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                                                       Calendar No. 509
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-276
_______________________________________________________________________


 
                        INTERNET TAX FREEDOM ACT

                                _______
                                

                 July 30, 1998.--Ordered to be printed

_______________________________________________________________________


    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 442]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(S. 442) to establish a national policy against State and local 
government interference with interstate commerce on the 
Internet or interactive computer services, and to exercise 
Congressional jurisdiction over interstate commerce by 
establishing a moratorium on the imposition of exactions that 
would interfere with the free flow of commerce via the 
Internet, and for other purposes, having considered the same, 
reports favorably thereon with an amendment and recommends that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. Legislative background and summary...............................2
          A. Legislative background..............................     2
          B. Summary.............................................     2
 II. Explanation of the committee amendment...........................3
          A. Present-law tax and tariff provisions...............     3
          B. Reasons for change..................................     4
          C. Explanation of provisions...........................     5
          D. Effective date......................................     7
III. Budget Effects of the committee amendment........................7
          A. Committee estimates.................................     7
          B. Budget authority and tax expenditures...............     8
          C. Consultation with congressional budget office.......     8
 IV. Votes of the committee..........................................12
  V. Regulatory impact and other matters.............................13
          A. Regulatory impact...................................    13
          B. Unfunded Mandates Statement.........................    13
 VI. Changes in existing law made by the bill, as reported...........14
VII. Minority views of Senator Graham................................15

                 I. LEGISLATIVE BACKGROUND AND SUMMARY

                       A. Legislative Background

    An amendment in the nature of a substitute to S. 442, the 
``Internet Tax Freedom Act,'' was reported by the Senate 
Committee on Commerce, Science, and Transportation (``Commerce 
Committee'') on May 5, 1998 (S. Rept. 105-184). As reported by 
the Commerce Committee, S. 442 would impose a moratorium on the 
ability of States and local governments to impose taxes with 
respect to Internet activity, including both access to and 
transactions conducted on the Internet. As reported by the 
Commerce Committee, S. 442 further would direct the Secretaries 
of State, Treasury, and Commerce, in consultation with private 
business and appropriate Congressional committees, to undertake 
a study of the appropriate taxation of Internet activity, and 
would provide that it is the sense of the Congress that 
Internet activity be a tariff-free zone. Consistent with the 
jurisdiction of the Committee on Finance (the ``Finance 
Committee'') over issues related to interstate taxation by 
States and local governments and international taxation and 
trade, S. 442 was referred to the Finance Committee through 
July 30, 1998.
    Similar legislation, H.R. 4105, was passed by the House of 
Representatives on June 23, 1998.
    The Finance Committee held a public hearing on S. 442 and 
other proposals relating to tax and trade issues regarding the 
Internet on July 16, 1998. The Finance Committee held a markup 
on July 28, 1998, to consider a substitute amendment to the 
provisions of S. 442, as reported by the Commerce Committee. At 
the markup, the Finance Committee approved a substitute 
amendment to the Commerce Committee's amendment in the nature 
of a substitute, and ordered the bill, as amended, favorably 
reported.

                   B. Summary of Committee Amendment

    The Finance Committee amendment (``committee amendment'') 
prohibits States and local governments from imposing any 
Internet access tax, any bit tax, or any multiple or 
discriminatory tax on electronic commerce during the period 
beginning on July 29, 1998, and ending two years after the date 
of the bill's enactment. The terms Internet access tax and bit 
tax do not include any taxes on gross or net income derived 
from the Internet or electronic commerce. Further, the 
moratorium does not preclude States from continuing to impose 
taxes on telecommunications services or cable television 
access.
    The committee amendment establishes a temporary Advisory 
Commission on Electronic Commerce ( the ``Commission'') to 
study and develop policy recommendations on the appropriate 
taxation (domestic and international) and tariff treatment of 
Internet activity. The Commission's findings and any 
legislative recommendations are required to be transmitted to 
the Congress within 18 months after the bill's enactment.
    The committee amendment provides that it is the sense of 
the Congress that no new Federal taxes like the State and local 
taxes to which the moratorium applies should be enacted on 
Internet activity during the moratorium.
    Further, the committee amendment declares that it is the 
sense of the Congress that international agreements be 
negotiated providing that international use of the Internet is 
free from tariffs and discriminatory taxation. The committee 
amendment also directs the United States Trade Representative 
to include barriers to electronic commerce in the barriers 
designated annually in the National Trade Estimates report.

                 II. EXPLANATION OF COMMITTEE AMENDMENT

                A. Present-Law Tax and Tariff Provisions

                         Federal tax provisions

Income taxation

    There are no special Federal income taxes on Internet 
services. The Federal income tax applies to Internet services 
in the same manner that it applies to any other provision of 
services. Accordingly, the income received by an Internet 
service provider is includible in that provider's income for 
Federal income tax purposes. Similarly, a business that pays 
amounts to an Internet service provider generally may deduct or 
amortize (as appropriate) those amounts as an ordinary and 
necessary business expense (assuming the other prerequisites 
for a deduction or amortization are satisfied).

Federal excise taxation

    Present law imposes no special excise taxes on Internet 
services. Access to and transactions conducted on the Internet 
are subject to generally applicable Federal excise taxes in the 
same manner as other taxable activities. For example, present 
law imposes a 3-percent Federal excise tax on certain 
communications services (i.e., local and long distance 
telephone service). Thus, amounts paid for telephone service 
connecting users to the Internet are subject to this excise tax 
in the same manner as other payments for telephone service. 
Charges for actual Internet service are not subject to this 
tax, as long as the service provided does not otherwise fall 
within the statutory provisions governing the communications 
excise tax (e.g., voice quality local or toll service).

                     International trade provisions

    Present law provides no direction to the President 
regarding Congress' interest in or intent with respect to the 
conduct of international negotiations regarding barriers to 
electronic commerce. Nothing in the law directs the President 
to include barriers to electronic commerce among the barriers 
cataloged annually in the National Trade Estimates report 
prepared by the United States Trade Representative. The 
National Trade Estimates report serves as a compendium of 
foreign barriers to U.S. commerce and a presumptive target for 
future negotiations with our trading partners.

     State and local government taxation of interstate transactions

    Under the United States Constitution, a State or local 
government may impose taxes on sales that occur within its 
jurisdiction or on the use of property within its jurisdiction. 
Approximately 6,600 State and local jurisdictions impose sales 
and use taxes.1 A limited number of States have 
applied their sales or other excise taxes to Internet activity. 
The allowable sales tax authority of a State or local 
government extends to mail order sales by out-of-State vendors 
to residents of the State if the sale is deemed to take place 
within the taxing jurisdiction.2 There are, however, 
limitations on the methods State and local jurisdictions may 
employ to collect sales and use taxes.
---------------------------------------------------------------------------
    \1\ Advisory Commission on Intergovernmental Relations, Significant 
Features of Fiscal Federalism, Vol. 1 (1995), table 27.
    \2\ See, e.g., McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944).
---------------------------------------------------------------------------
    State and local sales and use taxes are levied on the final 
purchaser, but are collected primarily through the vendor. In 
the case of a sale by an out-of-State vendor, the U.S. Supreme 
Court has held that a State or local government cannot 
constitutionally require the vendor to collect and remit use 
taxes unless the vendor has a sufficient business nexus with 
the State.3 In the National Bellas Hess case, the 
Court found that the required nexus was not present if the 
vendor's only connection with customers in the State was by 
common carriers or the United States mail.4 The 
Court based this conclusion on due process considerations and 
on the Commerce Clause of the United States Constitution, which 
reserves to Congress the power to regulate and control 
interstate commerce.5 The required nexus has been 
held to exist when the vendor arranges sales through local 
agents or maintains retail stores in the taxing State.
---------------------------------------------------------------------------
    \3\ National Bellas Hess, Inc., v. Department of Revenue of the 
State of Illinois, 386 U.S. 753 (1967) (henceforth referred to as 
National Bellas Hess).
    \4\ Id. at 754.
    \5\ Id. at 760.
---------------------------------------------------------------------------
    Subsequently, in 1992, the U.S. Supreme Court ruled that an 
out-of-state mail-order house with neither outlets nor sales 
representatives in the State is not required to collect and pay 
use tax on goods purchased for use in the State.6 
The Court ruled that the due process clause did not bar 
enforcement of the State's use tax, but held that enforcing the 
State's use tax would be inconsistent with the Court's commerce 
clause jurisprudence. The Court concluded by observing that 
``the underlying issue is not only one that Congress may be 
better qualified to resolve, but also one that Congress has the 
ultimate power to resolve.'' 7
---------------------------------------------------------------------------
    \6\ Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
    \7\ Id. at 318.
---------------------------------------------------------------------------

                         B. Reasons for Change

    Use of the Internet and of electronic commerce in general 
is expanding exponentially and comprises an increasingly 
important segment of the national and global economy. Fair and 
administrable rules for taxing and regulating use of the 
Internet, and electronic commerce in general, should be 
developed. Otherwise, inconsistent or difficult to administer 
tax rules could present impediments to development of this 
sector of the economy. The Committee determined that a limited 
moratorium, accompanied by a review of appropriate tax and 
trade issues, will give Congress the opportunity to evaluate 
proper State and local government interstate taxation, Federal 
taxation, and trade treatment of the Internet and electronic 
commerce.

                      C. Explanation of Provisions

    The committee amendment substitutes the provisions 
described below for the provisions of S. 442, as reported by 
the Commerce Committee.

                     State and local tax moratorium

    In lieu of the approximately six-year moratorium provided 
in S. 442, the committee amendment would prohibit imposition of 
State and local taxes on the Internet during the period 
beginning on July 29, 1998 and ending two years after the date 
of the bill's enactment.8 Taxes to which the 
moratorium applies include any State or local government taxes 
on Internet access, any bit taxes, or any multiple or 
discriminatory taxes on electronic commerce. The terms Internet 
access tax and bit tax do not include any taxes on gross or net 
income derived from the Internet or electronic commerce or 
other non-transactional taxes such as State or local government 
real and personal property taxes. Further, the restrictions on 
Internet access taxes and bit taxes do not preclude States from 
continuing to impose taxes on telecommunications services or 
cable television access. In general, the prohibition on 
multiple taxes applies to taxes imposed by more than one State, 
but for which credits for out-of-state taxation are not 
allowed, and the prohibition on discriminatory taxes applies to 
taxes imposed at different rates than taxes imposed on the same 
or similar transactions conducted by other means.
---------------------------------------------------------------------------
    \8\ The moratorium does not affect taxes, fees, and other charges 
imposed pursuant to Federal law. Thus, for example, the universal 
service charges currently being imposed by the Federal Communications 
Commission to fund certain programs anticipated by 1996 
telecommunications legislation are not addressed by the committee 
amendment.
---------------------------------------------------------------------------
    As stated above, the committee amendment provides that the 
moratorium applies only to taxes imposed after July 28, 1998 
(the date of Finance Committee action). Thus, the committee 
amendment does not affect the ability of States or local 
governments to collect tax with respect to transactions 
occurring before July 29, 1998, or the rights of parties in any 
dispute concerning State and local taxation of Internet 
activity during periods before July 29, 1998. The committee 
amendment does not grandfather any existing State or local 
taxes on Internet activity occurring during the period of the 
moratorium. Further, nothing in the committee amendment 
modifies the present-law rules for determining when an 
interstate seller has a ``nexus'' with a State for determining 
whether sales and use taxes are imposed on an interstate 
transaction or for requiring an out-of-state seller to collect 
such taxes.

                 establish national advisory commission

    The committee amendment establishes a temporary Advisory 
Commission on Electronic Commerce (``the Commission'') to study 
and recommend appropriate rules for international, Federal, 
State, and local government income and excise taxation of 
transactions using the Internet and other comparable interstate 
or international sales activities, as well as appropriate 
tariff treatment of such activities. In conducting this study, 
the Commission may review how the imposition of barriers to 
international use of the Internet will affect the United States 
relative to foreign markets, issues relating to taxation of 
interstate sales, particularly electronic commerce, and the 
impact, if any, of Internet usage on the revenue base of the 
Federal communications excise tax (Internal Revenue Code 
section 4251).
    The Commission is to be comprised of 16 members, as 
follows:
    Federal Government representatives.--The Secretaries of 
State, Treasury, and Commerce, and the United States Trade 
Representative, or the designee of each such cabinet member are 
to represent the Federal Government.
    State and local government representatives.--A total of six 
representatives of State and local governments are to be 
appointed, two members each by the Speaker of the House of 
Representatives and the Majority Leader of the Senate, and one 
member each by the Minority Leader of the House or 
Representatives and the Minority Leader of the Senate.
    Electronic industry and consumer representatives.--A total 
of six representatives of the electronic industry and of 
consumer groups are to be appointed, two members each by the 
Speaker of the House of Representatives and the Majority Leader 
of the Senate, and one member each by the Minority Leader of 
the House of Representatives and the Minority Leader of the 
Senate.
    The committee expects that the Congressional leadership 
will coordinate their appointments to the Commission to assure 
the broadest possible State and local government and private 
sector representation, and that the private sector appointments 
will include representatives of local, national, and 
international businesses and users of electronic commerce.
    The committee amendment does not provide an independent 
budget for the Commission; however, the Commission is to have 
reasonable access to materials, resources and facilities, data, 
and other information from the Departments of Justice,\9\ 
Commerce, State, and Treasury and the Office of the United 
States Trade Representative. The committee amendment does not 
override any privacy or similar protections for materials held 
by these agencies; accordingly, the Commission will not have 
access to these protected materials.\10\
---------------------------------------------------------------------------
    \9\ The Department of Justice is included in this list of agencies 
because of, inter alia, its oversight of Federal antitrust laws as they 
affect the electronic commerce industry.
    \10\ For example, the committee amendment does not provide any 
exceptions to the taxpayer privacy protections under section 6103 of 
the Internal Revenue Code.
---------------------------------------------------------------------------
    The Commission is directed to submit its findings, with any 
legislative recommendations, to the Congress within 18 months 
of the date of the bill's enactment. The adoption of any such 
findings or recommendations by the Commission requires 
agreement of at least two-thirds of the Commission members 
serving at the time the findings or recommendations are made.
    The work of the Commission must comply with the provisions 
of the Federal Advisory Commission Act. Thus, the Commission 
must hold public meetings. The Commission is required to 
provide opportunities for representatives of the general 
public, taxpayer groups, consumer groups, and State and local 
officials to testify.
    The committee amendment does not provide any expedited 
procedures for Congressional consideration of the Commission's 
recommendations.

     sense of the congress resolution on new federal internet taxes

    The committee amendment provides that it is the sense of 
the Congress that no new Federal taxes like the State and local 
government taxes to which the two-year moratorium applies 
should be enacted on Internet activity during the moratorium.

                     international trade provisions

    The committee amendment amends section 181 of the Trade Act 
of 1974 to ensure that the U.S. Trade Representative will 
include barriers to U.S. electronic commerce among the items 
catalogued in the annual National Trade Estimates report on 
foreign barriers to trade. The committee amendment would, in 
addition, provide a clear statement of Congress' intent in that 
the President should seek international agreements to remove 
barriers to global electronic commerce, then outlines the 
negotiating objectives the President should pursue. Those 
objectives include:
          (1) assuring that our trading partners do not impose 
        either tariff or non-tariff barriers to electronic 
        commerce;
          (2) eliminating existing barriers to trade in goods 
        and services via the Internet; and
          (3) eliminating barriers to trade in goods and 
        services, such as telecommunications equipment and 
        services, that are essential to the future growth of 
        electronic commerce.

                           D. Effective Date

    The committee amendment is effective on the date of 
enactment.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of S. 
442 as reported by the Finance Committee.
    The provisions of the committee amendment are estimated to 
have no effect on Federal revenues.

                B. Budget Authority and Tax Expenditures

                            budget authority

    In compliance with section 308(a)(1) of the budget Act, the 
Committee states that the provisions of the committee amendment 
involve no new or increased budget authority.

                            tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the provisions of the committee amendment 
involve no new or increased tax expenditures.

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on S. 442, as amended by the 
Finance Committee.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 30, 1998.
Hon. William V. Roth, Jr.,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate and mandates statement for 
S. 442, the Internet Tax Freedom Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark Hadley 
(for federal costs), and Pepper Santalucia (for the mandates 
statement).
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Enclosures.

               congressional budget office cost estimate

S. 442--Internet Tax Freedom Act

    Summary: S. 442 would impose a two-year moratorium on 
certain state and local taxation of online services and 
electronic commerce. In addition, the bill would establish an 
Advisory Commission on Electronic Commerce to examine issues 
related to the taxation of electronic commerce. Finally, the 
bill would require the Office of the United States Trade 
Representative to include an analysis of electronic commerce in 
its annual report on barriers to market access in foreign 
countries. CBO estimates that enacting S. 442 would result in 
new discretionary spending of $1 million to $2 million over the 
1999-2003 period, assuming appropriation of the necessary 
amounts.
    S. 442 could affect direct spending and receipts, so pay-
as-you-go procedures would apply, but CBO estimates that any 
such effects would be negligible.
    S. 442 contains no private-sector mandates, but by imposing 
a moratorium on certain types of state and local taxes, the 
bill would impose an intergovernmental mandate as defined in 
the Unfunded Mandates Reform Act (UMRA). CBO cannot estimate 
whether the direct costs of this mandate would exceed the 
statutory threshold established in UMRA ($50 million in 1996, 
adjusted annually for inflation).
    Estimated cost to the Federal Government: S. 442 would 
establish an advisory commission to examine issues related to 
the taxation of electronic commerce. The Commission would exist 
for up to 18 months and would consist of representatives of 
federal, state, and local governments, citizens, and business 
interests. The bill would authorize the commission to have 
reasonable access to information, resources, and space to 
conduct meetings from the Departments of Commerce, Justice, and 
the Treasury. CBO estimates the commission's expenses for the 
next 18 months would be less than $500,000 annually because no 
staff or contractual support would be authorized by the bill. 
CBO expects that nonfederal participants would bear a 
significant portion of the costs of the commission.
    S. 442 would authorize the commission to accept and use 
gifts and donations to assist in its work. Donations of money 
are recorded in the budget as governmental receipts (revenues), 
and the use of any such amounts would be direct spending. CBO 
expects that any such effects would be negligible.
    S. 442 would require the Office of the U.S. Trade 
Representative to include an analysis of electronic commerce in 
its annual report concerning barriers to market access in 
foreign countries. Based on information from the Department of 
Commerce, CBO estimates this work would cost less than 
$500,000, assuming appropriation of the necessary funds. The 
costs of this legislation fall within budget function 370 
(commerce and housing credit).
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. By 
allowing the proposed advisory commission to accept and use 
donations, S. 442 could affect both direct spending and 
receipts, but CBO estimates that any such donations would be 
significantly less than $500,000 a year.
    Intergovernmental and private-sector impact: S. 442 
contains no private-sector mandates, but by imposing a 
moratorium on certain types of state and local taxes, the bill 
would impose an intergovernmental mandate as defined in UMRA. 
CBO cannot estimate whether the direct costs of this mandate 
would exceed the statutory threshold established in UMRA ($50 
million in 1996, adjusted annually for inflation). CBO's 
estimate of the bill's impact on state, local, and tribal 
governments is provided as a separate enclosure.
    Previous CBO estimates: CBO has completed cost estimates 
for four other versions of the Internet Tax Freedom Act. On 
June 23, 1998, CBO transmitted an estimate of H.R. 3529, as 
ordered reported by the House Committee on the Judiciary on 
June 17, 1998. On June 19, 1998, CBO transmitted an estimate of 
H.R. 3849, as reported by the House Committee on the Judiciary 
on June 19, 1998. On May 22, 1998, CBO transmitted an estimate 
of the federal costs of H.R. 3849, as ordered reported by the 
House Committee on Commerce on May 14, 1998. And on January 21, 
1998, CBO transmitted an estimate of the federal costs of S. 
442, as ordered reported by the Senate Committee on Commerce, 
Science, and Transportation on November 4, 1997. Differences 
between those estimates and this estimate of S. 442 reflect 
differences in the bills.
    Estimate prepared by: Mark Hadley.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

             congressional budget office mandates statement

S. 442--Internet Tax Freedom Act

    Summary: S. 442 contains no private-sector mandates, but by 
imposing a moratorium on certain types of state and local 
taxes, the bill would impose an intergovernmental mandate as 
defined in the Unfunded Mandates Reform Act (UMRA). For reasons 
described below, CBO cannot estimate whether the direct costs 
of this mandate would exceed the statutory threshold 
established in UMRA ($50 million in 1996, adjusted annually for 
inflation).
    Intergovernmental mandates contained in the bill: S. 442 
would impose a two-year moratorium on certain state and local 
taxes, including taxes on Internet access and online services. 
This moratorium would constitute an intergovernmental mandate 
as defined in UMRA. The bill would not grandfather any states 
or localities that have already imposed such taxes.

Is the statutory threshold exceeded?

    Estimated direct costs of mandates to State, local, and 
tribal governments: Because it is unclear what should be 
counted as the direct costs of the moratorium, CBO cannot 
determine whether the threshold for intergovernmental mandates 
would be exceeded in either year of the moratorium.

Total direct costs of mandates

    UMRA defines the direct costs of an intergovernmental 
mandate as ``the aggregate estimated amounts that all state, 
local, and tribal governments . . . would be prohibited from 
raising in revenues in order to comply with the federal 
intergovernmental mandate.'' Twelve states, including the 
District of Columbia, have sought to impose their sales and use 
taxes on Internet access and online services. (These twelve 
include Illinois, which taxes the services in only very limited 
circumstances.) Twelve home-rule cities in Colorado also impose 
such taxes.
    Information from states and industry sources indicates that 
while total collections and unpaid assessments for all twelve 
states in 1997 were close to $50 million, actual collections 
alone were significantly lower than that amount. The difference 
occurs because, in some of the states, companies are 
challenging the applicability of the tax to the service they 
provide or the state's finding that they are obliged to collect 
the tax on the state's behalf. In those cases, the companies 
are not collecting or remitting the tax, but they are accruing 
a potential tax liability to the states. CBO is unsure whether 
a tax that is being assessed but is not being paid should be 
counted toward the direct costs of a mandate when the 
applicability or constitutionality of the tax is being 
litigated.
    Whichever measure is used, the potential cost of the 
mandate would grow over the two years that the moratorium would 
be in effect, because of the projected growth of the market for 
Internet access and online services. Some industry analysts 
have predicted that the market will more than double in the 
next three years. Growth of this magnitude would push 
collections plus potential tax liability for the twelve states 
over $50 million, but whether actual collections would reach 
that threshold would depend on the outcome of litigation. If 
the states prevail in court, the total mandate cost for the 
twelve states would exceed the threshold.
    It is possible that, in the absence of this legislation, 
some state and local governments would enact new taxes or 
decide to apply existing taxes to Internet access or online 
services during the next two years. It is also possible that 
some governments would repeal existing taxes or preclude their 
application to these services. Such changes would affect the 
ultimate cost of the mandate but are extremely difficult to 
predict. Therefore, for the purposes of estimating the direct 
costs of the mandate in this bill, CBO considered only the 
revenues from taxes that are currently in place.
    The moratorium in S. 442 would also apply to ``bit taxes,'' 
which are taxes based in some way on the volume of digital 
information being transmitted. According to both state 
officials and industry representatives, no state or locality 
has adopted this type of tax. In addition, theMoratorium would 
apply to ``multiple or discriminatory taxes on electronic commerce.'' 
CBO could not identify any current state or local taxes that would 
clearly meet the definitions provided in the bill for these two types 
of taxes.
    Appropriation or other federal financial assistance 
provided in bill to cover mandate costs: None.
    Other impacts on State, local, and tribal governments: S. 
442 would establish an Advisory Commission on Electronic 
Commerce made up of federal officials and representatives of 
state and local governments, the electronic industry, and 
consumer groups. The commission would study and write a report 
on the tax treatment of Internet access and electronic commerce 
at the federal, state, local, and international levels. As part 
of its study, the commission could examine ways to simplify the 
administration of sales and use taxes on interstate commerce in 
general.
    Previous CBO estimates: CBO has completed intergovernmental 
mandates statements for seven other versions of the Internet 
Tax Freedom Act. All but one of these versions would impose a 
moratorium on some categories of state and local taxes. In each 
case, we determined that the moratorium would constitute an 
intergovernmental mandate as defined in UMRA. The direct costs 
that we estimated for the mandate in each bill differed 
depending on the scope and duration of the moratorium. For two 
versions, we determined that the costs of complying with the 
mandate would exceed the threshold established in UMRA. For the 
remaining four versions, we could not determine whether the 
threshold was exceeded. H.R. 3849, as reported by the House 
Judiciary Committee on June 19, 1998, contained an 
intergovernmental mandate but did not include a moratorium on 
state and local taxes.

----------------------------------------------------------------------------------------------------------------
              Date                      Bill number              Version             Threshold determination    
----------------------------------------------------------------------------------------------------------------
June 18, 1997...................  S. 442................  As introduced........  Threshold exceeded.            
January 21, 1998................  S. 442................  As ordered reported    Cannot determine.              
                                                           by Senate Commerce,                                  
                                                           Science and                                          
                                                           Transportation                                       
                                                           Committee.                                           
March 25, 1998..................  H.R. 1054.............  As approved by a       Threshold exceeded.            
                                                           subcommittee of                                      
                                                           House Commerce                                       
                                                           Committee.                                           
May 22, 1998....................  H.R. 3849.............  As ordered reported    Cannot determine.              
                                                           by House Commerce                                    
                                                           Committee.                                           
June 19, 1998...................  H.R. 3849.............  As reported by House   Below threshold.               
                                                           Judiciary Committee.                                 
June 23, 1998...................  H.R. 3529.............  As ordered reported    Cannot determine.              
                                                           by House Judiciary                                   
                                                           Committee.                                           
July 20, 1998...................  H.R. 4105.............  As passed by the       Cannot determine.              
                                                           House of                                             
                                                           Representatives.                                     
----------------------------------------------------------------------------------------------------------------

    Estimate prepared by: Pepper Santalucia.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of S. 442.

                       motion to report the bill

    The bill (S. 442) was ordered favorably reported, as 
amended by the Chairman's amendment in the nature of a 
substitute (as amended) by a roll call vote of 11 yeas and 1 
nay on July 28, 1998. The vote, with a quorum present, was as 
follows (proxy votes are not counted in the total vote on a 
motion to order a bill reported):
    Yeas.--Senators Roth, Chafee, Grassley (proxy), Hatch, 
D'Amato (proxy), Murkowski (proxy), Nickles, Gramm, Lott 
(proxy), Jeffords (proxy), Mack, Moynihan, Baucus, Rockefeller 
(proxy), Breaux (proxy), Conrad, Moseley-Braun (proxy), Bryan 
and Kerrey.
    Nay.--Senator Graham.

                       votes on other amendments

    (1) An amendment by Senator Kerrey (and Chaffee) to provide 
for a two-year morattorium (rather than a three-year) on the 
imposition of State and local taxes on the Internet and an 
advisory commission to study and make recommendations on 
appropriate tax and tariff treatment of such Internet 
activities (report due 18 months after enactment) was approved 
by a roll call vote of 11 yeas and 9 nays.
    Yeas.--Senators Chafee, Jeffords (proxy), Moynihan, Baucus, 
Rockefeller (proxy), Breaux (proxy), Conrad, Graham, Moseley-
Braun (proxy), Bryan and Kerrey.
    Nays.--Senator Roth, Grassley (proxy), Hatch, D'Amato 
(proxy), Murkowski (proxy), Nickles, Gramm, Lott (proxy), and 
Mack.
    (2) An amendment by Senator Graham that would require out-
of-State direct marketers to collect State and local state and 
use taxes when the company (a) solicits in the State and (b) 
delivers products into the State was defeated by a roll call 
vote of 6 yeas, 13 nays and 1 abstention. The vote was as 
follows:
    Yeas.--Senators Moynihan, Breaux (proxy), Conrad, Graham, 
Moseley-Braun (proxy) and Bryan.
    Nays.--Senators Roth, Chafee, Grassley (proxy), Hatch, 
D'Amato (proxy), Murkowski (proxy), Nickles, Gramm, Lott 
(proxy), Jeffords (proxy), Mack, Baucus and Kerrey.
    Abstention.--Senator Rockefeller.
    (3) An amendment by Senator Conrad that would provide that 
the moratorium applies only to new taxes imposed on Internet 
access services delivered after Jyly 28, 1998, and that the 
moratorium would not impair the ability of any State or local 
government to continue collecting taxes on Internet access that 
were generally imposed and actually enforced under State or 
local law before July 28, 1998, was defeated by a roll call 
vote of 10 yeas and 10 nays. The vote was as follows:
    Yeas.--Senators Lott (proxy), Moynihan, Baucus, Rockefeller 
(proxy), Breaux (proxy), Conrad, Graham, Moseley-Braun (proxy), 
Bryan and Kerrey (proxy).
    Nays.--Senators Roth, Chafee, Grassley (proxy), Hatch, 
D'Amato (proxy), Murkowski (proxy), Nickles, Gramm, Jeffords 
(proxy) and Mack.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the committee 
amendment to the bill, S. 442.

                  impact on individuals and businesses

    The committee amendment places a moratorium on any State or 
local government tax, license, or fee being imposed directly or 
indirectly on the Internet or interactive computer services 
beginning on July 29, 1998, and ending two years after the date 
of enactment. The committee amendment establishes an Advisory 
Commission on Electronic Commerce to study and develop policy 
recommendations on the appropriate taxation (domestic and 
international) and tariff treatment of Internet activity. The 
committee amendment also directs the United States Trade 
Representative to include barriers to electronic commerce in 
the barriers designated annually in the National Trade 
Estimates report.

                impact on personal privacy and paperwork

    The committee amendment should not have any adverse impact 
on personal privacy, nor should it increase any taxpayer 
paperwork. The moratorium against certain State and local taxes 
on Internet activities may reduce the burdens of complying with 
State and local tax requirements during the two-year period.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Congressional Budget Office (``CBO'') has reviewed the 
provisions of the bill (S. 442) as approved by the Committee on 
July 28, 1998. In accordance with the requirements of Public 
Law 104-4, the CBO has determined that the provisions of the 
bill, as amended, contain no Federal private sector mandates.
    The bill, as amended, will impose a Federal 
intergovernmental mandate by prohibiting certain State and 
local taxes on Internet activities for a period ending two 
years after the date of enactment. The amount of the 
intergovernmental mandate is indeterminate at the present time, 
depending on what taxes that the States and local governments 
may or may not have enacted in the absence of such moratorium. 
(See CBO statement in Part III.C., above.)

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, in order to expedite the 
business of the Senate, it is necessary to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                          VII. MINORITY VIEWS

    The undersigned Member of the Committee on Finance opposed 
the Internet Tax Freedom Act, as reported by the Finance 
Committee on July 28, 1998. I opposed the bill because of its 
adverse impact on states and main street businesses.
    First, as a former governor, I believe that if states and 
local governments are to properly address important issues, 
such as--education and police protection--which are 
traditionally the responsibility of the states, then the 
Federal government should not restrict the states' ability to 
finance those issues. The bill both preempts existing taxes and 
precludes state and local governments' right to decide how to 
fund its priorities during the moratorium.
    Second, I offered an amendment, which failed, to address 
remote sellers and the collection of state and local sales 
taxes. Currently remote sellers (mail order sales or Internet 
sales) are not required to collect the sales or use tax due by 
the purchaser of the good, unless the remote seller has a nexus 
in the purchaser's state. Lost tax revenues are growing as 
remote sales grow. The annual state revenue loss in mail order 
sales alone is estimated at $3.3 billion. This is unfair to 
states, who have limited means of collecting the sales or use 
tax due from the purchaser. Current practice also is unfair to 
main street businesses who must collect the sales tax.
    Because Internet Tax Freedom Act as drafted harms the tax 
bases of states and provides unfair competition to main street 
businesses, I opposed it.
                                                        Bob Graham.