FROM THE OFFICE OF PUBLIC AFFAIRS

Electronic Commerce and the associated explosion of the information technology sector are key sources of economic growth in the United States and around the world. Since issuing his Framework for Global Electronic Commerce in July 1997, the President and the entire Administration have focused on creating a policy environment in which this new medium of commerce will flourish.

This Commission was charged with examining some of the most difficult issues associated with this evolving marketplace. The three Administration representatives participated fully in the Commission=s deliberations. They assessed the issues before the Commission on the basis of two fundamental principles:

• the Internet and electronic commerce should not be subject to discriminatory taxes;
• tax policy in this area should be neutral, nondiscriminatory, simple, certain, fair, and flexible.

Applying these principles, the Administration representatives reached the following conclusions regarding the key issues before the Commission:

1. Internet Access Taxes

The current statutory moratorium on Internet access taxes should be made permanent.

It is critically important to encourage access to the Internet. Because taxes on Internet access would create an obstacle to the access of all Americans to the Internet, and in turn, their ability to participate in electronic commerce, these taxes should be prohibited permanently.

2. Multiple and Discriminatory Taxes

The current statutory moratorium on multiple and discriminatory taxes should be extended.

Multiple or discriminatory taxes on electronic commerce plainly would hinder its development. This existing statutory moratorium should be extended, and final protections against such taxes should be crafted after the States develop simplified sales tax systems.

3. State and Local Taxes on Telecommunications

States and local governments should work expeditiously, in conjunction with the private sector to simplify and reform these taxes. The goal of these reforms should be neutrality in taxation of telecommunications as compared to other sectors as well as neutrality in taxation of providers of similar telecommunications services.

This complex web of taxes is in large part a relic of the time when telecommunications services were a regulated monopoly and when taxes on these services were passed on to consumers through the regulated rate structure. Today, telecommunications on all levels have moved from regulated monopoly to competitive market, and the line between telecommunications and other types of services becomes less clear every day. State and local governments have recognized the pressing need for reform in this area. We believe that these governments, working in cooperation with businesses and consumers, can accomplish this goal.

4. State and Local Sales and Use Taxes

States and localities should develop a simplified sales and use tax system within two years. During that time, the current rules governing this area, which were established by the Supreme Court, should remain unchanged.

While this simplified system is being developed, States and localities should engage in a dialogue with businesses and consumers to address the complex and difficult issues regarding the application of these taxes to Internet sales. These issues include:

• fairness to both Internet businesses and bricks and mortar businesses;
• significantly reducing or eliminating the cost to businesses of collecting these taxes;
• the effect of these taxes on the international competitiveness of U.S. Internet companies;
• whether lower-income Americans are paying, or will be required to pay, an unfair and disproportionate share of state and local sales taxes;
• ensuring protection of consumer privacy; and
• the feasibility of imposing and collecting sales taxes on goods delivered digitally over the Internet (software, music, etc.).

The application of sales tax laws to Internet transactions raises difficult issues. It is essential that we maintain the vitality of electronic commerce, which is one of the primary drivers of our economy. It also is essential that States and localities have the revenues they need to provide citizens with essential services - such as education, police, fire protection. Addressing this issue is extraordinarily complex for a number of reasons, including the fact that policymakers do not now have all of the information they need. Everyone agrees, however, that simplification is the key. So the States should proceed in developing a model act that produces real and effective simplification, while discussion on the other issues continues. While the model act is being developed, which is estimated to take two years, the current sales and use tax rules, established by the Supreme Court, should remain in place; they plainly have not hindered the growth of electronic commerce. In the event of any change in existing rules governing the application of sales and use taxes to Internet sales, there should be full accountability so that citizens of each State can determine the appropriate consequences of any projected increase in revenue.

5. Federal Excise Tax on Communications

Phase out of this tax is a worthy policy objective and should be considered, but must be weighed against other worthy objectives including other proposed tax reductions, and must not be allowed to threaten the important priorities of maintaining fiscal discipline, paying down the national debt, extending the solvency of Medicare and Social Security, and maintaining core government functions such as health care and education.

This tax contributes more than $4 billion in revenue per year and $52 billion over ten years. Because of this substantial budgetary impact, phasing out of the tax cannot be considered in a vacuum, but must be weighed against other important priorities.

6. Customs Duties

The current moratorium on customs duties on electronic transmissions should be made permanent.

Maintaining the moratorium on customs duties on electronic transmissions is a goal shared both domestically and internationally. There is a broad recognition that imposing customs duties on electronic transmissions would only undermine the ability to attract the investment and technology necessary to build and develop an e-commerce infrastructure.

7. International Taxation

Any taxation of electronic commerce should be neutral, nondiscriminatory, simple, certain, fair and flexible.

Regarding international taxation of electronic commerce, our view is that any taxation of electronic commerce should be neutral and non-discriminatory. We must continue to work within the Organization for Economic Cooperation and Development (OECD) to agree on tax rules based on the principle of neutrality and other core principles, such as simplicity, certainty and fairness. We must also continue to work with non-OECD member countries. Global electronic commerce should not be impeded by globally inconsistent tax treatment and thus a global consensus must be reached regarding appropriate taxation.