THE FORUM ON TECHNOLOGY & INNOVATION

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INTERNET TAXATION:

FOUR VIEWS FROM THE ADVISORY COMMISSION

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WEDNESDAY,

MARCH 8, 2000

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Participants in this lunchtime policy briefing met in the Columbus Club at Union Station, Washington, D.C., at 12:15 p.m., Senator Jay Rockefeller and Senator Bill Frist, Co-chairs, presiding.

Senator Jay Rockefeller Co-Chair

Senator Bill Frist Co-Chair

Peter W. Rooney Executive Director

Michael Leavitt, Governor of Utah

Ronald Kirk, Mayor of Dallas

Dean Andal, Chairman of the California Board of Equalization

John Sidgmore, Vice Chairman of MCI WorldCom

This transcript was produced from a tape provided by the Council on Competitiveness.

C-O-N-T-E-N-T-S

Page

Welcoming remarks by Peter W. Rooney 3

Executive Director

Opening Statement and Introductions

Senator Jay Rockefeller 5

Presentation by Dean Andal, Chairman of the

California Board of Equalization 9

Presentation by Ronald Kirk, Mayor of Dallas 21

Presentation by John Sidgmore, Vice Chairman of

MCI WorldCom, Inc. 33

Presentation by Michael Leavitt, Governor of

Utah and Chairman of the National

Governors' Association 43

Questions and Answers 51

P-R-O-C-E-E-D-I-N-G-S

(12:15 p.m.)

MR. ROONEY: Senator Rockefeller, Senator Frist and the Council on Competitiveness. I'm happy to welcome you here today to another in our ongoing series of lunchtime policy briefings on technology and new economy issues. These briefings are brought to you by generous grants from the W.K. Kellogg Foundation, the Alfred P. Sloan Foundation and the David and Lucile Packard Foundation, and we're delighted to have their support.

In your briefing packets, on the back side, the first item is the agenda for today's briefing and it's the same format that we always follow. The Senators will briefly introduce the topic and introduce the speakers all at once and then each speaker -- and the Senators have brought you just a dynamite panel today -- each speaker will give you a ten minute summation of their world view on the Internet tax issue from their position on the Advisory Commission.

And then the Senators will throw the floor open to your questions and they will moderate the roundtable discussion. We have microphones on the floor and we very much prefer to have live questions. We're delighted at all the guests that are here today but we do ask that you give priority to congressional staff at the microphones. We're here, and the Senators are here, to deliver valuable information to the staffs.

In your briefing packets there are also green question cards for those of you who are congenitally shy. You can fill these cards out, hold them up in the air when they're filled out, our staff will come and collect them, bring them up the front and the senators will ask questions on your behalf National Press Club style.

And, finally, I want to draw your attention to the blue evaluation cards. We ask that each of you take a moment towards the end of the session and fill these out and drop them off at the registration desk on your way out. We pay attention to what you say, they have an impact on how we put together our briefings and we really know what to know what you think. Thank you. Senator Rockefeller.

SENATOR ROCKEFELLER: Thank you, Peter. I'm just going to fill in for Bill Frist for a moment here.

As you know, we did the Internet Tax Freedom Act of 1998 and in that there was a blue ribbon panel that was established. Several of our speakers today are participatory to that. The Advisory Commission on Electronic Commerce. And the whole point was to look at the Internet tax issue and to report to Congress in April, which is shortly. In the meantime the Act imposed a three year moratorium and this is really at the heart of a whole lot of things for a whole lot of people because it brings very different philosophies, very different points of view and thus should be a wonderful session.

Our issue therefore is how to administer sales tax for goods sold on line, whether, how, whatever.

Interestingly, the current moratorium does not bar sales tax, but states cannot require businesses to collect sales taxes unless they have a physical presence or nexus in that state. Now the result is in practice sales taxes are not collected for many on-line purchases and this is a major issue for state and local governments, that in some instances rely on sales taxes for up to 40 percent of their total tax base.

While revenues from sales and use taxes are still growing nationwide, some fear that on-line purchases will begin to supplant shopping at local stores, etc. etc. and you understand that conflict. And then there's the view of leave the Internet alone and leave technology alone to do its entrepreneurial thing and then there's the other point of view about what about the local tax base -- and that's what we're here about.

It's not an easy question and it's one that the Commission's going to be reporting to us on. when it says here that Senator Rockefeller will introduce the four speakers to you, so I will do that and it'll be in this order. And I will introduce them all at once, they'll each speak for ten minutes then you will in the meantime be getting very aggressive and thinking of all kinds of probing questions for them because, you know, we don't get these people that often and they're really good and they're in the heart of it.

And we have microphones and, again, be aggressive with questions and I encourage the panel to be aggressive with each other where you may disagree with each other so that we have a very lively rather than a distinguished discussion.

So Dean Andal is Chairman of the California Board of Equalization which administers property, sales and use taxes in the seventh largest nation in the world called California. He's a former member of the California State Legislature, first elected to the Board of Equalization in 1994, he's always been a forceful advocate for smaller, more efficient government -- good luck -- and lower, more equitable taxation.

The next speaker will be Ronald Kirk who's now serving his second term as Mayor of Dallas where he obviously manipulated the system because the second term he got elected with 74 percent of the vote, which is statistically impossible.

(Laughter.)

He's attracted a lot of attention by completely revitalizing Dallas, also, at the same time, cutting taxes. He's Chairman of the Standing Committee on Urban Economic Policy for the U.S. Conference of Mayors and we're very fortunate to have him here.

John Sidgmore I think most of you know about at least, is Vice Chairman of MCI WorldCom, and also Chairman of UUNet, an MCI WorldCom company that is one of the world's largest Internet access providers with more than 70,000 business customers and more than 7,000 employees. He's responsible for WorldCom's technology vision and, importantly, Internet strategy.

Michael Leavitt is Governor of Utah and Chairman of the National Governors' Association, something that I have a lot of respect for. He was first elected governor in 1992, reelected again in 1996, he has helped really transform Utah in terms of making it a center of high tech economy. He's launched all kinds of major new initiatives to deliver state services, which I think a lot of states could pay attention to, through e-commerce. In other words, he uses e-commerce for the delivery of state services and he does this in partnership with the private sector.

So Dean Andal will be first, Mayor Kirk second, John Sidgmore third, and Governor Leavitt fourth. And so Dean.

MR. ANDAL: Great. Well thank you very much. I come from California and because I wanted to be there for election night I left at 12:30, so if I look a little incoherent you'll know why. But I did bring California weather with me, it's beautiful in the city today and it's a pleasure to be here.

I think that one of the first arguments in the ongoing argument that we've had before the Electronic Commerce Commission is what the problem is. Some believe that the problem is that if the Internet continues to grow and a new tax regime is not developed, that there will be revenue loss from the existing base to states throughout the country. I disagree with that and I'll explain a little bit later why.

Others believe that there is an unlevel playing field between brick and mortar businesses and Internet sellers over the Internet, and I also believe that is false.

I believe that the real problem is complexity, compliance cost and litigation, and those are the problems I'll offer a solution to at the end.

But let me deal with these two other issues. California collects $29.9 billion dollars worth of sales tax a year. It is our third biggest revenue source, behind income and property tax, and 50 percent of that goes to our public schools. So about $16 billion dollars to go public schools. I have a lot more interest in this now because I have a third grader who goes to a public school in California and we don't want to jeopardize that existing revenue. But in California we have more Internet users than anywhere in the world.

We have more electronic commerce transactions than any anywhere in the world and arguably, although New York is giving us a run for our money, we have the most Internet tax friendly laws vis a vis our sales and we exempt a lot from sales tax that other states do not.

So you would think, as the Internet grows, that if there was a revenue loss as a result, it would show up in California. But the exact opposite is happening. Last year our sales tax grew 8.9 percent. In the over a hundred year history of our state, it is the single greatest rate of increase in our sales tax ever. It is also the greatest amount of sales tax we've ever collected. And over the last five years, we've had sales tax growth rates that have been at least double the inflation rate.

And so in California anyway, where you would think that there would be some evidence of this revenue loss, it is not occurring. What's happening is the traditional retailers are making more sales and they are collecting more sales tax, and the percentages, as the growth of the sales occurs, the percentages that relate to remote sales -- and I'll define remote sales as mail order, telephone and on-line Internet transactions -- is still less than 2 percent and there's no evidence that that percentage is growing as a part of all sales.

And so I always ask people in this debate, and we're getting there, and Senator Rockefeller and Senator Frist inviting us here today is helpful, because you ought to look at the facts before we make broad assumptions about what is or is not happening. Every state in the United States over the last several years has been gaining record amounts of sales tax revenue, even though the Internet is growing.

Now I think there are reasons for that and I'll try to run through them very quickly. Fifty percent of all Internet transactions are two products: airplane tickets, stock sales. And that represents 50 percent of the value of Internet transactions and also 50 percent of the volume. Most states do not tax stock sales or airplane tickets -- California does not and I don't think most states do. As a result, there can be no revenue loss from taking something that is not taxable under the sales tax system and putting it on the Internet. And that represents 50 percent of the whole.

If you go to the other 50 percent, you have to go through several screens to get where I want you to go so hang with me, but 80 percent of the remainder is business to business transactions. In California and in most states that have a sales tax -- there are 46 states that have a sales tax -- you audit most businesses.

In California we're very aggressive at auditing, more than I'd like to be. But when we audit them if they have bought a product from out of state we force them to pay the use tax. And so we don't lose that 80 percent, or most of that 80 percent that relates to business to business transactions because we audit them and we get the use tax. There is, after all, always a tax. It's a matter of whether or not you collect it or not.

So now we're down to 20 percent of half or 10 percent of the whole, and I go to another screen called the big stuff -- for lack of a better word -- and that's planes, boats, automobiles. And literally people are buying planes on the Internet, if you can believe that, and bringing them in from out of state and they buy a lot of cars these days and there'll be more and more of that done.

When you buy those, before you can drive them in your state you have to go to the government and you have to have them licensed and when you license them the state makes you pay the use tax. So we literally do not lose any money on those types of big purchases.

And then if you're crazy enough, I'm not in this category but I'll tell you a little story about our auditor in Los Angeles, a very wealthy businessman, went to Europe and bought a Rembrandt. This is a true story. And everything went fine, he thought he got a good price and he brought it back. But he made a fundamental error.

He told the L.A. Times and when the L.A. Times found out they did a big feature on this Rembrandt, this $10 million dollar painting. And our auditors, as bright as they are, read the L.A. Times every morning on their doorstep. And so they saw this $10 million dollar Rembrandt and they figured well, gee, that guy owes a use tax doesn't he? And sure enough, the fellow had to pay. So highly visible purchases also get our attention.

So what is missed is relatively low value individual purchases. That's what we're arguing over and sometimes people think the pie is this big but we're really arguing over this much and there are legitimate arguments I concede over that small part of the base, but it doesn't amount to a hill of beans right now and I don't think it will in the future because there is not a cost advantage. This goes to the unlevel playing field argument.

There is not a cost advantage for a customer to do that. If you are in California and you buy a book on amazon.com which is headquartered in Washington and does not yet have nexus in California, say you buy one book, say you buy two books, say you buy three, I think you can buy three. The shipping charges that you pay to get the book from Washington to your home are greater than you avoid paying in sales tax. So if you went round to Barnes and Noble and you bought the three books instead of buying them on Amazon.com, then you would come out better from a financial transaction point of view.

Now I don't believe most buyers are seeking to avoid the tax, I think they're mainly interested in convenience and selection, and that's why they go to Amazon.com rather than Barnes and Noble. But even if you believe they are, they're failing to achieve their objective because they're paying more in shipping charges than they're achieving in tax advantage.

And so I don't believe that there is a big problem and you will hear from some forceful advocates of the other view in a moment, but I don't believe that there is any significant revenue loss from sales tax on the Internet under our current regimen and I don't think there will be in the future as the Internet grows. And I don't believe there's an unlevel playing field.

Now all that said, I have to point out that there is one place where there will be tax loss. There definitely is one place and I don't think it's a huge part of our sales tax base, and that is things that are tangible now that won't be tangible later. Music CDs for instance. If you want to go buy a music CD you go buy it, it's physical, it's tangible, and you have to pay sales tax. But very soon you'll be able to download that music on your computer and because it's digitally transferred, under most sales tax laws in America you will not have to pay tax. So there will be revenue loss from books, videotapes, music CDs and the like, things that can be digitized.

So if I don't believe that those are the problems why am I serving on this Commission, other than to fight back attempts to raise taxes? And that's a good reason.

The reason I think there's a problem is because the long-standing law, which is basically two Supreme Court cases -- Quill and Complete Auto Transit -- that established two different principles that are linked. One is that you have to have substantial nexus before a state can force collection obligations, that's Complete Auto Transit. And the other one is that you had to have physical presence before you can do that, which is Quill.

The states have really not conceded that. Many governors, many states continue to assert nexus when it's not physically present and it's not substantial, and that is causing continued litigation, compliance cost and interrupting what otherwise might be a smooth flow of traffic on the Internet. I think Congress should deal with that and Congress should intervene in that, and that's what my proposal does. I think it's in your packet. It's got a lofty name but in the corner you'll see Andal Proposal No. 1. And what that basically does it takes two pieces of existing law, the Quill decision for sales tax purposes, and Public Law 86272 for income tax apportionment purposes, and it links them in a seamless way, creates safe harbors.

In other words, we define in this proposal and we hope that Congress will define, what is a safe harbor? In other words, what is not nexus and what is. And we hope to resolve, and the litigation is occurring in state courts and federal courts around the country as a result.

We think that if Congress acted and did that, they would be doing a great service to the net, they would be reducing compliance costs for both states and taxpayers, and they would be solving a real problem that exists.

Finally, I should say what I'm not for. I'm not for overturning Quill. Eight thousand sales tax rates, 32,000 tax rate areas, non-uniform tax bases, in New Jersey you don't have to pay tax on clothes, in California you don't have to pay tax on food, it would be a nightmare for people getting on the Internet if Quill or Complete Auto Transit were overturned by Congress. And it would dramatically affect the ability of small entrepreneurs to get on the Internet and comply with all those tax laws.

And I am also not for -- forgive me, I guess Senator McCain's out of town so it's okay to talk about him. But I am also not for Senator McCain's proposals and those variations that say that there should be no sales tax on the Internet. It's a great press release but the consequences would be extreme.

In California, I've told you, we collect $29.9 billion dollars in sales tax in every year under our existing regime. If Senator McCain's proposal, or other proposals like it, did not allow us to have sales taxes on Internet transactions, that means not just the 2 percent that's remote sales but the 98 percent that's intra-state sales would be exempted from tax if on the Internet.

And so what would happen is you would go into your local Radio Shack and when you're ready to buy either the computer or the calculator, whatever, you go up to the counter you would be referred to a computer screen and you'd punch in your order, you'd make your transaction and thus eliminate the need to pay sales tax, even though it was in the state.

Now the result of that would be to eliminate sales tax in every state in the country immediately.

So I think we have to carve back these extremes and focus on what the real problem is which is too much litigation, too much overreaching by state tax bureaucrats who are trying to assert nexus when it doesn't exist, and I think it's time for Congress to intervene and tell us what nexus is.

So thank you very much.

(Applause.)

SENATOR ROCKEFELLER: Mayor Kirk.

MR. KIRK: First of all, thank you Senator Rockefeller and Senator Frist for giving us this opportunity to address this audience that will have occasion I presume over the next several years and months, to visit with this issue. I'm from Dallas so I didn't travel as far as my fellow commissioner Andal and so my ten minutes will probably be a little more compressed than his from that standpoint.

As the only mayor on this Electronic Advisory Commission, I have a unique perspective on this issue of how to treat the sales transactions that occur over the Internet, and you're going to hear from one of our leading governors on this -- Governor Leavitt -- and others, and so anything I leave out I hope you don't think that is my not thinking it's important but I know you want to hear from all of us and get our perspectives.

But as a mayor we deal in the real world of pot holes and police officers and libraries and playgrounds and parks and fire trucks, even though I know Dean is tired of hearing this story, but I approach this whole issue of how to treat the net from a fairly simple standpoint. And I was on a similar panel about 18 months ago, believe it or not now Senator, and I was debating a fellow who's a futurist who's a brilliant, brilliant guy. Really was. And he reminded me of my father's definition of an intellectual as being someone who can hear the William Tell Overture and not think of the Lone Ranger.

(Laughter.)

But he was truly approaching this from a very intellectual and thoughtful perspective and he assuaged all of my fears as a mayor of government not having sufficient resources to build roads and pay for schools and that everything was going to happen over the net and we'd be in a wired world and you'd be able to do everything you want to do from home. You'd be able to work from home, more and greater access to knowledge and information, educate your children than ever before, and that all of our fears about funding schools would be dissipated because you can do all this at home. Which I think is a wonderful thing, and we are beginning to do that.

But I raised the fairly simple question to him that I think demonstrates some of the dilemma that we face that in this wired world in the future where everybody is hooked up and wired up, God forbid if you have a short. You have a circuit breaker break and you have a short and you have a fire.

Well in that moment, and since we're in the future and you'll be bright enough, you won't even call 911. Something will send us a message immediately that lets us know you have a fire at your home. And I asked him in that moment would be an appropriate response be to fax back a picture of a fire truck or would he rather have a big fire truck come to the house with real men and women, put the fire out and save him? If the answer is the latter, from the standpoint of the thousands of local government officials, we have to solve the riddle of how we continue to pay for those services.

And for years and for decades in this country we've had a social contract that we have given state and cities and jurisdictions the sovereignty to decide how you want to raise the money to pay for government. And California can decide if they want to have an income tax; Texas can decide we don't want to have an income tax. We may decide to have higher property taxes and rely on sales taxes, we may decide to tax blue jeans, we may not. But we use that revenue to pay for services that we all need.

Now this current debate over the Internet, I think it's important to remember Senator Rockefeller's opening remarks relevant to this Internet Freedom From Taxation Act because, unfortunately, the entire debate has evolved into a discussion over whether or not the sales tax, Internet sales, should be treated the same on sales tax, and we've lost sight of a number of other issues. And the good news is I think there is a growing consensus on the Commission that most of us would like to see the Internet be free from access taxes, non-discriminatory taxes. We support the administration's position on non-application of tariffs and others, but there is this difficult issue of trying to apply traditional state and local sales taxes to what is truly the first global international economic activity that we're seeing over the Internet.

And now Mr. Andal, who knows everything there is to know about taxes, who's a brilliant authority on it, gave you a lot of figures and numbers to imply that this is not very important.

Now being a former Senate staffer myself, and it's great to be back to the Hill, I won't ask you but I would wager most of you have access to a computer, I would wager everybody in this room -- how many of you have bought something over the Internet? That's just about everybody. How many of you bought an airplane over the Internet?

(Laughter.)

Senator You'll either be visited by the Los Angeles Times or their --

AUDIENCE MEMBER: Ask about art.

MR. KIRK: Senator Rockefeller, that's right. With the exception of Senator Rockefeller, if you could keep your hand down, if you bought an airplane or an automobile or a boat over the Internet, raise your hand. The reality is the bulk of growth in this activity is not going to come from those Americans who can afford to buy a Rembrandt or an airplane, it's going to come from those of us who find a place that we can find triple A narrow shoes for our daughter who has too small-sized feet and can't buy them in the store and we found a great source on the net. And we found another place that gives us exactly the books by our favorite authors that we want, and we don't even have to order it any more because they know from our buying habits that that's that we like and they send us an e-mail and say we have your book.

And the growth is going to be explosive and the fact that it only represents one or two percent of our current retail sales economy does not mean we should ignore the impact of making a decision today that says we will treat the taxation of sales transactions differently solely because they happen over the Internet as opposed to Main Street could be disastrous for state and local governments in the future.

Basically I believe that there should be no discrimination in the application of sales taxes. If you buy a book from the bookstore here in Union Station and pay sales taxes and you go home and order it from the same merchant you should pay taxes on that.

I also believe that we should use this as an opportunity, and I think Governor Leavitt will speak more to that. This is a great opportunity if we will seize it to re-examine and greatly simplify the confusing, complex maze of state and local sales taxes and use this as an opportunity to re-examine and restructure and inform both the administration and collection of that to fit and mirror this new economy.

But particularly because we have this unique opportunity to be in front and those of you will be involved in the decision of this at the federal level, I think in all fairness we should reverse this equation because the whole debate, part of the frustration has been why should we do this? And I'm not sure anyone's ever raised the issue of whether or not this an industry that needs a tax break. And that needs a tax break that will probably grow to $30, $40 billion dollars a year within the next several years.

Now usually in Washington when people come up and want to tax help, just as in this current election season, you go through a pretty robust debate over how we spend excess money because this all has to come out of somewhere. And we make policy decisions. Is our first priority to reduce the federal debt, to ensure the solvency of the Social Security system, and we're going to use this as an opportunity to increase the safety net for all of Americans and maybe add more money in for childcare or health care or WIC programs or others. This is the only debate I've seen in recent years that we've started with the presumption we've got a marvelous new toy, an incredible economic engine, and let's give them a big tax break. And, better yet, the biggest concern for a mayor, and what's really fun in Washington, is to say let's give them a tax break and let the mayors pay for it. What's more fun than spending other people's money? We've got a great idea. Let's give away $50 billion dollars a year and we can all embrace the net and we don't have to pay for it.

Folks, this would be the largest unfunded mandate in history and it won't end. It will go on year after year after year. And I come from a community, and I will tell you Dallas in Texas is identified as the fastest growing technology community in the nation, we have the second highest concentration of people employed in the high tech industry. We make more semi-conductors in the Dallas area than they make in the Silicon Valley. This is a wonderful technology, and Dean's right -- it's helping to grow all of our communities.

But the question is do you shop on the net because you can save sales tax, or do you shop on the net because it's easier, it's more convenient, and you can find what you want. You don't have to leave your house, they deliver it to your house or your business. And I believe, as we look at this debate, as you look at this debate, you have to honestly ask yourself, would the equal non-discriminatory treatment of transactions over the Internet at all hinder the growth of this marvelous industry. I believe it won't. It is an information based economy, it is based on the genius and entrepreneurial spirit of the American people that says we can find ways to do things faster, better, cheaper than any other group of people. We do it again and again and again.

But I think long term the greatest threat to this incredible industry and its growth is the fact that we are about to cripple the very institutions that make that technology possible, and that's if we destroy, or if we dramatically reduce, the state sales tax funding formula, which is principally how we fund higher education in this country, and reduce the amount of students attending and graduating from colleges, that's what will cripple this Internet.

If you have many more people calling your Senate offices every day, would you pass the bills to lift the immigration limits on the amount of engineers and scientists that can come into the United States? When you talk to your high tech companies and ask them what their greatest challenge is right now, it's finding talent. If you want to do something really eye opening, when you get your next spring break I challenge you to go to your home states, attend a graduating class of any science, higher mathematical ceremony in your state supported institutions and look at the diminishing number of students that are graduating with degrees in science and technology. That is the threat to the Internet. The fuel that drives this economy is intellectual, it's not a 6 percent break from paying sales tax.

And whatever we do this debate, I think we should do it from national perspective of fairness, of equity, of making sure we don't have a fairly arbitrary shifting of the burden for paying for services from local government from those of us who have computers and can afford to shop on the net to those poorest of Americans who don't have that.

And one other issue that hasn't been discussed is that issue of the digital divide. If we come up with an arbitrary system that says we'll make transactions exempt just because of where they occur, most of us are intelligent enough to take advantage of that and we'll increasingly shop on the net. But of those who shop on the net the average median income is about $57,000 dollars and 80 percent of them have their computer. Those Americans who make $20,000 or less, they do not.

Those people will be locked out of that economy and as Ted Waite, who was the CEO of Gateway shared with our Commission at our last meeting, not only is this an Internet economy, it's more of a credit card economy because when you buy on the net and, as you know, they don't ask what your income is, all they want to know is where do you live, is your basket full, how do you want to ship it, and which credit card do you want to use to pay for it. If you don't have access to good credit you're going to be locked out of this economy. I think there's a potentially gross inequity and widening the gulf between the haves the have nots in this country, and the burden that we would put on the poorest of Americans to pay for the services that all of us need.

But this is a great opportunity to have this debate. The time to address this is now when the impact on our state and local revenues is not that great, and I think all of us should take advantage of the next three years to examine this from the broader public policy of not only how we help this industry grow but also how we help to make sure that our states, our cities, have the funds necessary to build roads, pay for schools, and have that fire truck there when you call us and need us.

Thank you.

(Applause.)

SENATOR ROCKEFELLER: John Sidgmore.

MR. SIDGMORE: I just hate following smart and interesting speakers who are also funny. I was praying when I saw the agenda that I was going to follow Dean.

(Laughter.)

Just kidding. This is a tough crowd. I would also like to thank Senator Rockefeller and Senator Frist for inviting us today. I think this is an important debate to have and I'm glad to have the opportunity. And I have to say, being an Internet technology guy by background, you know when I was appointed to this I really had never thought before that taxes would be an exciting issue to look through. But I've got to tell you, afterwards, we've had some very, very interesting debates here as you heard from the first two speakers.

My role here today really I think, and I never thought I'd say this, is to provide a balanced view between what I consider to be two sides of the debate that could possibly form the basis for a compromise on the principles. If you could believe it, I actually do think that there are a few things that Dean and Mayor Kirk can probably agree on.

Anyway, I am here excited to talk about the work of the Commerce Commission over the last year, it's been an honor and a privilege to work with so many distinguished Americans like those on the panel, talking about this issue. Because I think, I really do think this is the most important issue facing society now, not just the tax piece but the Internet generally and how it grows. I mean after all, the Internet will create millions and millions of jobs, I think it'll be the fuel for the forward growth of the economies all around the world over the next few years, and we actually do have a chance to create an incredible array of opportunities for everybody if we do it right. And we also have a chance not to do it right.

And let's just say we've had a few disagreements on this Commission over the last year. We've had a number of very, very tough debates on the merits of the issues. And they're tough issues. And having gone through this lengthy period, I am cautiously optimistic that there will be the basis for an agreement on a number, or a consensus on a number of the key points in the debate that initially caused division. I'm hopeful that we'll able to offer Congress some reasonably clear direction on where we think we ought to head here and, you know, making sure that we recognize continually that the Internet is in its infancy and will grow at an astronomical rate over the next few years.

I'm also here today as the only representative of the Commission's, I guess I'd say informal business caucus that we kind of developed after our last meeting. It's made up of the six members on the Commission representing business, I'm just going to tell you who they are. Along with myself, the caucus includes Mike Armstrong, Chairman of AT&T; Richard Parsons, President of Time-Warner; Bob Pittman, the President of AOL; Dave Patrick, President of Charles Schwab; and Ted Waite, the Chairman of Gateway. We came together to try and depoliticize, in our view, the debate between what we considered to be the pro-tax camp and the anti-tax camp and maybe to break the impasse there and strike out a middle ground between their positions.

Since our proposal came out, I guess it is our view that we've seen both sides make great strides toward compromise here and toward reaching a consensus, and we're very hopeful at this point.

Let me give you the key provisions of our proposal. We recommend that Congress first extend the current moratorium on multiple and discriminatory taxes on electronic commerce for a period of five years. We think the limited extension on the moratorium is a fair compromise among all the parties, it will give both sides a chance to continue to consider the issues and develop the issues as we get smarter about what this new Internet-based economy means. And let's face it, the Internet is brand new. We do not know, no one knows exactly how these issues are going to play out over the next few years. And, as I said, in the last meeting, I think it's prudent at this point to give this a little time and to punt to a certain extent.

You know last week, to Dean's point, the U.S. Commerce Commission came out with a report tracking on-line consumer sales, $5.3 billion for the fourth quarter of 1999 which is a very minuscule piece of the economy, actually .64 percent of the total economy.

However, I think it's clear, and I would disagree with Dean on this, that if you look out five or six years or eight years, e-commerce is going to be a huge piece of the economy, and I think from our standpoint we have to recognize both factors. And while I personally do not believe that we should permanently advantage Internet commerce, I do not think it's even necessary for the growth of the Internet, over traditional commerce, I think there's ample precedent going back to many, many generations of different technologies, for helping new technologies get off the ground in their start-up phase. And we think that five years is probably sufficient.

Second, we propose to make permanent the current moratorium on taxes on the sale of Internet access, and we recommend the removal of Internet access taxes that were actually grandfathered in the Internet Tax Freedom Act of 1998.

I think from, you know, from the start of our meetings last year, one of the principal areas of agreement among all the members on the Commission, was that we did not want to unduly burden access to the basic Internet technology. I think that was the first thing that we agreed on and that's what we're proposing here.

We also did propose to draw some brighter lines in the nexus area, which is a highly confusing area in the tax codes and subject of huge debate, and we wanted to make sure that people could figure out what they were allowed to do in states and what they weren't allowed to do in states without taxation. Some of the factors that we're proposing as examples, a seller's use of an Internet service provider that has simply a physical presence in that state would not create nexus. Storage of a seller's digital data on third parties information server would not establish nexus, the mere use of a telecommunications provider that had a location in a state would not provide nexus.

Moreover, registration to collect taxes, sales and use taxes and remittance of the taxes would not, in and of itself, create nexus.

We believe that much, if not all of this, is very consistent with what is required under current laws, and I know there's some debate about that. But I don't think at the end of the day this is very far different than what we have here. It just makes things a little bit clearer, and I think most people would agree that getting clearer guidance in this area will potentially reduce confusion and potentially also reduce litigation.

On the question of tax simplification, throughout our meetings this has been one of the principal themes hammered home -- Dean mentioned it. For a small on-line seller to comply with thousands and thousands of jurisdictions around the country is an incredible burden today and makes probably the collection of these taxes impractical in any case for a few years until that's solved. And what we're trying to do is reduce that burden and make sure that the tax laws around the country, state by state, get simplified, and we create a system that would ensure that.

So what we're proposing to do is to encourage state and local governments to work together through the National Conference of Commissioners on Uniform State Laws, to draft a uniform sales and use tax by 2004 that would simplify the rate structures, for example provide for one sales and use tax rate per state; secondly, establish uniform tax base definitions for state and local governments, develop uniform -- did I miss a page here? I'm sorry, uniform tax returns and audit procedures and facilitate the creation of a method for approving software on which sellers could rely to determine tax rates and applicability.

The business caucus proposal would also encourage state and local governments to reform their telecommunications tax structures to remove the excess tax burden on the telecommunications industry and make sure that state and local telecommunication systems were competitively neutral. I was pleased to read last month that the National Governors' Association, under the direction of Governor Leavitt, has just issued a report urging similar legislation in their state and local governments and to undertake a thorough review.

Our proposal would also create another congressional advisory board to oversee the efforts of the National Conference of Commissioners on uniform state laws, and to submit a final report to Congress within six months after the completion of the National Conference's work on whether the states that adopt the uniform sales and use tax act should be allowed to go forward and then collect sales and use taxes on remote sales.

We're proposing the oversight board for a simple reason, and that is that we want to ensure that this is implemented by the states and that the recommendations of the National Conference of Commissioners on Uniform State Tax Laws get implemented correctly.

We think, and I'm going to repeat again as I often do, the Internet is the greatest explosion of technology and new ideas in possibly a hundred years. It is very, very important that we get this right. We want to encourage the accessibility to this technology by everybody in America and around the world, and we want to make sure that this technology gets off the ground. But, at the end of the day, we support the proposition that there should be a level playing field at the end of the day between Main Street commerce and Internet commerce.

Thank you for listening.

(Applause.)

SENATOR ROCKEFELLER: Governor Leavitt.

MR. LEAVITT: I would like to begin with a declaration that I love the Internet and I hate taxes. In that context, may I ask if you're taking notes today I would like to suggest that if there are three things I would like you to remember from my presentation, it would be the three policy issues that I think ultimately this boils down to, and for my limited time today I would like to define what I believe those policy issues are.

And then I would like to do a very dangerous feat and I'd like to walk forward with you over the next maybe three years and talk about the way I believe this issue will unfold and in the context of which I believe all of you will likely end up dealing with it.

Before I do that, however, could I just say on the question of is this a problem? Is this a big problem? I'd like to stipulate to the fact that right now this is not a problem that is changing the shape of the world and states, but I would ask you to do two things. One is to call your State Tax Commission and ask them when they do their revenue projections now, are they factoring Internet sales into their revenue projections? You will find that they are and they're always with brackets around them. This is becoming a significant matter. It is not a big deal, but I would point out to you that there is a point in the life of every problem when it's big enough you can see it but small enough you can still solve it. That is precisely where we are with this issue.

Over Christmas my mother came to stay at my home. She still had to go out in the crowds and the mall and she was dreading it. She has 29 grandchildren of which she is very proud, and felt the need to buy a gift for each of them and I said, "Mother, why don't we sit down and I'll teach you to Internet shop."

Well within about an hour and a half, maybe two hours, we had purchased a gift for every one of her 29 grandchildren and to her delight, not only had we purchased them, they were wrapped. And not only were they wrapped, they were shipped and under the tree in all of those different households where she was having to deploy them.

Now I have an Internet shopping convert on my hands with my mother.

She discovered e-mail a while ago, I now and my brothers get what we call low overhead lectures from my mother about three times a week. She calls me on the telephone now only to ask why I haven't returned her e-mail.

This is a transition that we are going through.

Now had she gone out on that snowy day she would have gone to a mall. These are not new purchases. She was going to the mall but she discovered a new way, a better way, and I'm guessing if we went around and asked each of you your individual experiences, you went on the Internet to shop because you were up at two o'clock in the morning and didn't want to go the mall yourself or some place, or some similar circumstance like that. And it's a wonderful thing.

Now if we could go to the three policy issues that I'd ask you to focus on.

No. 1, is the sales tax a viable tool for the 21st century? And if it isn't, and it may not be, what are our options?

No. 2, if we are to have a sales tax, we must make a basic decision, as a society, if we're to have a sales tax, are we going to create a permanent special privilege for those who choose to buy on the Internet and say to them, you have no responsibility to pay for your share of our schools, to pay for your share of our roads, we're going to create this special privilege for you. Or are we going to have a tax policy that says we have a level playing field, and if you're going to have taxes, you need to pay your share. Special privilege or level playing field? I think that's the policy decision.

We may choose to make a decision either deliberately or without deliberation, that it is reasonable for us to make a special privilege for those who shop over the Internet. But there are consequences to it and we need to begin thinking that process through and determining if they are reasonable, because there's a time in the life of every problem when it's big enough you can see it but small enough you can still solve it.

Policy issue No. 3. Who will make decisions regarding basic local services in this country? Are we going to continue, in the information age, in an age when political boundaries are no longer as relevant, will we continue to function as a federalist government?

Well let me describe that one for a moment. The inequity that has been spoken of, the fact that I can go to Amazon.com and buy a book and not have sales tax collected on it, or I can go to another web site that's got a store in my state and they have to collect sales taxes, I can buy the same book, the same night, the same computer, the same purchaser and be treated differently. Ultimately that cannot be allowed to stand, in my judgment. It is simply not fair.

At some point, people are going to stand up and say, we need a national system. And the IRS is going to stand up and put their hand in the air and say, we're your guys. We're national. We'll collect this. Leave it to us. And then our friends in the Congress -- of who all of you are a part -- will say, if the IRS is going to collect this, we have the responsibility that we should appropriate it.

Then we have this convergence of enormous amounts of incentives that we would create toward e-commerce with more and more revenue being gathered on a national basis and appropriated by the Congress so decisions that were made on local schools, decisions that had been made on roads, on law enforcement, all of a sudden they shift to Washington.

Now there may be those who view that as a very important and valuable policy direction but, again, I would say the three policy issues. One, is the sales tax a viable tool and, if not, what are the alternatives?

Two, if we are going to have a sales tax, are we going to have a level playing field or are we going to have special privilege?

And, three, who's going to make decisions on basic services?

And we're down to a debate that will ultimately mature into a fundamental reshaping of how we organize government driven by technology and there's nothing we can about it. The debate's going to go forward and let it come. It's a wonderful and exciting thing.

Now, let me do the high wire act and predict where we go from here.

John Sidgmore's indicated that the Commission will have its report done on April 21. It's unclear to me whether or not we'll end up with a delineating report or not. It would be terrific if we could. If we don't, the debate will go forward anyway and the report will basically say here's one opinion and here's the other. And either way, I think we get a tremendous amount of legislation being filed on both sides of this issue, beginning April 22.

We're in an election year. There's going to be a lot of debate on this. I am guessing that virtually nothing will happen, maybe they'll talk about extending the moratorium but essentially nothing will happen.

And then we'll get to the Christmas season and there will be another Christmas season with four and five hundred percent increases, with more people like my mother learning to shop, and it will continue to grow. And as soon as the Christmas season is over we'll have a lot of major retailers, I'm talking about the K-Marts, the Wal Marts, the Sears, the J.C. Penneys, the GMs, the Fords, the Circuit Cities, the Gaps, people who have a presence in all 50 states, will have invested by that time hundreds of millions, maybe billions of dollars, in their own version of the dot-com world because they all want and need a piece of this. And we'll start to move toward a clicks and mortar society, where every seller has a catalogue, a telephone, a retail stand and an Internet site and people will be able to buy any one of those ways.

What will happen is that the major retailers will suddenly discover we have an obligation to collect this tax in all 50 states. And those with whom we are competing don't have that obligation and we are at a 7 percent disadvantage competitively. That ain't fair. And they will march on Capitol Hill in a united way and they will have one phrase on their lips and you will hear it over and over, and that is level playing field.

Then this debate will mature. Is it a special privilege or is it a level playing field?

Now John Sidgmore has indicated that there are ways to resolve this issue. My time is up. But may I say that we are faced, I believe, with reshaping decisions in this country. If not the sales tax, I believe I will end my political career -- and it may be sooner than I like -- but before this becomes a serious problem for anyone in my position to the point that it is absolutely rendering us helpless. But I really believe that it will reshape the nature of the way all of us do business. And we'll have a chance in the discussion to elaborate on any part of this. Thank you very much.

(Applause.)

SENATOR FRIST: Governor Leavitt, thank you. And all four presentations really tremendous in terms of setting the stage.

We, as all of you know, have cards. It's probably already been mentioned. You're welcome to use the cards, we'd much prefer you to come to the microphone, it just makes for a livelier interaction. Also, in your folders there is a blue evaluation sheet, we do ask for you to fill those out before we leave at two o'clock. We will stop right at two o'clock, but we have about 35 minutes for discussion.

Let me just open, Governor Leavitt, and this has to do a little bit with what you said of policy and your outline of how things will change in terms of federalism. I'm from the state of Tennessee and in Tennessee we do rely almost solely on sales taxes. We do not have an income tax, and Governor Don Sundquist was here last week with many of the other governors and he has written and said repeatedly, and I quote from an article, he said that he would be forced to cut basic services unless the state collects sales taxes from Internet based transactions.

He went on to outline the typical, almost the Radio Shack or dress shop, he basically said people actually go into the dress shop, try on a dress to make sure they like it and that it fits, and then they go home and purchase it over the Internet. The shop owner loses out on that sale but so do state and local governments. When that sale is lost so are the state and local taxes on that sale.

Now each of the panelists have mentioned something to the effect that that's not the way it is going to work but it does come back to the level playing field.

My question is do you see the current dynamics and discussions and moratorium, as you project out, changing states like Tennessee in terms of their tax policy where they rely solely on sales taxes and do not have an income tax?

MR. LEAVITT: If we are not able to solve this problem and radically simplify the existing system. I want to emphasize that, radically simplify. The existing system is simply incompatible with the 21st century. You just can't expect, as has been said, for Internet sellers to somehow respond to this complexity.

I might add one of the things that I believe hasn't been discussed in this debate yet is the need for us or the potential for us to create de minimus rules where we don't subject new Internet sellers to any of these laws until they've reached a certain point of maturity and then they can become responsible adults and have to deal with them.

That would be an acceptable public policy approach I think. But unless we deal with it, states aren't going to have any alternative.

Now we, Governor Sundquist, and I would like to say I'm among them, I think the first thing we would do is to say where can we cut? If we lose 40 percent, I think Tennessee's 80 percent isn't it? Eighty percent of their income comes from sales tax. And suddenly we start to see this erosion occur, what will we do?

Well I think the first thing we'll do is try to cut things back, try to be even more efficient than we are today. The second thing that will come up is, okay, what are the alternatives, because at some point things will break.

Now Dean will argue a kind of don't worry be happy we're all going to be rich, because this thing's just going --

Ten years ago in California we had a lot of folks moving to Utah, it's a better deal there now because things are better. But economies go in cycles and if we're dealing in tax policy, it seems to me we really ought not to be forming tax policy on the basis of a current situation and we ought not to be doing it on the basis that we're all going to be California all the time. We probably aren't. And so the answer is absolutely it will.

SENATOR FRIST: Let me move on to a question and then we will come back and there'll be plenty of opportunity to comment on the answers as we go through.

A question submitted on a card. The wireless telecom industry. Governors, localities and the multi-state Tax Commission recently agreed to a plan that will allow taxation of mobile telephone calls in a relatively simple way, and whereby local tax bases will not be undermined. Is this a model for Internet taxation? To any of the panel.

MR. SIDGMORE: I'll just say yes. It is an example of the way we can deal with central coordination but maintain local control. It's something that the governors support, it's a great success in the way it can be done, it's a very similar problem and it's an example of how I believe we can solve this problem.

SENATOR FRIST: Other panelists?

MR. ANDAL: The answer is yes. It would be a model but for the reasons that the governors agreed to that proposal, they would not in my view agree to the same premise for sales tax. It's basically a seller state model, meaning that the destination is the mailing address. And the reason the states in my view, including California, agreed to it, is they were having difficult collecting it. And so it was better to get something rather than nothing. The problem with the sales tax is if you move to a seller state system there would be winners and losers with East and West coast states gaining and middle of the country and rural states losing. And therefore I don't believe the NGA would even support that kind of a model.

MR. LEAVITT: Actually, the NGA has supported that model and come out with a policy statement.

MR. ANDAL: Seller state?

MR. LEAVITT: The proposal that is before the Congress. And we've done so recognizing that we need to solve the problem. This is a new model that has to be occupied by states. Unless we step forward and start solving these problems, they're going to be solved in ways that are very hurtful to states in the capacity to reduce local services.

MR. ANDAL: Well maybe we have something here. The seller state model means that you tax those sales that come from your state.

MR. LEAVITT: As I said, it's a good example of the way states can work together to solve problems. I didn't say it was the same solution.

SENATOR ROCKEFELLER: Okay. Next question from the audience. On the one hand many politicians decry conventional taxes in favor of greater locally administered sales taxes, yet many of the same politicians praise and advise that the federal government should disallow state and local governments from applying e-commerce sales taxes. Are these contradictory positions? Does the position of the federal government barring sales tax on e-commerce constitute a federal seizure of local and state power? Anybody?

MR. ANDAL: The answer is remarkable because I think -- I've listened to my colleagues and I'm a politician too, I am an elected tax commissioner and actually represent 25 percent of California so I always have to be careful as well. But one of the mistakes that's being made is no tax on electronic commerce, Senator Frist you mentioned your governor being worried about that. There is tax on Internet transactions, 98 percent of them are taxed right now, they're intra states, they occur buyer and seller in the same state over the Internet and they're taxed today.

When people use phrases like Congress says well you can't tax the Internet, that is just untrue. We're talking about the 2 percent that is remote sales.

SENATOR FRIST: We have a question from the audience.

AUDIENCE MEMBER: Well I would hope that as far as being local versus federally controlled with the money that's spent I was thinking of the idea of having all the senators go back to their states and then communicate through encrypted video transmissions, but that's a different issue.

I just want to make a statement and ask two questions. First of all, I started an e-commerce site in Utah about four years ago and if there would have been any tax immediately on that as it was started up, it would have been really difficult to begin that type of endeavor. I think for maybe companies like Dow Chemical or Toys 'R' Us or somebody who can automatically throw all their weight in that direction, they don't have those troubles. But in just the first two years alone, if there wouldn't have been the brief opportunity to get that up and running, it never would have succeeded.

Now I turned that over to a friend of mine and so I don't really know where it's at, but what we traffic in is information and we're not selling goods or a product, it's a lot like those job hunting web sites where you're matching up people with a certain skill with a certain employer.

Now I'm curious, this would be first for Governor Leavitt, and then I have a second question for everyone. The first question is now my friend currently has --

SENATOR ROCKEFELLER: Why don't you pick the best one. Pick the best of the two questions because we've got a lot of questions to look at.

AUDIENCE MEMBER: Okay, no problem. I'll combine them and go for the best one.

Currently, the way my friend's set up is everything he does is based on Utah, the web servers, his ideas, his programmers, and he's told me he's paying some sort of taxes. I don't know if he's supposed to, I'm not really tax savvy. I don't know what he's supposed to be doing as far as Utah goes. But I'm wondering if I decide now to replicate that model, and as I've researched it and figured out what I want to do, I'll be living here in Virginia, working as a Hill staffer, but maybe put my web server in Utah have my programmers be in Minnesota, have my financial transactions take place in Arizona where I've got a company who looks like they can do that for a reasonable skill set, and I'm wondering where then would I pay taxes? And who to?

MR. LEAVITT: Good question. Let me just make a couple of quick points on that. First of all, you've defined the problem quite well, and let me point out that you would not pay any taxes, but the question is would you have to collect taxes that consumers pay. That's the issue. It's not whether you pay them, it's whether you have a burden to collect them.

I think there is ample reason to say, as these tender shoots as I referred to them earlier, like you and your company, begin to poke their head out of the soil, there may well be a good policy position for us to say let's not do anything to diminish their capacity to grow and be nourished, but at some point you've got to become a mature, adult company. You're right, there are lots of companies who collect them now.

And I think we are going to have to have ask the question, is the sales tax viable? And let me suggest I think the way that has to be answered. It has to be answered can we come up with a system that's adequately simple, that has virtually no burden on sellers, and can we implement it? And if we can't I think you can argue that it's a very short period of time when we come to the conclusion that this is no longer going to work.

Now if we can, use sale aside, we've got a period of time here when the sellers have the ability to grow unhampered by any responsibility to collect, then they shift into a world that is an adult world where they have to meet the same responsibility a retailer does, but let's make them very, let's make it easy for them by giving them a system that is no burden to them.

Now, I will argue if we do that we ought to do that for retailers, too because the system's a mess. An absolute mess. And this is an opportunity for us to radically reconstruct the way we deal with this entire issue and save billions of dollars for people who are currently struggling under a system that doesn't make a whole lot of sense.

MR. KIRK: I would only add that if you were going to start that business I would just advise you to move to Dallas where you can finance it, build it, serve it, all in one place and not have to do all of that running around.

MR. LEAVITT: This is how coalitions fall apart.

MR. KIRK: That's right. Just a suggestion.

MR. SIDGMORE: Could I make an additional comment? I think one question you always have to ask with these stories about new Internet companies is whether the business should work. And you can argue that if that business's only advantage is a sales tax break and doesn't really have a viable model, why is that business in business in the first place. Is that what we want to encourage? I don't think so.

And I just have to say that nobody gains more from the growth of the Internet than we do at MCI WorldCom. We have the largest Internet presence. More Internet means more revenue, more profits, etc. for us. But we don't believe, fundamentally, that the Internet needs any significant subsidy to grow. The internet's doing just fine on its own and it's way too late to stop it from my position.

I do think, however, there's a reason why it's not such a bad idea to delay this a little bit, because for practical reasons, as I said before, because of the complexity of the tax codes we practically can't implement it now anyway. So it gives us the time to take a look at it and implement something different that's more sensible in a couple of years when e-commerce really is a substantive part of the economy.

SENATOR FRIST: John, we have a number of cards here and they do refer back to the five year moratorium. Let me just read a couple of questions then you can respond. How does your business group justify a five year moratorium when all the speaker recognize the net industry shows it can rapidly adapt.

Another question. Some members of the Commission argue that Congress should extend the moratorium for five more years. What would five more years do for our ability to find the right answer? Is this just a way to give industry five more years of subsidy with no real benefit to the decision making process?

MR. SIDGMORE: Was that for me?

MR. KIRK: Let me say in fairness to John and I think of the industry representatives he has been incredibly forthcoming and responsible in terms of the overall position. But even those of us at the local level, and I think you can see I'm a fairly strong advocate for treating this industry non-discriminatorily, this is a horrible complex issue as Governor Leavitt has said, but it's also a great opportunity to radically reform the way we fund state and local government. But it clashes with notions of sovereignty and federalism, even if we can come to agreement.

And I'm still optimistic enough to believe because we have some really intelligent people -- with the exception maybe one or two mayors on this Commission -- trying to do this, this is going to take 24 months. I mean even in our state of Texas, if we changed our tax code, it takes time to go through and change the way hundreds of thousands of people do business. We're trying to do this for every business, ever state in the country. And so in fairness to the industry, this was not just an attempt to give them a three year break. We recognize that it would probably take that long to come up with a system and have something that could be implemented in any reasonable period of time.

And maybe if we can do it sooner then we let the moratorium expire.

MR. SIDGMORE: Yes, I think there's a fair question about how long it takes and we can debate three years, four years, five years or six years. I mean so the five year, you know, window is really sort of a compromise even among the business team. And I'm not saying we couldn't argue that further, but I think there's a significant amount of time that's going to be required to simplify here. If you just think about how hard it was for a few people on the Commission to agree on anything, I mean getting all the tax jurisdictions around the country to put together a program that will work is going to take some significant period of time.

MR. ANDAL: Yes, I have something important to add and I think the biggest problem in this debate nationally -- and so politicians, congressional staffers, lobbyists, listen up -- there is no moratorium on sales taxes. There is no temporary moratorium on sales taxes, there is no permanent moratorium on sales taxes, there are no proposals by anybody here to put a moratorium on sales taxes.

The Internet Tax Freedom Act provided a moratorium on new taxes. The sales tax has been around a hundred years, it is not a new tax. This is going on in the newspapers all across the country, by Congressional leaders, we need to get that part of this off.

This is not a sales tax moratorium issue. No one's proposing one, there isn't one in place, and the extension of the moratorium, which I believe should be permanent but I've agreed to compromise, the extension of the moratorium is on new taxes. That's things like utility taxes on ISPs or Internet access fees, but it has nothing to do with sales tax.

SENATOR FRIST: I think one of the real purposes that Jay and I both set up Tech Forum and believe is very important to our mission is to help educate, which is the purpose of today. And just being back in the state talking to all of our leaders in the state and with the press, there is a real misunderstanding of this moratorium and, again, through a dialogue today we can help further define that but encourage people to really listen very carefully as to what we have done and what this moratorium is all about.

Let's go to the very back, a question.

AUDIENCE MEMBER: Thank you very much. I've heard a number of the speakers basically suggest that we no longer look at whether the buyer and the seller have a common nexus, but simply look to the location of the purchaser so, for example, if I buy books from Amazon they come to my home in Virginia they're taxed if there's a tax in Virginia at that rate. That's easily enforceable for physical goods delivered to a physical address, but an increasing share of commerce is going to be intellectual property, books, video, music, software, delivered directly over a wire and it's very difficult to determine where that's being delivered to.

So the question is are you going to give all of that stuff delivered in bits over the net a pass on taxation? Or would you suggest that we have a law that requires everyone purchasing over the Internet to basically declare a tax regime that they're going to be taxed on.

SENATOR ROCKEFELLER: Each of our panelists may want to respond on that. Governor, why don't you begin?

MR. LEAVITT: There may well be, the principle is a level playing field. In my judgment the principle is a level playing field. We may well conclude that it's impossible to know where those are being shipped or where they're being purchased and if that's the case, I would argue that a level playing field requires that we look at the physical manifestations of those digitized goods and treat them the same way.

If you're going to not have the ability to know where a CD was sent or music was sent over the Internet, maybe we ought not to have a sales tax on the physical good of a CD. If you're not going to have a sales tax on a movie you download over the Internet, maybe a movie theater ought not to have the same treatment. If you're not going to charge sales tax on a newspaper that you buy over the Internet, maybe you ought not to do it at 7-Eleven. Level playing field is the principle and it is inconceivable to me that we would form a tax policy around any other principle.

SENATOR FRIST: Other panelists want to respond to that?

MR. ANDAL: Yes, I would. Governor Leavitt, with all due respect, virtually every tax that we have in the United States has unlevel playing fields. If we looked at the House Ways and Means Committee for just one session and tried to develop an unlevel playing field in that nightmare we couldn't find it. Every state in the country that has a sales tax provides an exemption for export. That's good for every state that has it. That's good for Tennessee, that's good for Utah, that's good for California. So when we, a Californian, exports a product, we don't make them pay the sales tax. That is an unlevel playing field.

So these are concepts that don't automatically easily translate into everyday tax policy, and I would assert that a sales tax system that's collecting $29.9 billion dollars in California this year with a 9 percent growth rate from the year before is not fundamentally broken, and we ought not to fix something until it is.

MR. LEAVITT: I'd suggest it's your economy that's not fundamentally broken. It's doing very well. And I think your sales tax system is like all of the rest of us, badly in need of redesign.

But could I just say with respect to, I got sidetracked, I had a really important comment to make.

SENATOR FRIST: We'll come right back to it. Let's jump back to a second question in the middle.

AUDIENCE MEMBER: I wanted to follow up on Governor Leavitt's point about a level playing field, but also it seems many members of the panel have been talking about dealing with the Internet tax issue in the context of overall sales tax reform. And based on that I have a question dealing with the sales tax which is that as the economy's changed over the past 20 or 30 years, we see people's disposable income being dispensed of differently.

People spending a smaller percentage of their income on goods and more on services and I'm sure Mayor Kirk would agree it's also a distributional issue because as incomes rise people spend a higher percentage of their income that they spend on services rather than goods.

So in this global information economy, what continuing justification is there for taxing bread but not haircuts? Or taxing books but not law services? It seems that as a governor or a mayor it would make sense, especially as a Republican that believes in sound tax policy, that we ought to broaden the base and lower the rates, and let California -- where I just used to live -- for example tax all these services, web site design and everything, but then lower the rate to 3 percent rather than 6 or 7 so that everybody pays the same.

MR. ANDAL: Two responses. There would be a lot more people for service taxes, which is expanding the sales tax to services, especially if we tax lawyers by the way. I might even sign onto that.

For broadening the base and lowering the rate, the problem is that's not what's proposed. The proposal is just to broaden the base and that means more revenue, and that avoids fundamental questions about the size of government. A lot of people think we collect enough and we have enough government and that gets you into that debate over whether or not government should have more tax revenue or not. These issues of fairness, I think, are fronts for the argument that state governments want more money. And that's where we lead to inevitably on all of these debates.

MR. LEAVITT: That's going to make me break into song. Listen, if any state in this country, including California, Virginia, Maine, anybody who chose to do so today could legislatively in their legislature take off their use tax. There's nothing prohibiting somebody from saying we don't want to collect it. This is a question about whether they want to or not and if you want to take the sales and use tax off in your state, do it. But let's not have Congress decide that they're going to do it for us. There's no reason for that.

MR. KIRK: I, for one, am fairly neutral about taxing haircuts.

(Laughter.)

SENATOR ROCKEFELLER: We have a lot of questions still to be asked but let's have the final two from the two gentlemen who are standing. You first, sir, and then you second.

AUDIENCE MEMBER: With regard to taxation, how do Internet sales differ from, say, catalogue sales?

MR. ANDAL: One day is the answer. The transaction is fundamentally the same. When you order a catalogue from Land's End you wait for the catalogue to come, you fill out the order sheet, you send it back. A product is taken off the shelf, wherever it is, and it's UPS-ed or Fedexed to the customer.

When the Internet comes into play you don't have to wait for the catalogue and you don't have to send a form back, so the ordering time is really the fundamentally different thing. And that's all in my view.

MR. KIRK: And one of the challenges of the Commission I think we're trying to solve is to treat this as remote. We've been careful to try to use remote sales and not get into distinguishing between Internet and catalogue sales. And I think all of us would hope that whatever we recommend would apply equitably to either.

SENATOR FRIST: Question from the middle of the room.

AUDIENCE MEMBER: One continuing thing, this is addressed to all of you, what can we do to have the press clarify the distinction between an Internet taxation and an Internet sales tax, because I've seen a lot of articles and it's this fundamental problem we don't know which thing we're talking about. And it's very fundamental. And I'd just like to see what we can do to get the press to use the right terminology here, and I'd further like to add that I haven't seen such confusion since the days when Watergate was referred to almost from the first year as the Watergate caper.

MR. KIRK: If someone has an answer to how do we get the press to characterize issues, you're going to be a very wealthy person. But I mean I think you heard Dean Andal, that was part of his, I won't say frustration and just trying to clarify the fact that what we're dealing with really is more the issue of access but it's all been characterized not only as sales tax or Internet, but it's also been characterized as a new tax, which it is not.

But, hopefully through these debates and, again, I think I can speak for all the commissioners, we agreed we really appreciate the opportunity that the Senators have given us to discuss this in this forum and, hopefully, the more of these we have maybe the more enlightenment we can bring to the discussion.

SENATOR FRIST: Let me just ask Dean and Governor Leavitt, I guess, when you talk to other states, are other states collecting these intra state taxes and user fees as well as your --

MR. ANDAL: I don't know every state but I think almost every state does collect intra state sales taxes so if the buyer and seller is in Tennessee, Tennessee collects the tax. I think that's true of all states. I can't speak that precisely about it though.

MR. LEAVITT: If a person makes a purchase over the Internet, in 46 states where they have a sales and use tax, they have an obligation to report on their income tax and to pay it then. In Utah we had 850,000 tax returns filed, we had 3,400 who listed some sort of purchase on a remote basis -- and that would include catalogues, telecommunications and Internet. Something tells me there were more than that. I'm not sure, but I think there were.

MR. ANDAL: Governor, maybe I misunderstood your question which was intra state, meaning both the buyer and the seller were located in the state and if those are the facts I think in Utah you'd collect that just like you would a normal --

MR. LEAVITT: Here's a great story. We haven't got time for great stories I guess.

SENATOR FRIST: Make it short and we'll close with it.

MR. LEAVITT: I was on the Internet a couple of nights ago and my sons and I had been doing some trading on E-Bay and I ended up talking to some guy in South Korea who wants a short video camera but he's got a credit card restriction on his government on how much he can spend. And he said could you get one and then send it to me?

And I found a guy from Utah who was selling a camera and I wrote to him and I said you've got this camera, do you want to sell it? And he said you're in Utah, you'll have to collect the sales tax. And I thought that's really an interesting, this is down to an individual seller who recognizes now that this is an issue and this is becoming a topic that's not so misunderstood that people who are doing individual and small transaction don't understand.

SENATOR FRIST: Mayor, do you have one more?

MR. KIRK: I don't want to comment, I neglected in my opening remarks to at least advise you and we've been going along as if all of you are just intimately hanging on every action of our Commission, but as part of the Freedom from Internet Taxation Act that created this Commission, we did get started late but we were asked to make our recommendation back to Congress this spring.

Our final meeting will be in Dallas, March 20 and 21, and I know, or I presume many of you or staffers, you may not be able to travel to Dallas, you're welcome to come, the meeting's open but I think they've all been broadcast live over the net. C-SPAN has carried all if not part of them but we obviously invite you to tune in, listen, watch or come join us for that final session.

And again Senator, thank you so much for giving us this opportunity.

SENATOR ROCKEFELLER: Thank you.

SENATOR FRIST: Thank you. The Forum on Technology Innovation is here for one sole purpose and that is to educate and to inform and on behalf of our Forum I want to thank all four of our panelists, a superb discussion which again people who have come to this conference have the most up to date information anywhere in the world.

So I appreciate people really coming and listening and participating. We stay on time, we try to keep them fast-paced, non-partisan, objective and balanced and in order for us to keep doing it, I need you to fill out these little blue cards, suggestions, leave them at the door at the back.

We'll be sending out notices shortly about our next Tech Forum event and again to the panelists and to the audience than you all for being here.

(Whereupon, the above-entitled matter went off the record at 2:00 p.m.)