FROM THE OFFICE OF PUBLIC AFFAIRS

I am pleased today to have this opportunity to present the views of the Treasury Department on taxation of the Internet, including proposed legislation dealing with state and local tax issues and, more broadly, international tax concerns. The state and local tax issues are dealt with in the Internet Tax Freedom Act (S. 442 and H.R. 4105). When I advised Deputy Secretary Lawrence Summers of this important hearing he asked me to convey his continued strong support for the Internet Tax Freedom Act. The Internet Tax Freedom Act has undergone some very important revisions since Deputy Secretary Summers testified in favor of its goals and principles last year. These revisions have addressed some technical and substantive concerns that we have had in the past and now put the Administration in a position to support strongly this legislation. In February, the President announced his support for legislation. More recently, last month, Deputy Secretary Summers wrote to the Speaker of the House and Ranking Minority Member to convey the Administration's support for the legislation and its important goals on the eve of passage of H.R. 4105 by the House.

The Internet Tax Freedom Act as passed by the House would impose a three-year moratorium on subnational taxation of the Internet, including taxes on Internet access and bit taxes, and would prohibit multiple and discriminatory taxes on electronic commerce. The moratorium would not apply to Internet access taxes imposed by certain states if certain conditions are met. The bill establishes an Advisory Commission on Electronic Commerce that will address issues concerning the taxation of all remote sales. The Commission, consisting of the Secretaries of the Treasury and Commerce and the Attorney General, or their representatives, business, taxpayer, and subnational government representatives, in consultation with the National Tax Association -- Communications and Electronic Commerce Tax Project, would undertake a broad and thorough study of numerous issues concerning domestic and international taxation of the Internet and electronic commerce.

The legislation to which I refer does not, of course, involve Federal level taxation. However, the broad tax and trade implications of the Internet and related new technologies make it imperative that we develop an appropriate legislative background that will encourage the growth of these wonderful new tools consistent with sound fiscal policy and the many other issues involved.

Treasury believes that two vital goals are addressed by this legislation. First, we would not want duplicative, discriminatory or inappropriate taxation by thousands of different state and local tax jurisdictions to stunt the development of what President Clinton has called "the most promising new economic opportunity in decades." For this reason, we support a temporary and appropriate moratorium on taxation of the Internet. Second, to insure that the Internet does not become a tax haven that drains the sales tax and other revenues that our states and cities need to educate our children and keep our streets safe, in conjunction with this moratorium, we need to establish a commission to explore the longer-term tax issues raised by the Internet and electronic commerce.

As the legislation has moved forward, Treasury has worked closely with many interested constituencies, including state and local governments and their representatives and the affected industries, to reach the point where we have arrived today. We will continue to keep in contact with these constituencies.

Mr. Chairman, we will continue working with the Members and staff with respect to issues with which we might be helpful. We hope that the remaining issues can be resolved promptly between the two Houses with the assistance of state and local tax authorities and the affected industries.

The proposed legislation declares that it is the sense of the Congress that the President should seek bilateral and multinational agreements to establish that the provision of Internet access or online services be free from international tariffs and discriminatory taxation. Going forward, the Treasury Department is particularly well-positioned to assist with the international tax implications of the Internet and electronic commerce.

My testimony will focus on the international efforts underway to create a smooth playing field for commercial activity on the Internet. Our tax policy in this area, as reflected in support of the proposed Internet Tax Freedom Act, is consistent with our overall international tax policy towards the Internet, electronic commerce, and all of the related new technologies.

Overall Tax Policy

To encourage the growth of this technology and the resulting social and economic benefits, it is crucial that governments act responsibly and fairly regarding the Internet and electronic commerce. The Administration's key objectives are no new Internet taxes and neutrality in taxing electronic commerce. Overall, it is the view of the Administration that there should be no tax rules at the national, international, federal or sub-federal levels that inappropriately impede the full development of these exciting new technologies.

Neutrality is a fundamental principle that should guide the development of tax rules in this area. Neutrality requires that the tax system treat economically similar transactions equally, whether such transactions occur through electronic means or through conventional channels of commerce. In addition, tax rules should be consistent across jurisdictions, so as to minimize the possibility of multiple or no taxation, and the rules should be transparent and easy to administer, so as to protect the revenue base.

International Issues

Close cooperation and mutual assistance are necessary between the United States and all of our trading partners to ensure that international policies regarding the Internet and electronic commerce are consistent and do not lead to multiple or discriminatory taxation of electronic commerce or the Internet. Continuing these efforts is one of our major objectives.

Treasury has been a leader in adapting international tax rules to electronic commerce. In November 1996, Treasury published Selected Tax Policy Implications of Global Electronic Commerce, an issues paper that set forth both the major international tax issues created by electronic commerce and the general tax policy principles that should apply in this area. This paper has been very well-received and has been widely read, both in the United States and abroad. This paper has helped us formulate specific tax policy guidance and has stimulated other countries to prepare their own papers. At least half a dozen other countries have issued similar papers addressing various aspects of global electronic commerce.

Treasury is actively involved in the work of the Organization for Economic Cooperation and Development, which is at the forefront in developing international tax rules to achieve our mutually desired objectives. Many of our efforts are directed at preparing materials for the upcoming OECD Ministerial conference on "A Borderless World: Realising the Potential of Global Electronic Commerce." This conference, which will be held in Ottawa in October, will provide an international platform to present, along with other important issues, basic framework conditions regarding the taxation of electronic commerce. These framework conditions make it clear that any taxation of the Internet or electronic commerce should be neutral, fair, simple, consistent, effective and flexible.

These concepts will be discussed fully with business at the tax roundtable the day immediately preceding the Ministerial conference. At the tax roundtable, governments and business will have the opportunity to explore the challenges and opportunities presented by the Internet. One of the main topics of discussion will be identifying the best mechanisms for modernizing tax rules and collection procedures to accommodate global electronic commerce. The conference will offer an opportunity for all interested parties from all over the world to share knowledge and resolve issues.

The examination of issues concerning electronic commerce is not limited to the United States. The European Commission issued in April 1997 a Communication entitled A European Initiative in Electronic Commerce that promoted the elimination of barriers to the development of the Internet. Several countries, including Japan and France, as well as the European Union, have issued joint statements with the United States on the Internet and electronic commerce. Additional statements with other major trading and investment partners are in the works.

In addition to Treasury's specific efforts to ensure that inappropriate taxation on any level does not impede the development of the Internet, the Administration as a whole is committed to encouraging the growth of electronic commerce. An interagency working group has developed a set of principles to guide government's role in promoting electronic commerce. These principles deal with financial issues, such as customs, taxation, and electronic payments; legal issues, such as intellectual property protection, privacy, and security; and market access issues, such as telecommunications infrastructure and information technology, content regulation, and technical standards. These principles were set forth in A Framework For Global Electronic Commerce on July 1, 1997, a report that will be updated shortly.

Although government has an important role to play, we recognize that the private sector must lead this growth and that the success of electronic commerce requires a continuation of the partnership between the private and public sectors. Furthermore, as stated in the Framework for Global Electronic Commerce, "Innovation, expansion of services and participants, and lower prices will depend upon the Internet remaining a market-driven arena, not one that operates as a regulated industry." Government's role should be limited to extending appropriate regulatory policies to the Internet and electronic commerce. For example, businesses need to know that contracts entered into on-line are valid, consumers need to know that goods and services purchased on-line are subject to consumer protection laws, and government needs to know that the Internet is not being used for any illegal activity. These objectives must be accomplished while recognizing the unique features and potential of the Internet and electronic commerce.

The Administration is working on several fronts to achieve these goals. The Office of the United States Trade Representative has advocated in international fora, such as the World Trade Organization, the OECD, and APEC, that cyberspace remain a tariff-free environment whenever it is used to deliver products or services. Our overall objective is to keep the Internet free from international tariffs and discriminatory taxation.

Subnational Issues

The field of taxation is one of the most important areas where governments must adopt appropriate rules. Unreasonable taxation, or even a fear of unreasonable taxation, could significantly slow the growth of the Internet and electronic commerce. The Internet has a major role to play in promoting the ongoing vitality of our economy and our global competitiveness. The introduction of new taxes imposed solely on the Internet or electronic commerce will inevitability discourage the growth and use of the Internet. While new taxes may initially raise some additional revenue, they have the potential of discouraging growth of the Internet and electronic commerce, thus slowing the growth of the economy, and becoming counterproductive in the long-term. Instead of seeing the Internet as a bountiful new revenue source, we should, instead, adopt policies that encourage its growth and use, which will stimulate economic growth that leads to greater revenues from existing taxes.

Therefore, Treasury is opposed to any new or discriminatory taxes imposed on electronic commerce, whether imposed by other countries or at the federal or subfederal level. Many of our trading partners share this view. Reaching this general consensus was not guaranteed. In the early days of the Internet ---- just a couple of years ago! ---- some were considering proposals for a new "bit tax" that would tax each electronic transmission according to the amount of information being transmitted. Needless to say, such a tax would discriminate against the Internet and likely stifle its development. These proposals rightly have been rejected. For example, Ambassador Hugo Paemen, the Head of the European Commission's Delegation to the United States, recently stated that the European Commission has strongly rejected proposals for a "bit tax" because such a tax "could easily nip e-commerce in the bud." The United States has firmly and consistently opposed any efforts to impose any special taxes, whether at the national or the international level, on the use of the Internet.

The fact that not all share the view that taxation of the Internet should be neutral and that no new taxes should be imposed on the Internet reinforces the importance of continuing our efforts at the international level. We work hard, together with our colleagues in the Administration, to dissuade jurisdictions from seeing the Internet as a lucrative new revenue source and choosing to ignore the long-run detrimental effect such a policy would likely have on their economic growth.

Instead of enacting new taxes on the Internet or electronic commerce or providing subsidies, Treasury believes that neutrality should be the fundamental principle guiding the development of tax rules in this area. Ideally, tax rules should not affect economic choices about commercial activities, nor influence market structures. Achieving neutrality in taxation is the best way to see that market forces alone determine the success or failure of new commercial methods. Neutrality can best be achieved through an approach that adopts and adapts existing tax principles in lieu of imposing new or additional taxes.

The statement that there should be no new taxes on the Internet does not mean that the neutral application of existing taxes should be prevented. On the contrary, it means that any taxation should be applied in a neutral manner, that it should not discriminate against one form of commerce over another, and that it should be fairly applied. These are goals that all governments should pursue in shaping their tax policies.

Neutrality is not the only principle that should guide tax policy. As stated previously, tax rules should also be consistent across jurisdictions and they should be transparent and easy to administer. In achieving these goals, Treasury recognizes that the implementation of basic principles of tax policy may vary at the state level, although the fundamental principles of neutrality, consistency, and non-discrimination apply at all levels of government.

Advisory Commission on Electronic Commerce

We applaud the creation of the Advisory Commission on Electronic Commerce, and look forward to working with you to structure the Commission in a way that meets our mutual goals. As Deputy Secretary Summers stated when expressing his support for H.R. 4105, "In conjunction with this moratorium, we need to establish a commission that will explore the longer-term issues raised by electronic commerce, and develop a policy framework that is fair to states and localities while allowing the Internet to earn its fair place in the ever-changing world." The Commission allows states and localities, industry, taxpayers and the Federal government to work together in finding a solution to these issues.

No one has the intention of allowing the Internet to become a tax haven that will drain states and localities of needed revenues. Indeed, it is vitally important to recognize the legitimate concerns of neutrality and equity that exist. Thus, we are encouraged to see that the issue is on the agenda of the Commission, as it provides a forum for exchanging of views by all interested parties and incorporating those views into appropriate policies.

Conclusion

The objectives of the Internet Tax Freedom Act are consistent with the general tax policy principles I have described. The Act would impose a temporary moratorium on certain state or local taxes on the Internet or electronic commerce. It would establish an Advisory Commission on Electronic Commerce composed of representatives from the Federal Government, State, local, and county governments, and business and taxpayers who would undertake a thorough study of a broad range of issues concerning the Internet and electronic commerce. Treasury wholeheartedly supports the goals and underlying objectives of both versions of the Internet Tax Freedom Act, and we are ready to work with the Committee to reach our shared objectives.