. Congratulations to The New Republic for once again kind of leading the effort in talking about serious policy and at a time when the House is about to vote and the Senate is on the cusp of an agreement it comes at exactly the right time.