Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
May 16, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4174 words
HEADLINE:
TESTIMONY May 16, 2000 JOHN R. LOGALBO VICE PRESIDENT, PUBLIC POLICY PSINET,
INC. HOUSE WAYS AND MEANS OVERSIGHT INTERNET TAXES
BODY:
May 16, 2000 Testimony of John R. LoGalbo
Vice President, Public Policy PSINet Inc. Before the Way and Means Committee,
Subcommittee on Oversight U.S. House of Representatives Mr. Chairman, Mr.
Ranking Member, members of the Subcommittee, thank you for the opportunity to
appear before you this afternoon. I am John LoGalbo, Vice President of Public
Policy for PSINet. More than 10 years ago - before the Internet became a
household word, long before the proliferation of "dot.com" companies, certainly
before anyone conceived of billions of dollars of commercial activity riding on
a stream of electrons - PSINet's chairman and founder, Bill Schrader, had a
vision of the future of telecommunications. That vision was founded on the
realization that every kind of communication - voice, text, pictures, sound,
video - can be "digitized," broken up into electronic pulses, carried anywhere
in the world over diverse paths, and reassembled into its original form at the
destination. The key was the ability to carry data over a new kind of robust,
inexpensive network that crossed all proprietary boundaries - without regard to
operating systems, network protocols, or physical communications media. Bill
Schrader formed PSINet as the first company to attempt to transform that vision
into a commercial reality, on a global scale, and he has succeeded beyond
anyone's wildest expectations (except perhaps his own). Today PSINet is an
Internet Super Carrier, having built a global e-commerce infrastructure over our
own optical fiber, satellite, Web hosting, and switching facilities. We serve
more than two million users in 800 metropolitan areas in 27 countries on five
continents, offering a full suite of retail and wholesale Internet services
through wholly- owned PSINet subsidiaries. At the heart of all PSINet services
is our advanced Internet Protocol ("IP") network. Connected to over 900
points-of-presence ("POPs") worldwide, and designed for nearly unlimited growth,
the PSINet network is one of the primary backbones that comprise the Internet.
We are building our e-commerce Web hosting centers, designed to support critical
Internet applications in secure, managed environments, in key financial and
business centers around the world. Our eight hosting centers (in New York City,
northern Virginia, Los Angeles, Tokyo, Toronto, Geneva, London, and Amsterdam)
are ideal for e-commerce applications. By the end of 2000, our plans call for 24
centers with two million square feet of revenue-producing space to be completed
or under development. At present PSINet hosts many of the most highly visible
and complex Web sites in the world. With the acquisition of Transaction Network
Services in 1999, PSINet is now at the forefront of the high-growth, high-margin
world of electronic commerce. As purchases and transactions migrate to the web,
companies need to be able to tap into a network that can process them
efficiently and safely. TNS is the leading worldwide provider of e- commerce
data communications solutions, handling more than 19 million transactions daily
from two million businesses. Finally, as an Internet Super Carrier, PSINet
provides the ideal infrastructure to support other companies offering Internet
services. We are, in effect, the Internet Service Providers' ISP, supporting a
full spectrum of dial-up and dedicated access services, security solutions, Web
hosting, e-mail and fax applications that can be privately labeled and sold to
end-users by ISPs, telecommunications carriers, or any group with a large
customer or membership base. As part of PSINet's partnership with the NFL's
Baltimore Ravens - which includes naming rights for PSINet Stadium at Camden
Yards - we created the first affinity ISP in professional sports history. The
report of the Advisory Commission on Electronic Commerce, submitted to the
Congress in April, makes significant recommendations with respect to ISPs. The
Subcommittee has asked that we address those that relate to Internet access, and
that would specifically impact ISPs. The Advisory Commission, by a vote of I I
Yeas to I Nay, with 7 Abstentions, proposed to make permanent the current
moratorium on any transaction taxes on the sale of Internet
access, including taxes that were grandfathered under the
Internet Tax Freedom Act. We strongly support this majority
proposal of the Advisory Commission and we look forward to a permanent ban on
Internet access taxes. At this point, we express our
appreciation to the House of Representatives for the vote taken last Wednesday
to extend the moratorium on Internet access taxes for a
five-year period. In addition, we thank the House for its foresight in
rescinding the grandfather clause for the nine states who currently impose
taxes on Internet access. The margin of approval in the House -
352 to 75 - is very heartening to those of us in the Internet and telecom
sector. PSINet believes that a permanent ban on Internet access
taxes is a substantial, but only preliminary, step toward the
type of radical simplification and reform of traditional tax
systems that must take place if those systems are to continue to function in the
coming decades without suppressing the technological dynamism that powers the
American economy. When we refer to Internet access, generally we think of
consumer- oriented, modern- based, "narrowband" dial-up access from a home PC,
for prices ranging from $9.95 to $29.95 per month, sometimes at a flat rate and
sometimes with an additional premium for hours of usage above a certain level.
My goal, however, is to illustrate for the Committee the type of Internet access
that PSINet has always focused on - the provision of more complex, dedicated,
high- bandwidth access to businesses, often accompanied by additional
value-added services. The issues we confront when dealing with the
tax systems of states and localities in that context are
similar to that of other backbone providers and business-oriented ISPs. It is
very difficult to separate taxes on Internet access from the
plethora of other taxes to which we are subject, particularly
as we utilize our IP- optirnized network to take on some of the functions of
traditional telecommunications companies. Let me use as an example one of
PSINet's core service offerings to business customers - our "virtual private
network" (VPN) solutions, known as PSINet IntraNet. In the past, businesses
seeking to tie together the private data networks of geographically dispersed
offices have had to rely on traditional wide-area networking, requiring them to
lease expensive, dedicated telephone circuits running between
each remote office location. Building on our extensive backbone network, PSINet
can offer secure and reliable data connections between remote offices at a
fraction of the cost of traditional dedicated networks. Customers need only
purchase circuit connections between each office and the nearest PSINet POP
(instead of circuits spanning thousands of miles between the offices
themselves). We carry the customer's data traffic between remote offices over
our own backbone network, but we isolate it from traffic on the public Internet
by means of frame relay technology or, for more advanced services, by
encryption. Typically, a customer seeking a VPN solution is also concerned about
network security, since the data traffic between headquarters and satellite
offices may include highly sensitive confidential and proprietary business
information. If the customer's objective is to extend its exchange of data with
its business suppliers or customers over a VPN (known as an "extranet"), the
security concerns may be even greater. PSINet offers additional services -
beyond the basic "connectivity" solution - to address these issues, by means of
firewalls, packet filtering, encryption technologies, and other value-added
security services. Many of these solutions include hardware, software, on-site
and remote service and maintenance components, in addition to connectivity.
Let's examine the tax implications of this fairly
straightforward package of services. Since the moratorium was enacted, nine
states continue to tax Internet access (Connecticut, Hawaii,
Ohio for commercial customers, New Mexico, North Dakota, South Dakota,
Tennessee, Texas, and Wisconsin). The District of Columbia, Iowa, and South
Carolina have - wisely, in our view - repealed their Internet access
taxes after the moratorium went into effect. Which of the
services offered in this VPN package fall under the definition of "Internet
access" in the Internet Tax Freedom Act? Perhaps because the
answer is unclear, several states now impose tax on some or all
"enhanced" Internet services, including not only network security but also Web
hosting, Website design, application service provider ("ASP") offerings, and
others. The industry is also finding that there can be dramatic state and local
tax implications depending on how basic ISP access services are
"bundled" together with other value- added services. Specifically, a service may
be exempt if invoiced to the customer on a stand-alone basis but taxable if
bundled with other services. Many business customers are moving away from simple
dial-up access to higher-bandwidth connections using dedicated circuits, digital
subscriber lines ("DSL"), cable modems, and other means - and ISPs, naturally,
are providing those connections as part of a package. Where there is a separate
charge for connectivity, most states are likely to tax it
(since "telecommunications" are expressly excluded from the definition of
"Internet access" under the Internet Tax Freedom Act). Where
connectivity is bundled with Internet access into a single charge, states may
attempt to tax the entire charge, including the otherwise
exempt access fees. Not only are connectivity charges subject to
telecommunications taxes, but installation charges, disconnect
fees, and associated charges face varying tax treatment among
the states and localities. These traditional telecom categories introduce
extraordinary levels of complexity and expense, with over 300 types of
taxes and fees potentially applicable, at combined rates that
reach and (in some cases) exceed 20%. The interaction of multiple
taxes adds insult to injury. Frequently taxes
build on one another, where the base for calculation of one tax
may include other taxes applied to that service - thereby
assessing a "tax on tax." Federal and state
excise taxes, for example, could be built into the base for
computation of a state sales tax. Similarly, there are too
frequent instances of pyramiding of tax - payment of
tax at both the wholesale and retail levels - which increase
bottom-line service costs to the customer. For instance, while 13 states allow
telecommunications companies a sales tax exemption on equipment
used to deliver their services, only New York and, to a very limited extent,
Virginia do so for Internet Service Providers. ISPs generally cannot avail
themselves of resale exemptions with respect to the telecom connectivity
services provided as a necessary part of the offer of Internet access. One
concrete example is Connecticut, where regulations flatly deny a resale
exemption even where a dedicated circuit is resold directly to the customer. As
such, an ISP may pay tax on the lease of a circuit from the
customer to its POP, then be forced to bill its customer for the
tax again when it passes through the circuit cost. Finally,
which jurisdictions are entitled to impose their specific array of
taxes on which portions of the entire package of services (the
VPN and security services, in our example)? By definition, a virtual private
network spans several locations, usually with the headquarters or "hub" in one
state and the satellite or remote offices in others. Tangible products (such as
routers) may be shipped to specified locations and taxed there, but the services
(such as connectivity, remote monitoring, and network design) may span a variety
of jurisdictions - each with its own tax rates, its own
definitions and rules for determining the amount of the overall transaction
applicable to its jurisdiction, and its own exemption requirements - many of
which may be contradictory or inconsistent with those of other jurisdictions. A
recent report noted that a full service telecommunications provider operating
nationwide would be required to file 55,748 tax returns a year,
with total effective tax rates exceeding 20% in ten states
(with Texas topping the list at 28.56%).' It is difficult to overstate the
burden these complexities place on ISPs as the tax collection
agents for these overlapping tax systems - not to mention their
customers, as they attempt to sort out the taxes included in
their bills. As another tax expert observed in a recent
authoritative study: C ompared to other advanced industrialized nations, the
sales tax in the United States is complicated by the large
number of state, county, and local jurisdictions that impose sales and use
taxes. Currently, 45 states and the District of Columbia impose
sales or use taxes at the state level. In addition to the
states, approximately 7,500 counties, cities, towns, transportation districts,
and other special local jurisdictions impose sales or use taxes
on transactions occurring within their borders. ... By contrast, in the European
Union, there are only 15 countries and generally only 15 different national
value-added tax rates. There are no local or county value-added
tax rules or rates to be complied with.' A fair assessment of
the value of Internet access taxes should therefore take into
consideration the negative effects that saddling U.S. companies with these
administrative costs may inflict on their competitiveness in the global economy.
Besides going a short distance to reduce the burdens and costs of collection on
ISPs, a permanent moratorium on Internet access taxes would
have an immediate positive impact by reducing the costs of Internet access for
both consumers and businesses. Reducing access costs is a quick and obvious way
to boost American competitiveness and to lower the "Digital Divide" that
threatens to exclude from the information economy those citizens with fewer
resources to spend on computers and Internet connectivity. Making the moratorium
permanent and applying it to Internet access taxes previously
excluded by the grandfather clause would not threaten state and local revenues
in any significant way. States could radically simplify and decrease the telecom
taxes that are now imposed on the channels by which Internet
access is delivered to their citizens - telephone lines,
wireless transmissions, and cable television and satellite communications - and
still maintain substantial revenue from these sources. Income
taxes, both corporate and individual, from income generated by
the growth of electronic commerce would be unaffected. Sales and use
taxes on most in-state purchases would continue to be
collected. Revenue losses from abolishing Internet access taxes
and decreasing other telecorn taxes would therefore be minimal.
There is much more to the Advisory Commission's report, of course, than the
recommendation that all Internet access taxes be subject to a
permanent moratorium. PSINet supports both the Formal Findings and
Recommendations of the Commission and the policy proposals adopted by the
majority of the Commissioners. Significantly, the Commission's report observed
that it is early to predict the trends and outcomes of many aspects of
e-commerce as it continues its development, and that empirical assessments of
these trends are just beginning to be made. We are grateful to the Chairman and
this Subcommittee for their leadership in holding these hearings, and for
extending this opportunity to PSINet to present its perspective. We hope you
will continue to look to PSINet to work with you on the issues arising from
tax policies, electronic commerce, and the Internet. We look
forward to answering any questions you may have.
LOAD-DATE: May 23, 2000, Tuesday
