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Document 72 of 142.

May 3, 2000, Wednesday

SECTION: CAPITOL HILL HEARING

LENGTH: 421800 words

HEADLINE: HEARING OF THE TELECOMMUNICATIONS, TRADE AND CONSUMER PROTECTION SUBCOMMITTEE OF THE HOUSE COMMERCE COMMITTEE

SUBJECT: INTERNET SERVICE CHARGES

CHAIRED BY: REP. W.J. TAUZIN (R-LA)

WITNESSES: FRED UPTON (R-MI); PETER LOWY, CO-PRESIDENT, WESTFIELD-AMERICA, INC.; HARRIS N. MILLER, PRESIDENT, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA; GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM; LEROY GRAY, RAVEN-VILLAGES INTERNET;

2123 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

10:00 AM. EDT WEDNESDAY, MAY 3, 2000

BODY:
REP. W.J. "BILLY" TAUZIN (R-LA): The subcommittee will please come to order. Today, the subcommittee begins a review of two important pieces of legislation --H.R. 1291, introduced by our good friend, Mr. Upton, and H.R. 4202, legislation sponsored by Mr. Ehrlich. The issue of interstate access charges has been with us, and with this committee, since 1983 when the FCC first constructed its access charge review. In recent years, however, the FCC's access charge exemption for information service providers has been, and continues to be, a subject of much debate.

Some would argue that the rationale for this exemption no longer makes sense because the information services industry is no longer fully in its infancy as it was in '83. In fact, many ISPs are larger in terms of market capitalization than many telecommunications service providers that still must pay per-minute access charges. On the other hand, there are those who feel that imposing per-minute access charges on ISPs would result in dramatically increasing the consumer price of dial-up access to the internet. The current exemption, they argue, enables ISPs to continue charging customers flat rate monthly fees for access to the internet, whereas long distance charges are computer based on minutes of use.

The subcommittee recently heard from Governor Gilmore of Virginia, the chairman of the Advisory Committee on Electronic Commerce, on this very issue. He believes that per-minute access charges would suppress demand for internet services and, as such, would stifle innovation in the electronic marketplace. It certainly does make sense. Consumers today stay online for lengthy periods of time -- sometimes for several hours. When confronted with time- sensitive charges, consumers will necessarily pull back. They'll limit their time spent surfing the web per week and, not surprisingly, unload on Congress for authorizing internet service price hikes.

To ensure that ISPs do not inflict rate shock on their subscribers, I've joined with Congressman Fred Upton in cosponsoring H.R. 1291, which is intended to prevent time-based access charges from being imposed on consumers. Since the introduction of H.R. 1291, I think that all of us have learned a great deal more about this subject and, unfortunately, the complexity of the FCC's web of access charges. When the '83 exemption from access charges was promulgated, there was little information service traffic, and certainly no internet traffic. As a result, we have a fine line to walk here.

We must, on the one hand, ensure that those consumers who use their computers to view a website, send an email, or purchase a service or product, are not charged on a per-minute basis. Simultaneously, however, we need to extensively consider whether it is still equitable to subsidize ISPs by not charging them for the fair share of the cost of their use of telephone networks. And, we also need to debate issues like whether the internet telephony or computer- to-computer voice services should be exempt from access charges. I mean, think about this with us as we debate the bill.

When telephone services become very permanent on the internet and, therefore, internet users are accessing and using the telephone networks to make telephone calls -- not to do data transmissions or ordinary internet surfing and emailing -- but when they actually begin making telephone calls regularly over the internet, as many are beginning to do, is it fair for other telephone users to have to pay for those networks through access charges and, yet, internet users are nonexempt? There is a question of fairness. There's a question of equity. And, there's a question of concern about the viability of those networks, given a world of internet telephony.

Well, we're going to debate that. And, I think before we complete this session today, and before we begin mark-up on the bill, hopefully we'll have a consensus on how to deal with that very thorny issue. We've also gathered today to discuss the utility of extending the Internet Tax Freedom Act's moratorium on state and local taxes. The country is home to over 7,000 taxing jurisdictions. Nonetheless, many electronic retailers are small operators that could have real trouble complying with the complexity and the burden of multiple and discriminatory taxation. And, so, we gather today to examine whether or not we in fact ought to extend the moratorium that was just recently enacted.

We cannot lose sight, however, of what state and local taxation would mean to consumers, as well as the growth of electronic commerce. At the same time, all evidence suggests that states and localities are prospering, even as electronic commerce grows at the same time. In short, those who ask Congress to empower the states and localities to discriminatorily tax the internet have to make a stronger case. I look forward to that discussion. With all that said, we should consider the two bills before us today with a clear understanding that they are vital components in our efforts to implement a sensible and fair policy regarding the taxation of electronic commerce.

Our debate on this important issue will ultimately determine who can, who should, and who will pay for the cost of providing the facilities and the capabilities necessary to make the internet a fully operational network. The chair yields back his time and recognizes the gentleman, my friend from Massachusetts, Mr. Markey, for an opening statement.

REP. EDWARD MARKEY (D-MA): Thank you, Mr. Chairman, very much. I want to commend you for holding this hearing on a number of tax issues that are related to the internet. This hearing follows the hearing that we had a few weeks ago where we heard from Virginia Governor Gilmore on his perspective on the work of the special commission we established to explore internet taxation issues. Today, we revisit the issue of internet taxes, but also focus on the exemption that many internet service providers enjoy from access charges.

The exemption on enhanced service provider access charges began in 1983. In the late 80's, the Federal Communications Commission began a rulemaking which sought to reverse its earlier decision.

I believe that the FCC would've imposed such access charges on Prodigy and CompuServe and the other forerunners of the internet revolution back in 1988, but for the efforts of this subcommittee, which had hearing after hearing, with the Federal Communications Commission sitting right at that table, as we tried to persuade them that that would be the wrong route to go -- that flat rate pricing was much more preferable than the per-minute charges that they were looking at.

And I believe in many ways that that was the pivotal decision that helped to make the internet viable. I think if permanent charges were used today or had been used over the last 12 years, that there would have been a completely different direction that the internet would have taken. I'm very proud of the work that this subcommittee did in the 1980's in convincing the FCC to change its position and to ensure that the flat rate pricing was in fact the approach which was taken. Because it was the belief of this subcommittee back then that it was necessary to nurture the fledgling information industry through the retention of the exemption.

Now, one of those then fledgling beneficiaries of government protection from access charges now intends to own CNN, TNT, the Atlanta Braves, and all of Time-Warner. So, obviously, the policy was a success -- in 12 years to have been able to move to the point when one of those fledgling companies now owns the most important media corporation in the world. It is quite appropriate and timely, as a result, to revisit this issue and to analyze the affect on consumers and e-commerce if usage-sensitive per-minute access charges were levied on internet service providers.

I have battled time and again to lower universal service fees over the years, particularly access charges. I continue to believe that the current universal service support levels are excessive and bloated. We must examine, however, the overall equity across industries of universal service obligations. It is unfair to ask consumers of local phone companies and traditional long distance services to pay the lion's share of the universal service support of the network, especially if that network is utilized by internet companies to offer competing services without such obligations, especially if those services are identical to the services which are in fact provided by the local and long distance phone companies.

As we explore all of these internet tax-related issues, I believe it is important to keep things in perspective. The magnitude of what we're talking about is relatively small. The Department of Commerce announced just last month that the estimate of US retail e-commerce sales for the fourth quarter of 1999, October through December, was $5.3 billion. That means that e-commerce sales accounted for less than one percent of the total retail sales estimate, which was $821 billion for the quarter.

Yet, there's little question that the growth trend for on-line commerce promises to be exponential in nature. That's why this hearing is absolutely essential. That's why, Mr. Chairman, I want to compliment you for calling this double-header today. I think we really are catching these issues just at the point at which they should be dealt with by the subcommittee. I yield back the balance.

REP. TAUZIN: I just wanted to compliment the gentleman on his observation with reference to the fledgling industry now becoming such a giant, and also commend him for his assistance in making sure that there was at least one competitor -- broadcast competitor that customers could turn to. When we see the awful struggle these two titans, Disney and Time-Warner, I also want to make the point it sure would be nice to have another (live?) competitor. Maybe we can discuss that sometime in this committee. I thank the gentleman.

The chair's now pleased to welcome and recognize the author of one of the pieces of legislation we're going to hear today, the gentleman from Maryland, Mr. Ehrlich.

REP. ROBERT EHRLICH (R-MD): Thank you, Mr. Chairman. Thanks for having this hearing today. I will be brief. We all know this is an issue that will dominate the work of this committee and Congress for years to come. I applaud the leadership of Chairman Bliley generally on telecommunications issues. As we know, it was his leadership that led to the enactment of the Telecom Act of 1996, which has provided the roadmap for deregulation of the industry generally. In addition, I want to recognize my buddy at the witness table, Fred Upton, and his bill to prohibit access fees, which I support.

Mr. Chairman, of all the constituent letters I have received during my tenure in Congress, internet taxation, specifically the imposition of per-minute fees, is by far the most popular issue. To date, I've received almost 4,000 letters -- 3,700 to be exact -- asking me to oppose any efforts by Congress or the FCC to impose charges on internet service. Regardless of whether those fees come in the form of direct or indirect charges, my constituents have made it clear they do not want their internet bill to resemble their telephone bill, comprised of outdated taxes and a multitude of confusing service charges.

In an effort to prevent government from imposing fees and taxes that increase the cost of internet service for all Americans, I recently introduced H.R. 4202, the Internet Service Promotion Act of 2000. The purpose of this bill is twofold. One, prohibit access charges or regulatory fees on internet service providers. And, two, extend the internet tax moratorium by an additional five years. One of the primary reasons for the tremendous growth of the internet is that government has taken a hands-off approach. It's imperative that Congress prevent unnecessary fees or regulations that only serve to impede the rollouts of internet service if the internet is to fulfill its promise of revolutionizing how the world communicates.

It's my understanding there may be concerns regarding Section 2 of my bill, which prohibits access charges on internet service providers. As always, I will work with any and all parties to resolve concerns, issues, or unintended consequences resulting from this provision. With respect to the moratorium, I want to recognize the hard work of my colleague, Chris Cox, in passing the original bill in 1996. This moratorium has resulted in the rapid development and deployment of electronic commerce internet service in general all across America. I know my good friend, John Kasich wants to make this moratorium permanent.

While I share his enthusiasm in this regard, I believe the five- year extension of the moratorium is appropriate and will provide Congress and the American people the evidence that is needed to determine whether the moratorium should be made permanent. I also want to take this opportunity to recognize another friend and leader on the internet tax issue, the Governor of Virginia and Chairman of the Advisory Commission, Governor Jim Gilmore, who has taken his time and talent on this important issue and, along the way, provided compelling evidence for keeping the internet tax free.

I look forward to working with him and other members of the commission to produce legislation that implements the sound policy recommendations of the commission. Once again, thank you, Mr. Chairman, for holding this hearing, and I look forward to moving these important bills through the committee and onto the House floor, and I yield back.

REP. TAUZIN: I thank the gentleman. The chair recognizes the gentleman from Virginia, Mr. Boucher, for an opening statement.

REP. RICK BOUCHER (D-VA): Thank you very much, Mr. Chairman. I applaud your intention to move quickly to approve legislation that will confer a major consumer benefit through the repeal of the three percent federal excise tax on telephone services. Since that tax is currently passed through to consumers, it will be the consumers of telephone services who will directly benefit from its repeal. I also endorse your effort to extend the current moratorium on taxes that are discriminatorily applied with respect to the internet, and on multiple state and local taxation with respect to electronic commerce.

And I also think that a permanent prohibition on access charges, as applied to internet service providers, is appropriate. As we make these changes, however, I want to encourage the subcommittee this morning to consider removing another unfair charge that is associated with internet service delivery. At the present time, local telephone companies make payments to each other for the termination on one company's network of telephone calls which originate on another telephone company's network. This arrangement is called reciprocal compensation. And while the arrangement works well with regard to traditional voice-based telephone traffic, it operates in an illogical and inequitable manner when it is applied to the delivery of internet traffic.

In this context, it has become an entirely one-way arrangement and has no reciprocal nature.

Some internet service providers have qualified as Competitive Local Exchange Carriers, and as CLECs, they receive these payments from the local telephone company when that company's customer connects over the modem to the ISP who carries that customer's internet account. In other words, the ISP receives from its customer traffic that derives from the local telephone company's network, and gets paid by the local telephone company for the privilege of having that information delivered to the ISP. No calls are made in return. And, so, all of the payments go from the local telephone company to the ISP, which has qualified as a CLEC.

In some other instances, CLECs have gone into business just for the purpose of serving ISPs, so that they can receive these reciprocal compensation payments. And since no calls ever originate on their networks, they make no payments in return. And the problem is of truly large magnitude. Payment from CLECs under this distorted structure now total hundreds of millions of dollars annually, and those numbers are rising dramatically as the level of internet usage increases. It's an unfair system. And, as we enact bills before us that would prohibit the imposition of access charges on ISPs, I urge that we take this opportunity to remove the current unfair reciprocal compensation fee that is associated with internet access. It's a perfect fit.

And as we confer a major benefit on ISPs, I think we also should correct the distortion in the current reciprocal compensation system. I also applaud your statement, Mr. Chairman, that we need to look carefully at the affect on universal service support in the event that internet telephony for the provision of long distance calling becomes commonplace. And I think that day will arrive and probably pretty soon. When that happens, the access charges that long distance providers pay to local exchange carriers for terminating their traffic would no longer be paid, and I think that would have a dramatic affect on universal service support. I think it's appropriate that we consider that as we make the decisions with regard to the imposition of access charges on ISPs.

These are important subjects, and I am very pleased that the subcommittee is addressing them. I want to commend our colleagues, Mr. Upton and Mr. Ehrlich, for bringing these measures before us, and I look forward to the witnesses' testimony today. Thank you.

REP. TAUZIN: The chair thanks the gentleman particularly for reemphasizing some of the concerns that I think we need to address before we move the bill forward. The chair is pleased to welcome the chairman of the full committee, the gentleman from Richmond, Virginia, Mr. Bliley, for an opening statement.

REP. TOM BLILEY (D-VA): Thank you, Mr. Chairman. With today's hearing, this committee begins the task of ensuring that the internet remains a tax-free environment. We've all talked about how important the internet and electronic commerce are to the growth of the economy. They are the engine driving this long train of economic growth. But now comes the time for Congress to do more than pay lip service to the principles of lower taxes and deregulation.

This subcommittee will examine two bills today that give us an opportunity to provide consumers with relief from taxes and regulation. I want to commend my colleagues, Bob Ehrlich and Fred Upton, for their hard work in crafting these two bills. They have identified a real problem that affects our constituents, as well as the development and growth of electronic commerce. We've all seen the e-mails and letters from constituents, pleading us to block the FCC from imposing a modem tax or an e-mail tax. In fact, I've brought two recent examples with me this morning, and I ask unanimous consent, Mr. Chairman, that they both be included in the record.

I should add that consumers are right to be concerned. While it is true that internet service providers are currently exempt from having to pay access charges, the FCC could always change its mind. Moreover, some in the telecommunications industry continue to wage battle at the FCC and in the courts on this issue. It is clear that some have a vested stake in extending the FCC's access charge regime so that it sweeps in consumers of internet access service. The Ehrlich and Upton bills, however, would block the FCC from doing so. More to the point, these bills would block the FCC from imposing per- minute access charges on consumers when they log-on.

The practical -- not to mention the political -- implications of doing otherwise are huge. Keep in mind that a run-of-the-mill telephone call lasts roughly five minutes. By contrast, a consumer stays online for about 45 minutes to an hour. Consumers would be understandably outraged if Congress allowed such a tax. People using to the internet grows everyday precisely because the cost is falling, and it's charged on a flat-rate basis. The imposition of per-minute access charges would undo all that.

Moreover, we should recognize access charges for what they are -- an FCC-imposed tax that's passed on to the American consumer. A per- minute tax on internet access hurts consumers, hurts the internet, and hurts electronic commerce, both of which depend upon affordable access to the internet. I support the five year extension of the current moratorium on state and local taxation of internet access and electronic commerce for a number of reasons. First, it's the right thing to do for the American consumer. Electronic commerce provides consumers with untold efficiencies, many of which might dry up if states and localities extend their power to tax to the internet.

Moreover, to those who say that the Internet Tax Freedom Act is unfair to states and localities, I reply that the government should receive only that which it needs, not what it wants. And by every estimate, electronic commerce poses little, if any, threat to their tax revenue needs at this time. Let me close by acknowledging Grover Norquist, who is with us today. As a member of the Advisory Commission on Electronic Commerce, he did fine work to advance the cause of lower taxes and less regulation. Thank you, Mr. Chairman, and I yield back the balance of my time.

REP. TAUZIN: Thank you, Mr. Chairman. And the chair is now pleased to recognize the ranking minority member of the full committee, the gentleman from Michigan, Mr. Dingell, for an opening statement.

REP. JOHN DINGELL (D-MI): Mr. Chairman, thank you. I commend you for holding this hearing. The two bills before us deal with two important internet policy issues. The first issue is whether internet service providers should be subject to either traditional FCC access charge regimes, or any other universal service support mechanisms. The second issue is whether the current internet tax moratorium should be extended temporarily, pending the resolution of a permanent internet tax policy.

The subcommittee understands well that formulating legislative policy dealing with the internet is an inordinately complex issue and becoming increasingly so. It requires making judgments and predictions about the future evolution of internet technology, and the consumer applications that are expected to flow from it. Prognostication of this sort is nearly an impossible task given the unprecedented speed with which internet develops. As a result, I am more convinced than ever that we need to tread lightly and to take extreme caution when making legislative changes in the area.

It is vitally important we understand the implications of all of our actions, because the economic penalty for not doing so is more quick and more severe than ever before. One need only look to the volatility of the financial markets to understand the fragile character of the new economy with which we are tinkering. On the whole, I believe the bills before us take a reasonable and modest approach to dealing with the various regulatory charges and taxes on the internet. And I commend you, Mr. Chairman, and the drafters for their thoughtful work in this regard.

While I generally agree with the purpose and intent of the bills, I have some reservations about the legislative language in each bill, and I hope that we will take the time necessary to avoid serious, unintended consequences. While each bill appears aimed at protecting consumers from incurring per-minute charges for internet access, H.R. 1291 may go farther than is necessary to achieve this goal. I agree we should make sure that the access charges or other universal service support mechanisms are not applied in a way that will cause consumers to pay by the minute for their basic internet connection.

But once consumers connect to the internet, long distance telephone paging or other services that happen to be procured over internet should not be treated in a discriminatory way compared with non-internet counterparts. This is a very important point. The statute should not prevent these services from being treated similarly to those delivered to consumers by traditional means. Particular to the purposes of determining whether or not they should contribute to support universal service, the language of H.R. 4202 may be better suited to achieve this desired result.

On the issue of internet tax, I believe it is wise to extend the moratorium contained in the Internet Tax Freedom Act for some period of time. The moratorium was drawn narrowly to apply to taxes imposed on internet access and to multiple or discriminatory state and local taxes on electronic commerce. At the same time, it permits states to tax remote sales by the internet in the same way that remote sales by mail order catalogs are handled today. However, while the moratorium ostensibly allows states to impose sales and use taxes on these transactions, it is beyond dispute that the states are currently ill equipped to actually collect this tax on most remote sales, whether they be internet or otherwise.

Therefore, it is critical that a cohesive policy be put in place sooner rather than later to simplify the process for imposing and collecting taxes on these remote transactions. As remote sales made by the internet continue to increase exponentially, states are playing beat-the-clock with their ability to retain, in many instances, greater than half their existing tax base. Given the enormity of the stakes involved for the financing of public schools, roads, fire, police departments, and other essential services, as well as the myriad of needs of other services to our communities, it is imperative that we revisit this issue at much shorter intervals.

The five year extension proposed in H.R. 4202 actually would not expire until more than six years from today. In that time, as measured by the internet, that is nearly an eternity. I hope the chairman and the drafters of this legislation will work with us to establish a more reasonable timeframe and to permit a more frequent, and I think, wiser opportunity to review these matters, and to protect the public from potentially crippling results. Thank you, Mr. Chairman, once again, for holding this hearing. I look forward to working with you as the matter goes forward.

REP. TAUZIN: I thank the gentleman for his thoughtful comments. The gentleman from Florida, Mr. Stearns, is recognized.

REP. CLIFF STEARNS (R-FL): Good morning, and thank you, Mr. Chairman. I also applaud you for having this hearing to examine the legislation of my colleague, Mr. Upton, and to, you know, preclude the Federal Communications Commission from imposing a per-minute charge on internet access services, as well as extending the current three-year moratorium on state and local taxation of internet access and electronic commerce.

Mr. Chairman, I think we probably could move post haste on this bill because I think the Telecommunications Act of 1996, while it didn't address the issue of the internet, I think the FCC, with this access charge or form order in its April 1998 report on universal service, the FCC took the steps -- probably the proper steps -- to ensure enhanced service providers and ISPs are not regulated as telephone carriers under Title II, and that enhanced service providers are identified as end users of the telephone network, thereby not paying the access charges of long distance.

I think that act alone would probably justify post haste on Mr. Ehrlich's bill and Fred Upton's bill. We can combine the two of them. At the same time, Mr. Chairman, we might as well add the idea of repealing the three percent telephone excise tax that was passed in 1898, and we could call this overall bill the "protection of the consumers who are using the internet act." I think many of us realize that way down the road if e-commerce succeeds ultimately, in which everybody is buying everything off the internet, there might have to be adjustment. I'm not sure what that adjustment would be. Certainly cities, towns and states can get revenues from other sources.

But the continued success of the internet is, I think, early stage is contingent upon whether it's taxed or not. I don't think it should be taxed, and so I urge my colleagues to move forward on these bills and pass them this year. Thank you, Mr. Chairman. I yield back the balance of my time.

REP. TAUZIN: The chair thanks the gentleman also, a cosponsor of Mr. Upton's bill. The chair now recognizes the gentleman from Tennessee, Mr. Gordon, for an opening statement.

REP. BART GORDON (D-TN): Mr. Chairman, I'm enjoying listening to all these comments, and I will reserve any remarks to hear Mr. Upton. I'm sure he's got something he'd like to share with us.

REP. TAUZIN: The gentleman from Texas, Mr. Green, then is recognized.

REP. GENE GREEN (D-TX): Thank you, Mr. Chairman, I appreciate the subcommittee's continuing interest in the internet taxation subject. As a cosponsor of Mr. Upton's bill, I believe that Congress cannot allow the FCC the ability to impose per-minute charges on internet access services. With the explosive growth in data traffic, per-minute access would quickly drive consumers off and kill the promise of this cutting technology of the future. Because the access fees were originally designed for voice traffic, there's little concern about adding a few cents per minute to fund the maintenance of the telecommunications infrastructure.

Unfortunately, the length of a consumer's phone call differs greatly from the same time consumers spend online. Access charges are designed for the typical five minute phone call. They were not intended for the typical consumer's 45-minute online session. I believe that portions of each of these bills' continuing the ban on per-minute access is something the subcommittee should act on immediately. I do, however, have to express reservations with portions of Mr. Ehrlich's bill that deals with extending the current moratorium on state and local taxation of electronic commerce for an additional five years.

To prohibit states from exercising -- expressing local needs, raises my concern. If they asked the Advisory Commission on Electronic Commerce to develop a consensus policy toward state and local taxation of internet commerce, they've many questions unanswered. For instance, the members of this subcommittee should -- we do not have reliable numbers as to what states stand to lose in local sales tax revenue if we extend the moratorium. My own state of Texas has no income tax and relies heavily on the sales tax to meet our spending obligations and priorities, and I'm not yet comfortable with the idea of excluding internet sales from local taxation. I'm not sure how it'll affect not only my own state, but also other states in our nation.

I further question the need to rush into further extending the moratorium when the current ban does not expire until October of next year. I believe we should use this time to gather more information as e-commerce matures, so that we can all have a better idea of the true size and scope of the issue. I want to make it clear that I don't favor raising taxes. However, we have to place a mandate on 50 states that could seriously impact their financial health in the future. The only issue I was sure of, after last month's hearing with Governor Gilmore, was that the majority of governors in this country do not feel comfortable with Congress limiting their options on this issue.

I support the continued growth of e-commerce, but right now it is the traditional mall businesses in my district that supplies the jobs for my constituents. I believe the subcommittee could be better served in using the additional time available to us under the current tax moratorium to gather comprehensive information. I want to conclude by thanking the chairman, not only for today's hearing, but also for the hearing last month when we had Governor Gilmore. I yield back my time, Mr. Chairman.

REP. TAUZIN: I thank the gentleman. The chair recognizes the gentleman from Illinois, Mr. Shimkus, for an opening statement.

REP. JOHN SHIMKUS (R-IL): Thank you, Mr. Chairman. Thank you for the hearing, and I'll be brief. I think there's consensus that the access charge issue, we need to continue the moratorium. There's a credible debate out there on the sales tax issue. I think technology will come around to make that doable. Although as a prior tax collector, in my prior life, of property taxes, I think government officials at all levels do not do their constituents a good service when we have all these taxes, user fees, sales taxes, and they really can't track back the amount of taxes that they're paying.

When you have a property tax bill and you get the bill and you have to write the check out to fund government, that's the best way to be held accountable of the fees. So, I would challenge the states and local governments to start being prepared, because this new era of technology is going to change, and I don't know if we're going to be able to keep up with it. So, you may have to be more honest with your citizens and find a proper, appropriate billing so they can track the actual cost of government and approve of those. So, this is a great time to talk about technology and the future, and the cost of government on our individual consumers, and I look forward to it. Mr. Chairman, thank you very much.

REP. TAUZIN: I thank the gentleman. The chair would ask the vice chairman of the full committee, Mr. Gillmor. No. Then, the chair is pleased to finally recognize Mr. Upton. You've finally got a taste of what it's like to be on that side listening to all of us. It must have been very unpleasant. It's now your turn, sir, and we're pleased to welcome the author of House Bill 1291, the honorable Fred Upton from Michigan. Mr. Upton.

REP. FRED UPTON (R-MI): Thank you, Mr. Chairman. Good morning. I appreciate the opportunity to testify on behalf of my bill, H.R. 1291, and I thought I'd begin my testimony with a short quiz. Who is the most unpopular member of Congress and what is the most unpopular bill? Mr. Markey, I thought you'd have a chance there. Massachusetts. That was the state. The answer is Congressman Schnell and his bill, H.R. 602P, and that is the final answer.

There is no such Congressman and there is no such bill. But if you're like me, you have received thousands and thousands of letters and e-mails saying that that bill in fact will be up in the next two weeks, beginning a year and a half ago, and that they are outraged that the Congress is going to take this bill up. And, of course, that is a rumor that is only false. Around the same time, however, another similar e-mail campaign suggested that the FCC was going to impose a per-minute access charge on internet use. And again, our constituents flooded our offices with e-mails to express their outrage.

Upon closer examination of this rumor, the FCC was asked if it was going to authorize a per-minute access fee on internet use. And in reply, the FCC stated that it had no plans at the present time to authorize such a fee. While I am glad that the FCC has no plans at the present time to assess such a fee, I am very troubled by the fact that there is nothing to prevent the FCC from doing so today, or tomorrow, or the next day, or the next. And that's why I introduced my bill, which so many of you have cosponsored today.

My bill will prevent a stopwatch from being placed on the internet, so that our constituents are not charged by the minute when they surf the web or when they e-mail their friends, family, customers -- or even us for that matter. And, after all, our constituents already are paying for phone service and a monthly fee to their internet service provider. Clearly, if our constituents were charged by the minute when they surfed the web or e-mailed, this would drastically increase the cost and dramatically inhibit their use of the internet.

This would disproportionately impact folks who communicate by e- mail, particularly families with children, or spouses in the military overseas, or children who are in college far away from home, families who are scattered across our nation or around the globe, and seniors on fixed income who have finally begun to communicate by e-mail to their grandchildren. We cannot let this happen, and my bill prevents it. And I am pleased that most of you here today, in fact, our cosponsors, along with 138 of our colleagues from both sides of the aisle. And I am pleased that Governor Gilmore testified in support of this bill when he testified before this subcommittee last month.

More specifically, my bill would prohibit the FCC from imposing any access charge that is based on a measure of time for the support of universal service. And as such, my bill is delicately crafted to prevent internet users from being swept into the current system of implicit subsidies that local and long distance telephone companies and their regulators have long relied on to promote and preserve universal service, without undermining the principle that phone companies need to be able to recoup the legitimate costs associated with providing services related to the internet.

On a final note, given the rapid pace of telecommunications technology, I believe that we must carefully consider how steps Congress might take today will impact, or apply to, future technology. In this regard, I believe there are legitimate concerns that a broad interpretation of my bill could jeopardize the near future deployment of internet telephony, which would enable people to use their computers to communicate by voice over the internet. To set the record straight, I would like to make crystal clear that my bill is not aimed at this type of voice telecommunication, but instead at data communications. That is why so many of our constituents have e-mailed us over the last year and a half.

And, furthermore, I recognize that the dazzling advances in technology have the potential to blur distinctions between data and voice, making our attempts to legislate all the more difficult, but I firmly believe we can carefully craft a proposal, based on my bill, which will accomplish our objective in a responsible manner. Again, Mr. Chairman, I appreciate the opportunity to come and testify before my former subcommittee and I look forward to being back in the future as well. I yield back the balance of my time.

REP. TAUZIN: The chair thanks the gentleman for his presentation. Fred, who's this Schnell? Is that a rumor on the internet?

REP. UPTON: I don't recall. One thing I do know, he's not a Republican.

REP. TAUZIN: Is there some rumor on the internet that -- REP. UPTON: It is.

REP. TAUZIN: That this fictitious Congressman is about to impose -- what is it? Modem fees on the -- REP. UPTON: The word is, and I read and send all my legislative mail -- and I have received over -- well over a thousand e-mails from my constituents telling me that in the next two weeks, we'll be taking up H.B. 602P, offered by Congressman Schnell and would hope that I would vote no on that measure. And I've been receiving that word about the next two weeks since January of last year. I think we did once have a Congressman Schnell, but not during my service in the Congress.

REP. TAUZIN: Mr. Markey and I were commenting that when you asked that question about who was the most unpopular member of Congress, it's not that we didn't have a ready answer for you, we had too many ready answers. But, obviously, there is no Congressman Schnell and there is no such bill. There is, however, you bill, which literally is aimed at targeting protection against access fees for regular data services on the internet.

You heard my comments about my concern -- other members expressed it -- that this bill not settle -- not get into the question of whether or not, when the internet becomes the vehicle for telephony, whether the ISPs who provide telephony services to people should or should not be required to contribute to the maintenance of the networks and the universal service systems that support telephone networks. Do you share those similar concerns?

REP. UPTON: I want to make it absolutely clear that you are correct. We've not had a chance to have that colloquy until now, but my bill was aimed solely at the data transfer. As an example, my brother-in-law serves still today in the Air Force. He's been all over the globe, in Bosnia, Kosovo, now in Japan. And as he's been on his missions, it has been wonderful for me to communicate with him, in terms of data, that we send back and forth using e-mail. And, this legislation looks at that transfer of communication, not at voice.

My bill should not at all be construed to incorporate voice as part of this bill, but solely on the data end of things.

REP. TAUZIN: I think it's important for all the members and listening audience to understand that this is not just a fictitious problem, that there are currently -- freephone.come. There are various others. I understand AT&T has bought Net to Phone (ph), which is an effort again to get into telephony on the internet.

And those forms of service of voice communications on the internet indeed are upon on. So, it's a consideration we have to somehow make in the final passage of this bill, that we don't get into that very thorny issue of who does and who does not support.

I also want to point out to the members that one of the problems here is that the FCC defined ISPs in the early 80's as being consumers or end users, not as providers. And so it complicates the issue of what happens when an ISP begins providing telephone service on the internet, as to whether or not it is subject to access charges for the support of universal service and the maintenance of telephone networks. Gets into a real thorny question. But, Fred, I have no other questions. I simply want to congratulate you on your good work and to also tell you that we intend to expeditiously move this legislation. And, again, ask your help in making sure that the language is designed in such a way that it does do exactly what you intend it to do in the bill.

REP. UPTON: If we need to make further clarification, I'll be glad to accept that language. I just appreciate your support from the get-go on this, and all the members of the subcommittee that have been very helpful.

REP. TAUZIN: I thank my friend. The chair yields to the ranking minority member, Mr. Markey.

REP. MARKEY: I thank you, Mr. Chairman, very much. I have this hearing that we conducted in the subcommittee on October 2, 1987, back long ago when I was chairman of the subcommittee.

REP. TAUZIN: That was long ago.

REP. MARKEY: And the subject of the hearing was flat rates versus per-minute charges. And the Federal Communications Commission was proposing to essentially move to a per minute system. And, so, the subcommittee held a hearing. At that point, we had it at the Tip O'Neill Building in Boston, Massachusetts, on this subject, with all of the concerned parties at the time. Chairman Dennis Patrick (ph) of the FCC was proposing that we move toward the per minute approach.

And, obviously, at that point in time -- as I'll go back here to my opening statement. At that point, less than one percent of Americans now use information services, and 95 percent of households with personal computers lacked the modems that allowed them to access those services. The industry rests on a precipice and these ill-timed FCC proposals could push it into the distant future. So after our series of hearings, we were able to convince them to flip their perspective and they ruled in the opposite direction.

REP. TAUZIN: You the man, Markey.

REP. MARKEY: Well, you know, even a blind squirrel finds an acorn once in a while. So, I'm taking credit only for ensuring that the issues of today are put in the proper context of the long storyline that they embody. And, that as we sit here today, we recognize the success of those policies. Okay. Let's take credit. This is not something that happened by accident, you know. The internet actually had to be voted from the public sector to the private sector by the Congress. We had to push it over there after they were constructed by BB&N (ph) in my congressional district.

So, I'm very proud of that. And, to a certain extent, that's why those hearings were held back then, because it was being constructed in my district. But, the question that I have now is that as it becomes much more of a ubiquitous technology, and it can be used for telephony, and since I continue to oppose moving from a flat rate to a per-minute basis, is it appropriate for us to look at a per line charge in order to make sure that there is some contribution which is made to the universal service pool? It could be relatively modest per month, but it at least would ensure that all sectors were contributing to the subsidies that go to rural America.

I mean, my concern here is that this rural America subsidy is something I think that most members want to protect, and we want to make sure that there is some fairness in this application. So, how would you look at, for example, per line -- maybe a dollar or two dollar per month per line charge as a way of ensuring that there is some aid given to rural subscribers?

REP. UPTON: Well, I would just note that as we've looked at the explosion of the internet -- last week I visited a fifth grade school outside of Kalamazoo --Portage's Central -- and I asked the students -- there were 120 kids -- how many kids there know how to use the internet. I don't think there was a single hand that stayed down. I know that the practical experience is that people have their home computer, whether it's AOL or whatever provider that they might have -- internet provider -- it's now that most folks are beginning to get two lines. My eight year old, my twelve year old, when I was on it and they were on it -- pick up the phone to call somebody, and if you had only one line, it disconnected the whole system.

And after a couple of crashes like that, like a lot of households, we now have two lines. We have a line solely dedicated to the computer.

REP. MARKEY: I guess my only question is, should there be a difference -- REP. UPTON: We are paying a line charge and the taxes as part of that, as is a lot of households -- REP. MARKEY: Should there be a difference though in terms of whether or not a telephone call is made on a circuit switch network as opposed to a package switch network? Because if you asked those children how many of them have phones in rural America, they're all going to raise their hands on that too. We want to maintain the universal accessibility to phones in rural America, and I think that's the central issue here. How do we maintain that quality rural telephone service and who should be subsidizing it?

And I guess my question is, should it just be my father, the retired milkman, or should there be some role that the package switch network, if it is going to provide telephone service, also play? But, not moving to a per-minute charge, but rather looking at perhaps a per line -- again, I'm just raising the question. More to look for a way to effectively ensure that rural telephone service is maintained at a high quality, and that it's done in an equitable basis. Are you open to that? To a per line charge, if it's modest?

REP. UPTON: Well, again, as I look at our household, as I look at all the people in our street, whether they be in Michigan or here, there are many people who have that second line. They're paying the taxes on that second line. They're paying the additional charge for that.

REP. MARKEY: I guess what I'm asking, if two companies are providing telephony, and one is using the internet to provide it, and one is using the traditional system, should one type of company be favored over the other one in terms of whether or not they have to subsidize the telephone service to rural America? Should only one -- REP. UPTON: My bill is clear that we're looking at data transfer, not at telephony. And I can see the case where the telephone provider might be in competition. There's ways now that you can circumvent and get free voice, long distance. I can see where that puts the existing folks at a real disadvantage, and that's why my bill was targeted only at data. I don't pretend to be an expert on the per line charge. I was not part of the hearings back in 1987.

REP. MARKEY: Well, in fact it was. I mean, to the extent to which we were trying to -- again, the analogy here is that at that point of time, there was only one percent usage. It tended to be the upper white middle class.

REP. UPTON: I'm surprised it was that high. One percent.

REP. MARKEY: Yeah. And 90 percent of them had college degrees. And without a decision at that point that was made -- that is to go to flat rate pricing that would lead to a faster democratization of access to technology, then I don't think we would be having this discussion here today. But, we have this kind of historical artifact, the rural subsidy -- the telephone that still sits there. And what you're talking about is all part of that larger discussion. I mean, it's really very difficult to separate it in terms of what the ones and the zeros mean in a digital era and the transmission of information out into the rural parts of country.

So, I just raised it to see if, you know, you might have some thoughts on it. But, thank you, Mr. Chairman.

REP. TAUZIN: I thank the gentleman. The chair recognizes the gentleman from Oklahoma, Mr. Largent, for a round of questions.

REP. STEVE LARGENT (R-OK): Mr. Upton, I just have one question. How do you respond when people talk about the diversion of tax dollars, I guess, or the loss of tax revenue to local, state, city, municipalities, as a result of the e-commerce that's taking place over the internet?

REP. UPTON: With regard to internet sales?

REP. LARGENT: Yes.

REP. UPTON: The way that I respond to it is, you know, I look at our state. Our governor has done a terrific job in cutting taxes and watching growth. We've been the number one job creator state the last three years. Property taxes, income taxes all have been cut. And our state has a nice problem right now of having a budget surplus. And the way that I respond to folks that would like to charge for products over the internet because of the unfairness of our six percent sales tax versus none, is to make things more competitive, I think our state ought to look at lowering the sales tax.

We're awash in cash. In lots of different ways, there ought to be a proposal on the table so that our bricks and mortar operations, to be more competitive with the sales that they're competing with, that they can lower that tax so that they're, in fact, in better competition. Now whether it's automobiles, books, or anything else, I think that ought to be on the table.

REP. LARGENT: Thank you, Mr. Upton. I yield back, Mr. Chairman.

REP. TAUZIN: I thank the gentleman. The gentleman from Tennessee, Mr. Gordon, is recognized.

REP. GORDON: Mr. Upton, do you have an income tax also in Michigan?

REP. UPTON: We do, and our governor and state legislature have just reduced that. It's coming down to under four percent now.

REP. GORDON: I think probably a lot of the surpluses that we're seeing in various states are not a function of the sales tax that is fairly inelastic, but rather those that have income taxes at this time of great prosperity. That is the reason that I think the tax coffers are swelling. As my friend from Texas mentioned, Texas and Tennessee only have a sales tax. So, we are somewhat at a disadvantage in that regard.

REP. UPTON: Now, my bill doesn't deal -- though I am supportive of the effort to extend the moratorium and I've had long discussions with my colleague, Mr. Cox, on this. My bill doesn't address that, though I do support it. Again, I look at our state. We've cut our property taxes by a third. It's been terrific. It's one of the reasons why our state has prospered to the degree that it has because we've had a terrific governor and a state legislature that has thought that cutting taxes would, in fact, create growth. And that's exactly what's happened.

REP. GORDON: Thank you.

REP. TAUZIN: Thank you, Mr. Gordon. The gentleman from Massachusetts, Mr. Ehrlich. California, Mr. Rogan, is next. I'm sorry.

REP. JAMES ROGAN (R-CA): Mr. Chairman, thank you. I want to thank you for calling this hearing and also I especially thank our colleague from Michigan for his presentation today. I'm fully in support of the premise under his bill. Just a quick question. Mr. Upton, I don't know whether you've seen this before. I read a couple of years ago that one of the premises underlying the creation of the sales tax was this. That because a business that opens its doors on main street would have to have responsiveness from the local community with respect to police, fire, parking spaces, meter attendants and so forth, that the justification for the sales tax was to help subsidize the cost of those additional expenses.

Have you, in your research on this bill, run into language that would indicate that there was justification for that?

REP. UPTON: Well, I agree with the gentleman's premise, which is one of the reasons why I support the moratorium on no sales taxes on the internet. In fact, it's very much like a catalog sale, where again you don't have a presence in that particular state. A point was made to me during our two week break that different products in different states -- terribly complicated in terms of what's taxed and what isn't. As I read the New York Times here in Washington, I see that they're talking about certain weeks in New York City where they're not going to have a sales tax on any clothes that are sold in the city. It's a special deal to get people to come into the city. Well, how do you factor that in?

There's a difference in the sales tax rate in New York City between a bottle of pickles that's glass and a bottle of pickles that's in plastic. I mean, those tax codes are terribly complicated. I don't know how you end up getting the right thing. You've got to remember, too, if you buy something on the internet, they usually have a delay of one day to five business days, in terms of the delivery of the good. That's somewhat of an inconvenience versus going -- you know, if you're going to buy a tennis racket on the internet versus going to Sports Authority where you can actually hold it, see it, and take it with you when you leave.

And there's the real thing about the village or the community that gets the money back from the sales tax when they don't have to provide police, fire, sewage, all the other things -- all the other services that a municipality does. Now, it is sort of interesting. We have one small community in my district -- a two traffic light town -- that is looking at an e-commerce company coming in and they're going to provide three, four hundred jobs if it gets fully up, which is terrific. And, they'll pay the taxes for those Michigan residents that buy that particular service. And, in a lot of cases, e-commerce companies have in fact expanded because all of sudden you've got the universe now at your sales door instead of just the folks in your particular community.

So, I buy the argument that we could extend the moratorium for all those reasons that you suggested.

REP. ROGAN: I know that the question of sales taxes is outside the four corners of your bill, but it all goes to the vitality of the internet. And precluding the FCC from imposing access charges, I think, is one of the key building blocks to maintaining the vitality of the internet. So, once again, I want to commend you for your leadership on this. Mr. Chairman, thank you again for holding this hearing. I yield back the balance of my time.

REP. TAUZIN: I thank the gentleman. The gentleman from Texas, Mr. Green, is recognized.

REP. GREEN: Thank you, Mr. Chairman. Again, Fred, I'm glad you introduced the bill. We're glad to be a cosponsor. And all of us who have received those letters, and maybe, Mr. Chairman, what we ought to do is have a hearing just -- and maybe subpoena Congressman Schnell, and put that out over the internet, because I don't know how long your letters have been coming in, but I know ours have been coming in at least six or seven months. We send back the same -- REP. TAUZIN: Every two weeks -- within the next two weeks, we're going to have that bill on the floor.

REP. GREEN: I know, but that's been the last six months and I'm still looking for Mr. Schnell.

REP. TAUZIN: He serves in a virtual Congress. It's not the real one.

REP. GREEN: Just so they can't pass real law. But, anyway, again, Mr. Chairman, I yield back my time. But I'm glad you introduced it, Fred, and I think it's a good bill. Hopefully we'll move quickly on it.

REP. UPTON: Well, I appreciate your early co-sponsorship of this measure as well, Gene.

REP. TAUZIN: I thank the gentleman. By the way, I think there were 16 members of our full committee who were original cosponsors.

I think there are many more now. I congratulate the gentleman on his good work. The chair would first of all -- I think the gentleman from California, Mr. Cox, is recognized next.

REP. CHRISTOPHER COX (R-CA): Thank you. I thought you were going to recognize the gentleman from Massachusetts.

REP. TAUZIN: Well, I want to apologize, both to Mr. Ehrlich and to the great state of Maryland for that mistake.

REP. COX: It's Congressman Schnell that's from Massachusetts. Thank you, Fred -- Congressman Upton, my colleague, for bringing us this bill and for giving us the opportunity to solve a big problem before it actually happens. This, like the Internet Tax Freedom Act, is a rescue just in time. It's a lot easier to prevent these bad things from happening before they really do occur. And, of course, this is an area where so far the taxes that you're talking about have not been imposed upon American consumers, but we're worried that because of the regulatory power that was given to the Federal Communications Commission in the 1930's, that they might -- at a time when, of course, the internet was not even a gleam in anyone's eye -- that they might try and interpret that ancient authority to impose new taxes now in the 21st century. I just want to run some numbers that my staff has given me by you and see if this comports with your understanding of just how bad the problem would be if the FCC were allowed to do this. The average Internet user spends 22 hours a month on-line.

REP. UPTON: That's our latest data.

REP. COX: If the FCC forced the average Internet user to pay the access charges that your bill would prevent, at the current average rate of 2.5 cents a minute, that works out to $33 a month, or about $400 a year. Is that your understanding of how big this tax bill would be?

REP. UPTON: It is.

REP. COX: Wouldn't this rather obviously price Internet services out of the range of many, if not most, Americans?

REP. UPTON: Well, I think that it would. And again, a lot of us have invested in a second line at our house. Your kids are grown up now as well. And you know, if you have only one line, you lose the whole connection and you've got to go back to the beginning again. So we've invested in an extra line. We're paying taxes on that extra line and the charges that are assessed as part of that. And then to say you're going to pay another $400 a year, per family on average, is going to put a lot of families out of touch with each other.

REP. COX: Now you mentioned the second line. Every phone line into the house is already subject to this $3.50 federal subscriber line charge.

REP. UPTON: Yeah. So a lot of us are already paying twice.

REP. COX: But now, in 1997, isn't it right that the FCC pushed through another tax on a second line, so you pay an extra tax on the second line?

REP. UPTON: That's right. Yep. The second line is actually, as I understand it, more expensive than the first line.

REP. COX: It's $6.00 a month for the second line. Is that right? So that amounts to -- to the extent that people are adding second lines so they can connect their modems, that amounts to a modem tax. And it amounts to a modem tax in that same range of hundreds of dollars a year. Does your bill address that?

REP. UPTON: It does not.

REP. COX: Well, Mr. Chairman, I hope that, as soon as we enact Mr. Upton's bill, that we can then address this next problem that he's pointed out for us and get rid of that horrible second line tax -- modem tax -- which discriminates against Internet usage, at a time when a lot of us are listening to the president, the governors and everyone else complain about the digital divide. I yield back.

REP. TAUZIN: I thank the gentleman. The chair recognizes the gentleman from Ohio, Mr. Sawyer, for a round of questions.

REP. SAWYER: Thank you, Mr. Chairman. I just want to take a brief moment to thank our colleague, Fred, for doing the work that it took to bring this bill to this point. And I look forward to seeing it on the floor.

REP. TAUZIN: Thank the gentleman. The chair now recognizes the gentleman from Maryland, Mr. Ehrlich, for a round of questions.

REP. EHRLICH: I could use any number of one-liners, if I wanted. Thank you, Mr. Chairman. Fred, just real briefly, first of all, you've done great work here, as we all know. Getting back to a few questions that have been asked with respect to this great philosophical issue about sales and use tax and fairness and even playing field. You were asked, I think, by Mr. Largent, how do you respond to the equitable-type argument that is used.

Isn't it fair, also, to -- and you also touched on this and I think it's an underanalyzed part of the e-commerce explosion -- these entities make things. They're located somewhere. You have a new one in your district. Obviously, to the extent that occurs, it's new products. It's new businesses. It's new property taxes, new income taxes, paid by employees, payroll taxes, the whole nine yards. And that is, I think, an underanalyzed part of the debate, with respect to how equitable this whole thing is and keeping the Internet explosion going.

Would you comment further on that because I find it fairly compelling and nobody ever talks about it?

REP. UPTON: Well, you know, I would make a point which, I think, uses your district. I play tennis with Chairman Bliley every Wednesday. And he whipped our butts this morning, despite my getting a new pair of tennis shoes from your district.

REP. EHRLICH: Congratulations.

REP. UPTON: Holabird (sp). Holabird Sport, is that in your district?

REP. EHRLICH: That's right.

REP. UPTON: Catalogue sales. And didn't pay tax on it because it was sent. I don't live in Maryland. And it was sent from your district. And I think e-commerce ought to be treated the same as catalogue sales. They don't have a bricks and mortar structure in Michigan and send it UPS. And pretty good shoes that I got. And that's the type of system that we ought to be -- it's the same thing. It's an exact parallel with catalogue sales as it is with e-commerce.

And if, for some reason, you know, all of a sudden you put up that road map of pickles, a glass jar or plastic or, you know, this is the week that New York City doesn't have the sales tax on a new suit or whatever. It's 6,000 -- 6,500 -- I've seen these statistics someplace -- 6,500 different regulations on sales taxes. And there is no way people are going to be -- and that's not why they're buying the shoes or racket or whatever. It's not because of the sales tax. but it, in fact, will inhibit the growth of what has really helped a lot of businesses and consumers, whether they be in urban or rural areas.

REP. EHRLICH: Well, I think your point is well taken. It certainly wouldn't apply to shoes. But the fact is, new products are introduced as a function of e-commerce. And that's, I think, something, chairman, we need to place in the course of this discussion, the context of this discussion. And I yield back.

REP. TAUZIN: Thank the gentleman. The gentleman from Illinois, Mr. Shimkus.

REP. SHIMKUS: Thank you. I'll be brief. And I want to thank my colleague from Michigan and note -- and I think Grover will confirm this -- today is Tax Freedom Day. It's probably appropriate that we're talking about this. And just focus on the fact, again, that why is it Tax Freedom Day and we can't just take our income tax and divide it out into the amount of days and figure out how long we work for the federal government because we have all these hidden taxes? And if we can be clear and honest and then let elected policy leaders, elected by their constituents, debate how best, clearly, to identify the amount of revenue they need to fund the services that the constituents desire, we would be much better off as a nation.

And I see this as a way that we continue to have to address this. And e-commerce may force us to do it. And I appreciate your work. And I yield back.

REP. UPTON: I would just comment, if the gentleman would just yield for one second, you know, our reading of the Constitution is only the Congress can tax or spend. And yet, we've seen a history now, over the last couple of years, of the FCC putting their elbows out and taking that authority. And this takes it away and puts it where it ought to be.

We ought to decide here whether to tax access to the Internet. And if we decide not to tax it, it shouldn't be done, versus allowing someone to tax it before we have to try and stop it.

REP. SHIMKUS: The price of freedom is eternal vigilance. And I appreciate that. Thank you.

REP. TAUZIN: Thank the gentleman.

REP. MARKEY: Mr. Chairman?

REP. TAUZIN: Yes, sir, Mr. Markey?

REP. MARKEY: Can I be recognized?

REP. TAUZIN: Yes, you may be recognized. Strike the last word.

REP. MARKEY: Thank you. I've just been listening to this discussion with Mr. Ehrlich. And the gentleman from Michigan is correct that he doesn't owe any taxes to the state of Maryland. But in purchasing that pair of sneakers, he does owe Governor Engler. You do owe taxes on that.

REP. UPTON: I had them sent to the District of Columbia. (Laughter.) REP. MARKEY: All right. Then you owe the taxes to the District of Columbia.

REP. UPTON: Not on a catalogue sale.

REP. MARKEY: Oh yes, you do. Oh yes, you do.

REP. : Particularly now that you've made it public. (Laughter.) REP. UPTON: I'll pay it. (Laughter.) REP. MARKEY: I mean, I know that you're quite proud of purchasing it, you know, in a way that didn't require actual -- REP. : Well, you ratted on yourself.

REP. MARKEY: But you do owe the taxes. And I think that that's a misunderstanding that a lot of people have about the Internet.

REP. COX: Would the gentleman yield?

REP. MARKEY: I'll be glad to yield.

REP. COX: We were just mentioning the same thing here, the use tax obligation is the mirror image of the sales tax obligation. But it should be added that the governors are the first to tell us that they're about as good at enforcing use taxes against individual consumers as the federal government is at enforcing the penalties for not filling out all the questions in the long census form. (Laughter.) REP. MARKEY: If I can reclaim my time? And although Governor Gilmore was here testifying, taking one position, three weeks ago, as we know, Governor Engler takes just the opposite position. And although he does take that position, I don't think he's a native of Massachusetts. I think he's just generically a governor. And I think that's the basis of his position. And you do owe him, or the District of Columbia, the tax money.

And the other point that I was going to make is that the reason I raised that question about the voice versus data is that, your bill, as you define it, you say, "The Commission shall not impose on any interactive computer service." And that, of course, would mean voice and data. So your bill, actually -- REP. UPTON: Well, it needs to be clarified.

REP. MARKEY: So that's the point I was making. The point I was making is just going back to your own definition. And you do include voice in your own bill.

REP. UPTON: Yeah. If you'd yield for a second? I introduced this bill a year-and-a-half ago or so. And at that point, it wasn't an issue. It's been rightly raised. And I am absolutely in favor of correcting it to define it the way that I indicated this morning.

REP. MARKEY: I'm just going at it, looking at this rural subsidy that urban America does provide and just trying to provide an equitable way -- REP. TAUZIN: I thank the gentleman. I think it's important that, at the conclusion of your testimony Fred, to point out we're going to hear some testimony on the moratorium bill as well. But the moratorium bill does not prohibit the collection of sales taxes or use taxes on Internet sales, any more than they do on catalogue sales. That's a big confusion. I had to straighten it out everywhere I went in my district this last week. And the difficulty, as Mr. Cox has pointed out, is that there's a huge difficulty, not only a constitutional question of nexus, but a practical difficulty of collecting use taxes.

By the way, Governor Gilmore tries to do it in state -- his state tries to do it, I should say, not Governor Gilmore -- with a line on the income tax form that asks the income tax reporters in Virginia to go ahead and divulge all the purchases they have made from out-of- state. And I would question how many people use those lines -- (laughing). It's a very complex and difficult area. And we will probably have to have some kind of an agreement of the states and the counties on how to manage this system in the future, just as we did on uniform sourcing on telephone -- on cellular telephone faxes, the bill we just passed out a couple of weeks ago from this committee.

Fred, thank you again. I also wanted to point out, by the way, Mr. Cox, that you made mention of the second line charge. The Progress and Freedom Foundation has a very excellent report out on telephone taxes that I would commend to all of you read, where Progress and Freedom Foundation estimates a 20 percent shortfall on poverty access to the Internet because of the already high level telephone taxes leveled at the state, local and now, the federal government through the Spanish-American War Tax and the FCC's own system of taxation.

REP. UPTON: Just note that Dick Army (sp) said this morning that the Spanish ambassador told him that they're not coming again. (Laughter.) REP. TAUZIN: Well, again, I think we'll have an opportunity to deal with that tax this year. I hope we will. Mr. Upton, thank you so much for your patience and your -- REP. COX: Mr. Chairman?

REP. TAUZIN: Mr. Cox?

REP. COX: Before our colleague leaves, I wonder if I could ask for one point of clarification?

REP. TAUZIN: Absolutely. The gentleman is recognized. Strike the last word.

REP. COX: We've had some good interchange about the portion of the bill that might direct itself toward Internet telephony, against Internet transmission of data. And our colleague from Massachusetts asked you whether or not you believe that packet-switched telephony should have an advantage when it comes to these taxes. And I think everybody agrees that we ought not to put the thumb on the scale in favor of one kind of telephony or another.

But what I'm concerned about and what I hope I'm not hearing is that we might impliedly be directing the FCC to impose these taxes on Internet telephony, which I sure as heck don't want to see. And I hope nobody here wishes to see that.

The model for the future must be the Internet, not the old system of the 1930s, when we had long lines subsidizing local service.

That was one thing. Now we've got all these different competing forms of telecommunications. That's the world we intended to create with our act a few years ago. And I think it's very, very important for us, for example, not to encourage the FCC to get into the business of trying to get inside the packets and figure out how much of it's data and how much of it's voice. It's all zeros and ones. It looks the same. It's technologically enormously challenging. It involves privacy rights, if they were going to use other means to find out what's in your communications.

And so I get very concerned when I hear about the importance of these subsidies and the importance of these taxes and the importance of this complexity of this old system that we adopted many decades ago, without the Internet in mind, because it's not necessary for a solution to the problem of the digital divide. It's not necessary to achieve universal service. I'll just leave you with this fact.

REP. TAUZIN: Would the gentleman yield?

REP. COX: I'll just leave you with this fact and I'll subside entirely, and it is that today in America, there is a greater penetration of the American population with television than there is with telephones. We have universal service, taxes and subsidies, for telephones and not for television. More people, more families, more poor people have televisions than telephones, notwithstanding this elaborate system of taxes and subsidies and so on, you can see why, when you figure out how regressive all these taxes are and how counterproductive the whole system is, the model should be the Internet for the future. And I hope we're very careful, when we draft this legislation, and don't encourage -- REP. TAUZIN: Will the gentleman yield?

REP. COX: Yes.

REP. TAUZIN: I simply want to point out that we may come to a point -- hopefully sooner than later -- when telephone companies are permitted to cross the ladder lines and offer full-blown, broad-band Internet services to everyone in this country, in competition with the AOLs and the AT&T cables, that second wire competition that I think all of us want to see one day. And maybe, at that point in time, that we can reach that point where the new Internet services -- including voice transmission, which I'm told are going to be loss leader, almost giving it away free -- no longer require these kinds of charges.

The problem is in the interim. And while I agree with the gentleman that we ought not direct the FCC on how to resolve it, Mr. Markey and Mr. Upton had a dialogue on potential ways to resolve it. But in the interim, what do you do when someone uses the current system of Internet to provide telephony using the local networks. When other people who use the local networks, through regular telephone service, are required to support those local networks and an ISP, under current definition, do not.

REP. UPTON: You get rid of the tax.

REP. TAUZIN: It's a real problem. We need to resolve it.

REP. UPTON: Get rid of the tax.

REP. MARKEY: Would the gentleman from California yield?

REP. COX: Sure.

REP. MARKEY: Thank you. You know, I share the gentleman's concern about access charges. And for 20 years, I've been trying to do my best to do away with access charges for the circuit switch network. I agree with that goal, okay? Obviously, I believe in that. And I'm looking very close at this rural subsidy. I believe it's very bloated.

But if we're not going to eliminate that, I mean, if we're going to -- if we want to maintain a subsidy for rural America, my only point here is that there should be some understanding that the service that's provided, whether it be package switch or circuit switch, really doesn't make any difference, in terms of the consumer. And I can understand why, back in 1967, AT&T, when it was offered by the federal government to contract to build the package switch network, said, "No." So did IBM. They had a perfectly good circuit switch monopoly. So that's why BB&N, up in Boston, had to build.

The point today is that, when you look at it in terms of its practical application, that there really isn't a difference, in terms of the consumer benefit. But there is a difference, in terms of the access charges that are imposed. And I have always believed that these access charges are bloated. I'd like to get rid of them or reduce them down to an absolute minimum. But I would also like to maintain some subsidies for rural America. And if we are going to do that, then we're just going to have to find a way of ensuring that there is some equity. And that's the only discussion I'm trying to raise.

I want to work with the gentleman towards achieving both goals.

REP. TAUZIN: Will the gentleman yield once again? I simply want to point out the day when access charges no longer become relevant or important is a day when the local telephone networks finally complete their 271s and they're into full-blown telephone competition or were smart enough, at least in these advanced services areas, to free them from these ladder line restrictions, which many of you have joined with me in an effort to do. I hope we do, sooner than later.

But doing that may be the prerequisite, may be the first thing you do, in order to get to that point when you can eliminate all access charges. Then you don't get into a fight as to whether or not you ought to have them for ISPs and not have them for telephony. And the sooner we reach that world, frankly, I think the sooner the folks in rural America are going to be better off because they will have the opportunity to get distance-irrelevant communications going, just the same way that the Internet provides distance-irrelevant data transmissions today.

REP. MARKEY: Mr. Chairman, could I just add that the difference between a telephone and a television and why television is more ubiquitous is when you buy a television, from them on, service is free. So you can buy a $100 television -- REP. COX: No, actually, it costs $1 billion in subsidies to put the satellite up so that then you can get pay TV.

REP. MARKEY: No, I'm talking about just television.

REP. COX: We did that in this committee.

REP. MARKEY: No, that's another subject.

REP. COX: $1.2 billion.

REP. MARKEY: That's a sore point that the gentleman and I agree upon 100 percent, in terms of pay TV. But in terms of -- REP. COX: That's a different hearing.

REP. MARKEY: Yes, that's a different hearing. (Laughter.) But in terms of just the television itself, you buy one, you know, put it in your living room. It's free forever, unless you want to subscribe to satellite or cable TV. You buy a phone, you're paying for that service, day one on. And so it make sense that everyone would have a television in the home because it's free. And with a phone, it would be a level expenditure -- REP. : Mr. Chairman, if I could just -- REP. TAUZIN: But before the gentleman -- yield for a quick clarification. There's also a difference, however, between services that are provided by wires and services that are provided over the air in a broadcast spectrum. And the notion that somebody had to lay a wire down to a rural community where very few people live, either a cable or a telephone wire, causes real cost problems and economic considerations. So it's a good discussion.

The gentleman has the last word.

REP. COX: I just hope that we recognize that if we take -- because this is not what Congressman Upton started out to do -- and if we take the steps, either wittingly or unwittingly, of encouraging the FCC to lay a tax on Internet telephony, than that is much more than the nose of the camel in the tent. That is now the determinant of the FCC's becoming the regulator of the Internet and its complete morphing from the Federal Communications Commission into the Federal Computer Commission, a step I dearly wish never to see.

REP. TAUZIN: And I join you in that concern. Mr. Upton, thank you so much for your patience, sir. And you can see the way we -- since you've left, we've really gotten excited. (Laughter.) You ought to come back.

The chair will now welcome the second panel. The second panel will consist of: Mr. Peter Lowy, co-president of Westfield America in Los Angeles, on behalf of the e-Fairness Coalition; Mr. Grover Norquist, president of Americans for Tax Reform here in Washington, DC; Mr. Harris Miller, president, Information Technology Association of America here in Arlington, Virginia; and Mr. Leroy Grey, president of RAVEN-Villages Internet, a small ISP in Romney, West Virginia.

Gentlemen, welcome. We'll begin with Mr. Peter Lowy, the co- president of Westfield America. Gentlemen, your written statements are a part of our record. We have them. You have five minutes to summarize the high points of your testimony and then we'll get to Q&A. Mr. Lowy?

MR. PETER LOWY: Thank you, Mr. Chairman. Good morning. I am Peter Lowy, president of Westfield America and founding chairman of the e-Fairness Coalition. I'd like to thank Chairman Tauzin and Ranking Member Markey for providing me the opportunity to speak on this important issue.

The e-Fairness Coalition represents the nation's real estate industry and 1.5 million retail stores, ranging from Cody's Booksellers in San Francisco to national retailers such as Wal-Mart and Sears, as well as one out of every five American workers nationwide.

Taxation of the Internet involves three interrelated issues: taxes on internet access charges; multiple and discriminatory taxes; and collection of sales and use tax on retail sales made on the Internet.

We oppose H.R. 4202 and 1291 because we believe there should be a fully integrated solution with regard to taxation and the Internet, not a piecemeal one that does not address an equitable collection of sales taxes on retail sales.

While there is broad agreement on the issues of access and on multiple and discriminatory taxes, there is clearly no agreement with respect to sales and use tax and e-commerce. If Congress passes bills addressing the first two issues, there is no incentive to address the most critical and most difficult issue, which is to provide a level playing field for the collection of sales taxes.

The states are currently working on simplifying sales tax rules nationwide. An extension of the moratorium will stop the momentum gained in solving the complex issues of sales and use tax collection. There should be no rush to extend the current moratorium, as it does not expire until October 21, 2001. We have 16 more months to consider permanent solutions to all of these issues.

Current law provides for a blatantly unfair playing field where brick and mortar retailers collect sales taxes, but their on-line competitors are exempt from collection responsibility. As tax-free online consumer sales grow, estimated to be in excess of $100 billion in 2003, the states and cities will look for other revenues to offset uncollected sales and use tax from sales that have migrated to the Internet.

The nation's governors also oppose a simple extension of the moratorium. On April 12, 2000, a bipartisan group of 36 governors sent a letter to the congressional leadership, urging rejection of the report of the Advisory Commission on Electronic Commerce and support for a level playing field. Five additional governors sent their own letters expressing similar concerns.

The message of the e-Fairness Coalition is simple. We support a level playing field, so that all retailers -- in-store, catalog and online -- have the same sales and use tax collection responsibilities. We do not support new taxes on Internet sales. Sales made over the Internet are already subject to sales and use taxes, as we saw earlier.

Under current law, if a remote retailer, such as an Internet seller or a catalogue company, has a physical presence, or nexus, in the state of the buyer, the retailer is required to collect sales tax on behalf of the state where the buyer is located. If it does not have a physical presence, it does not have to collect sales taxes, but the tax is still owed by the consumer.

We currently have a situation where on-line companies fit into three categories. Pure play -- pure Internet retailers that do not have physical presence in most states and do not collect sales taxes. Integrated clicks and mortar -- these retailers have both physical and on-line stores. Since many large retailers have a physical presence in most states, they are required to collect sales taxes on in-store and on-line sales. Physical presence with no nexus -- many retailers with physical and on-line stores are setting up a corporate structure in a way that does not require the collection of sales or use taxes on on-line sales. In this arrangement, the on-line business is set up in a separate subsidiary that does not have nexus and is therefore not required to collect sales and use taxes. Indeed, the expanded nexus provisions included in the ACEC report would formalize this situation.

If Congress does not address the current inequity in sales tax collection rules, more companies will create corporate structures to avoid sales tax collection responsibilities. While corporations would like to integrate their physical and on-line stores, discriminatory tax policies are forcing retailers to separate their on-line and in- store strategies.

The e-Fairness Coalition believes that Congress should enact legislation encouraging the states to adopt simplified sales tax systems. States that adopt the simplified systems should be authorized to require remote sellers to collect sales taxes. Allowing states to require all retailers to collect and remit sales taxes will expand the consumption base tax and enable states to lower taxes for all consumers. The best sales tax is broad-based and low.

Extending the moratorium and continuing the status quo will narrow the consumption tax base and lead to an increase in other taxes on business and individuals. Local and state governments may be forced to raise income, property, sales or other taxes to make up for lost revenues. Without solving the sales and use tax issue, an extension of the moratorium could result in an increase in taxes to the consumer.

It is important to remember that sales and use taxes are consumption taxes paid by the consumer to fund schools, police, roads and other services that benefit local consumers. The retailer is merely the collection agent. How a product is purchased -- whether in a store or on-line -- should not determine whether a consumption tax is paid. In either situation, the buyer receives a benefit from those public services. Congress should support efforts to level the playing field and provide all retailers with equal sales tax collection responsibilities.

No one wants to tax the Internet or provide discriminatory taxes on the Internet. However, extending the moratorium without addressing the equitable collection of sales tax is incomplete and counterproductive. Congress must address all three issues: access taxes, discriminatory taxes and sales taxes. Our nation's Internet tax policy should be fully integrated, incorporating a permanent solution for all three issues.

Thank you, Mr. Chairman.

REP. TAUZIN: The chair thanks the gentleman and will recognize Mr. Grover Norquist, president of Americans for Tax Reform. Grover?

MR. GROVER NORQUIST: Thank you, Chairman Tauzin for the opportunity to testify here. In keeping with truth in testimony, I'm here to represent Americans for Tax Reform. We do not now, nor have we ever, received money from the government -- federal, state or local.

I served as a commissioner on the Advisory Commission on Electronic Commerce. My particular job there was to represent consumers. And we looked at three things, the first one being present taxes on the Internet.

The component parts of the Internet are extremely heavily taxed -- now, the three percent federal excise tax to fund the Spanish-American War, that people are familiar with, but also the average state and local tax on telecommunications, about 14 percent, about triple what sales taxes on other industries are. Only tobacco and liquor are more heavily taxed than telecommunications.

Second, were threatened taxes, these access charges that we're talking about, discriminatory taxes that the moratorium presently puts off for three years but doesn't yet forbid. And the third one is the effort by some people to undermine the commerce clause and allow politicians in one state to tax businesses in another state, catalogue sales or electronic commerce.

We're here today to talk about two prophylactic bills: 1291, Upton's legislation to prohibit the imposition of access charges and 4202, Mr. Ehrlich's legislation that would both prohibit those access charges by the FCC and extend the present moratorium for another five years. I think they're both extremely helpful and good bills. I understand there are certain concerns about some unintended consequences that I'm sure the committee can -- but I think both of these are very good for taxpayers, very important to taxpayers. These taxes, of course, are paid by consumers, not by businesses, at the end of the day.

The commission did, actually, address both of these issues. And in a poll, 18 of the commissioners agreed when I asked whether they would support both opposition to taxing access and to the additional access charges -- there was one fellow from South Dakota who was for all taxes at all times. And we always lost his vote -- but 18, including the three federal representatives.

The second one was a continuation of the moratorium, which even Governor Leavitt said he would support, although he has been an advocate in other areas for taxing the Internet, but would support the extension of the moratorium. I believe, however, that we should go beyond a five-year extension of the moratorium to a permanent moratorium, which was the original effort by Congressman Cox and Senator Wyden in the Cox-Wyden legislation, to permanently ban that. Some people say, "Why wait now? It's a whole year or more away from when the moratorium lapses?" People don't make last-minute decisions. People do plan ahead. And it's important to decide now to make that a permanent moratorium. I think a five-year moratorium is the least we should do in that area.

I would also urge the committee to take a look at sunsetting the Gore Tax. Right now, the E-rate, the Gore Tax, is set up for a particular purpose and an admirable purpose of wiring those schools that aren't yet wired. Seventy percent are wired. Thirty percent or something aren't. But I think it's important that we sunset that or our grandchildren are going to be laughing about the Gore Tax, the way we're laughing about the Spanish-American War tax. So let's set up a date-certain or an amount-spent-certain. And when we finish spending $10 billion or whatever it is, that tax should lapse. And I would also suggest that we then have an audit of how the money has been spent.

The other issue that people have been focused on is the issue of taxing Internet sales or catalogue sales. Right now, the commerce clause does not allow Utah to levy taxes on L.L. Bean in Maine. And this is a good idea. The commerce clause was not a loophole, as some governors seem to think. The commerce clause was put in for good and sound reasons. And it is very important that a country founded on the revolutionary cry of "No taxation without representation," just as we objected to Britain taxing America, I think we should object to Utah politicians taxing businesses either in Washington State or in Maine.

We have already seen the damage done when Alabama juries are able to rate Michigan business. There's no limit to what a jury will do to out-of-state businesses. There would also be no limit to what tax collectors from Utah would do to businesses in Maine because they have -- there's a limit to what Maine will do to L.L. Bean. There is no limit to what tax collectors in Utah will do with regard to L.L Bean. And I think we need to protect against that.

And I would urge you not to allow -- what some people want to do is put politics over policy here. The two ideas put forward before this committee -- subcommittee -- are extremely good. Prohibiting access charges -- I hear everybody saying they're for that. And extending the moratorium, there is strong support for. Don't let that be held hostage to those politicians that want to take a great leap forward and undermine the commerce clause, a discussion that we can have another time.

REP. TAUZIN: Thank you, Mr. Norquist. The chair now recognizes Mr. Harris Miller, president of Information Technology Association of America in Arlington, Virginia.

MR. HARRIS MILLER: Thank you, Mr. Chairman. It's an honor to be before you again. I was very disappointed to hear from Congressman Upton that Congressman Schnell does not exist because I went to a fundraiser for his opponent last night. (Laughter.) But anyhow -- It's an honor to be before the subcommittee again and to speak on an issue which is very, very important to the future growth of the Internet and that is the issue of the access charges and trying to apply them to the Internet. We at ITA, as you know, Mr. Chairman, range across the whole range of companies, with our more than 26,000 companies across the United States. And we believe that both Mr. Upton's bill and Mr. Ehrlich's bill are very positive pieces of legislation. We look forward to working with this subcommittee, the full committee and the Congress to get these passed.

In the to and fro of the dry discussion of all these different charges, people tend to lose sight of what's really at stake. And Mr. Cox brought this up in his questions before to Congressman Upton. If consumers had to pay the same per-minute charge that are levied on long-distance voice calls, access charges would lead to $20 to $35 a month per user. So if you're thinking about a household with two or three or four users, it's actually much more than Mr. Cox was suggesting, possibly into the thousands of dollars.

Just simply traveling to Europe or to Japan and seeing how much difficulty they have had getting average consumers to use the Internet because the telephone charges, on a per-minute basis, drive home the point that Mr. Markey made earlier, that if you drive the cost up, even if you give away the Internet access itself for free, if you make the telephone charges that substantial, you simply are not going to have average consumers able to talk about accessing the Internet. We will not have a digital divide. We will have an unbridgeable digital gulf. And that is not what the Congress wants.

Secondly, it's important to continue to point out, it's been decided by this Congress and reaffirmed in the court in case after case, that Internet service providers are not, as a matter of law or a matter of policy, telecommunications carriers. They are customers of the carriers. And they pay charges too. They pay charges, such as the subscriber line charges and other business line charges. And of course, their customers do also.

It's also important to point out that the universal service fund is not exclusively funded by the access charges. In fact, it's a combination of several different taxes that go together to service the universal service fund. So I think that, as this subcommittee examines the possibility of what's going to happen to the universal service as more Internet over the -- telephone over the Internet grows, I think they have to look into the fact that it's not just access charges that are funding that, but it's a whole series of charges. And in fact, the FCC can try to work with Mr. Markey, as you're suggesting, to drive down the access charges and perhaps look at some other charges. So I agree with Mr. Cox. We shouldn't take this as a license for the FCC to go out and start regulating the Internet.

I think it's important to keep in mind that, as we look at all of these bills, that for many consumers as you've seen in the e-mail traffic and message you receive from your consumers, that in fact access charges being applied to the Internet will become the third rail of Internet policy. It is amazing to us that this issue does keep coming up. It's been killed off in the courts time after time. But like the vampire, it keeps resurfacing. The whole issue keeps resurfacing. And certainly, I think that Mr. Upton's bill, if passed by this Congress, would send a very clear message to the American people that this Congress will not support anything that's going to slow down the growth of the Internet and make it more difficult for all the American people to access the Internet.

It think it's again important to reiterate that access charges are not technically universal service contributions, even though that is how they describe. As a result, perhaps Mr. Upton's bill needs to be modified in another way also, to make sure that it doesn't have that specific reference, as it currently does, because someone might imply, from that, that that is the only role for the access charges. And again, Mr. Upton's bill, as drafted, I think may need some minor clarification in that area so that it doesn't become read as directly contributing solely to the universal service fund.

Any type of charge that is put on the Internet on a permanent basis, as I said, will drive down usage. And that is an area where we do not want to do.

I think we also have to make sure that, perhaps in Mr. Upton's bill, another way to achieve the same purpose would simply by reaffirming that information service providers are customers of telecommunications carriers and that they should not be discriminated against, relative to other end users. And that may be another way of achieving the objective that Mr. Upton and Mr. Ehrlich are trying to do in their bills.

And finally, I want to also support the provision in Mr. Ehrlich's bill about the extension of the Internet tax moratorium. Mr. Norquist said it very clearly and very concisely. This issue is not just an issue of the Internet. Some people try to make it that way. It's a general issue of on what basis the types of charges can be levied on out-of-state businesses. The Quill decision is out there. If Congress and elected officials want to change the Quill decision, they should do it. But they should not try to ride the back of the Internet as a way of doing that. Obviously, that's a major public policy issue. But I think it's unfair for people to come along and say the Internet is somehow different than these other charges.

I appreciate the committee's great efforts to continue to pursue policies to promote competition, to keep the hands of government off the Internet. In fact, yesterday we had our annual public policy summit. And the chairman of the full committee, Chairman Bliley, came. And the one phrase that he said that stuck in everybody's mind as he addressed our crowd was his message to his colleagues is, "Hands off the Internet." That is the kind of message that this entire committee and you, Mr. Chairman, as a subcommittee, have been sending. We encourage you to continue that. And we salute you for getting it right.

Thank you very much.

REP. TAUZIN: Thank you, Mr. Miller. Mr. Leroy Grey, RAVEN- Villages Internet, Romney, West Virginia. Mr. Grey?

MR. LEROY GREY: Yes, thank you, Chairman Tauzin, Mr. Markey and members of the subcommittee for the opportunity to speak here. I'm I am appearing this morning for myself and the Commercial Internet eXchange Association, which advocates on behalf of ISPs in Washington. I would like to express our strong support for both bills.

REP. TAUZIN: Mr. Grey, bring the mike up a little closer so we can hear you. Thank you, sir.

MR. GREY: Yeah. I'd like to express our strong support for both bills.

As noted above, I am president of RAVEN-Villages Internet, an ISP in Romney, West Virginia. Like the vast majority of service providers, my company operates under very strict conditions with little room for error. We have 600 customers, the large majority of them dial-up residential and small business subscribers. We're still growing at a fairly good rate. And we hope to continue to do so. But even in Romney, a town of 2,500 people, RAVEN-Villages Internet competes with three other ISPs.

In 1999, RAVEN-Villages Internet had a gross profit margin of $22,200 on gross revenues of $130,400. As a local ISP, we have designed our services and content to fit what we believe will be of interest to our friends, our neighbors, our customers. And because we are part of the community, we also try always to provide good connectivity, exceptional customer service and good value. For example, in addition to the usual newsgroups and web hosting services, RAVEN contracted with MindLeaders.com, which was formerly DPEC, to provide local service access to over 365 computer, business and professional courses, including many Microsoft certificate courses.

To enhance communications between our customers and their friends and business associates worldwide, we recently enabled our website with FireTalk, which brings up the telephony issue. And we agree totally with Mr. Cox with regards to the fact that you can't separate the data from, you know, voice from the data. And therefore, that's an important issue to try to prevent taxation -- I mean, per-minute fees on Internet access. This free software, FireTalk, allows RAVEN members to voice-conference with up to 100 others as well and take those conferees on web tours in which all participants' web browsers are synchronized to wherever the moderator browses.

Lastly, RAVEN-Villages Internet was one of the original 50 companies establishing the Freedom Network, launched by ZKS at the Spring, 1999 ISPCon show in Baltimore. This revolutionary network was showcased on a "60 Minutes" program and provides customers who communicate via this network within a network unparalleled secure, private communications.

In our commitment to local service, value and community, RAVEN- Villages Internet is like thousands of ISPs throughout the nation. Unfortunately we -- and they -- are also alike in our vulnerability to financial setbacks, competitive threats and technological and market changes. As you all are well aware, the Internet undergoes constant technological transformation. As local providers, we must constantly upgrade our networks, software, trained personnel and leased telecommunications facilities. If our net revenues were affected by regulatory or legal developments, our capital expenditures would necessarily reflect these financial setbacks.

Though there are no precise statistics, it has been estimated that the average local United States ISP employs between 10 and 12 workers and has annual revenues just in excess of $1 million. In short, the bulk of ISPs are small, community-based businesses. And many of the new service providers specialize in serving residential and rural customers -- consumers and small businesses -- which are not served by large national on-line and Internet service providers, primarily because they're in a smaller region.

Every year my company struggles to meet our modest profit margins so that we can reinvest in our network and employees. Unfortunately, far too many service providers face similar or worse financial dilemmas that could, over time, result in their exiting the Internet business. In fact, one of our local competitors, who at one time had nearly 9,000 customers, went bankrupt in 1999. They have since re- organized and are still selling local access, but I benefited from their poor service.

I knew the president of this company well enough to learn that fierce competition eroded market share considerably and that, coupled with the loss of a major NASA contract, led to their financial problems. RAVEN has faced similar erosion of new customer signups when our local telco became a competitor in 1999. Our new signups dropped from an average of 15 per week to seven per week and has remained, on average, 50 percent of what they were before our local phone company became a competitor.

I guess I'm not going to have time to read much more of this, but basically, as a local ISP, I'm in favor of both bills. And I'd like to summarize up by saying that we believe that the codification of the current legal status of American ISPs is an appropriate and responsible position. We would urge the subcommittee to draft a strong report to accompany whichever bill is ordered reported. In addition to the prohibition on access charges, CIX also supports the five-year extension of the Internet tax moratorium.

I also have a minor suggestion with regard to the definition of one of the terms used. And we can supply that information later. Thank you.

REP. TAUZIN: Thank you, sir. And the record will remain open for 30 days, if you might do so. The chair recognizes himself briefly. Let me first lay a predicate down, that we're in a period of transition from a regulated communications world to a marketplace, hopefully deregulated communications world and that in this period of transition, we have two Internet worlds.

We have an Internet world that will be delivered on cable and wireless systems and maybe even satellites that is subject to far less regulation than an Internet world delivered on telephones. And it raises certain questions.

When a cable company charges a customer a cable charge, a monthly cable rate, even a digital cable rate, if you want to go digital now, the cable company is free to do so today without government regulation, without local regulation. It simply charges its customers based upon its own decisions about its market, its value and the services it provides. And the customers, as I understand it, who sign up for digital cable services and who sign up for Internet services with the cable company, will be dealing with primarily a free market contract condition.

On the other hand, those of us who use Internet services over our telephone, and hopefully one day, digital broad band services fully over our telephone, are dealing with an entity still regulated by government, still required to subsidize some providers, some customers at the expense of other customers, et cetera. And the phone company, as Mr. Cox pointed out, charges us based upon these regulations of what it can and cannot charge, some set by a local PUC, some set by the Federal Communications Commission.

So there's really two worlds of the Internet. And I would like your comments on that, Mr. Miller, Mr. Norquist, any one of you? How do we rationalize this period of transition? And where should we be taking it, as we move from one world to the next?

MR. MILLER: Well, I think you answered the question yourself, Mr. Chairman, earlier in the discussion with Congressman Upton, the competition at the bottom line is the answer. Competition in the telecommunications industry, which this committee has such an important role in starting the ball down the hill in 1996, though we all think the ball hasn't rolled nearly far enough down the hill. But at least we know it is now rolling.

Secondly, of course, as you mentioned, the cable is a second alternative. Wireless is becoming more available as an alternative. There are many major wireless companies now that are willing, though they don't always have the access to the small business owners, to wire apartment buildings by putting wireless in. So that becomes another alternatives.

And third party lines, which you and I have discussed previously in other hearings, Mr. Chairman, over electric power lines or other kinds of lines. So the answer is competition. And I don't think Congress should get very focused too much on the short term.

REP. TAUZIN: But the problem is that in the interim, some of the competitors are heavily regulated and some are not. Some are restricted in where they can provide services and what services they can provide. And some are not. In the old world of telephony, that might have worked. In the new world of Internet services, how does that work? How should it work?

MR. GREY: I'd like to address one part of that issue, if I may? With regards to the local -- well, in West Virginia, the state Public Utilities Commission, we were supplying Internet access to the Blind School, which is a state-run blind school and located in Romney, right across the street from us. And we were doing that for free for about a year. And that gave us residual income in other areas. We got some money from them for putting in a 16-LAN computer lab and various other things. But we gave that service for free.

And the Public Utility Commission decided that they were going to make it statewide that everybody in the state had to get connected, so they used the West Virginia University Internet provision branch to provide that subsidy, I mean through them, to provide the access to the Internet. So therefore, we were cut out of the loop. And that happens to a lot of other Internet providers in the area. So I think that that is something that needs to be addressed.

REP. TAUZIN: Mr. Norquist?

MR. NORQUIST: When we merged East and West Germany, we all wanted to go to the West German model, not come to some sort of compromise. And there is always going to be these arguments. We've heard this on, "Gee, the governor of Michigan has high taxes on businesses in Michigan and there are businesses in Maine that are escaping them, therefore we should tax them."

There are two ways to solve these. You either extend regulations to the unregulated market. That could even things up. Or you could raise taxes on people that have presently not been taxed. That would even things up. And there are some political leaders whose idea of evening things up look like the guys who are trying to even up the table by cutting the legs and always toward higher taxes and higher regulations.

I would hope that we would move, in each case, if somebody comes in and my taxes are higher than your taxes, fine. Let's even the playing field down. This is a time when both the federal government and state governments are definitely spending more than they need to spend. But they're raising more than they spend. So it's exactly the right time to reduce taxes. And it's also the right time to speed up the process as much as possible of deregulating each of these industries.

I mean, I would recommend that you put telecommunications under the 4R laws, so that -- which protects railroads from discriminatory taxes by state and local government, because when telecommunications, you have the same situation with power plants, were government mandated monopolies, lots of state and local governments tagged on lots of taxes. Politicians loved that because everybody got mad at the phone company or the power company, rather than the mayors of the governor. But now that we're deregulating both of those -- you are deregulating both of those industries, we can't afford to have the high level of taxes on telecommunications and power plants that we used to.

And I think that's putting the 4R law, which protects railroads from being looted by local governments and state governments, so that you can't have discriminatory taxes. If you want to tax property at one percent, fine. You can tax railroad property at one percent. But you can't tax property in Utah at one percent and the railroad that crosses your state at 10 percent. We now tax telecommunications at 14 percent average. And sales taxes and excise taxes on other industries is a third of that.

REP. TAUZIN: In fact, according to the Progress and Freedom Foundation, there are some communities where telephone service is taxed at 35 percent. And the mayor of one of those communities, now chairman of our full committee, conceded that that's exactly what mayors used to do and is now sponsoring, with me, the Truth in Billing Act to shed some light on those kind of problems. So we've had a good confession there from a former mayor, who is now trying to right that situation.

But the problem -- I'm going to have to move to my friend quickly and then we're going to have to go to a floor vote, 15-minute floor vote, followed by four five-minute votes. So we're going to have to take probably a good half hour to 45-minute break and return and finish, unless we can finish now. The gentleman from Massachusetts?

REP. MARKEY: Thank you, Mr. Chairman, very much. Mr. Pickering, Republican from Mississippi on this committee, and I have introduced legislation on a proposal endorsed by the cellular phone industry, the governors and municipalities to have a uniform method to collect cellular sales taxes on consumers' cell phone use. So we know it's possible for a high-tech industry to work with taxing jurisdictions to come up with workable solutions across state lines. It would just be where the domicile of the phone is and that will be the point of nexus. The industry likes it. Governors like it. Bipartisan support here on the committee for the legislation.

How much time would states need to simplify their sales tax collection, Mr. Lowy?

MR. LOWY: In the work we've been doing with the states right now, we think that within the next four months, they can come back to the Congress with framework that could be put in place. I think then if you look at the minority proposal that came out from the commission, that they then believe that they'd need another two years to put that framework into effect.

So that, three years from now, they believe that they could be in a position to have a system that would work.

REP. MARKEY: So is an extension of the tax moratorium necessary for the states to simplify sales tax collection?

MR. LOWY: I think the way we look at it is that with 16 months still to go on the current moratorium, that we should give the states enough time to try and put the framework into place, in working with industry and themselves.

REP. MARKEY: The current moratorium does not include anything about sales tax. Is that correct?

MR. LOWY: It does not include anything about sales tax. But you see, we look at it as an integrated approach to the total taxation of the Internet and that, with the time period on the moratorium coming towards a close, that that's creating the political pressure and a pressure on both the industry and the states to get themselves together, to get this framework and bring it back in front of the Congress.

MR. MILLER: Could I answer that also?

REP. MARKEY: Okay, sure. Please.

MR. MILLER: They first thought up state sales taxes in Mississippi back in 1931. Governors and state legislators created the present structure that we have. There have been efforts dating back to the '80s that have gone on for years and years and years. And we heard testimony by the very people who now say they're going to be able to do it, but how they've never done it before and haven't been able to do it. And the executive director of the NGA is telling people it's five years or more.

So there is one line that they give you when they tell you, "Oh, don't do anything now. Hold on. We'll get it all done in a year." And there is another line that the NGA staff is telling people, "Five years plus." Since they've been at it for 60 years, 70 years now, I tend to think that, you know, if we're going to do it right away -- first of all, they can do it now. It has nothing to do with this legislation. Nothing stops the states from doing this now if they wish to. They haven't done it. All the governors who tell us they care deeply about this have been drifting in the opposite direction for 20 years.

REP. MARKEY: I guess the comment I would make here is that the world has changed in 60 years. There is now a shotgun at their back. And I find that many people do things with a shotgun at their back that they wouldn't do in the absence of that shotgun. And what we're dealing with here is something that probably will get resolved at the gubernatorial level, primarily out of necessity, rather than some voluntary act that they would have engaged in.

MR. LOWY: If I could just say one other thing? If you look at the extension of the moratorium today, as we said, there are 16 months still to go, if you look at an article that was put out in the "Washington Post" on February 24, in an interview with Governor Gilmore, he released a statement that the article says characterized his new proposal as a political ploy that would get the tax moratorium extended and that, by the year 2006, no tax collector would be welcome on the Internet. So we look at the moratorium is that we actually think, with the shotgun at the back of the states and with the growth of the Internet, that we can solve this problem within the time period allowed.

REP. TAUZIN: I thank the gentleman. Mr. Sawyer, if you can complete in a couple of minutes, we can wrap this up.

REP. SAWYER: Mr. Chairman, I would not ask the panel to stay for an hour so that I could come back and ask questions. Let me just say, I am particularly interested in Mr. Miller's comments in his testimony about the EU and particularly the UK. And I was interested in whether there is any harmonization going on throughout the EU, with regard to access fees.

And secondarily, there is a fundamental difference in taxing architectures between the EU and the United States, one having much more to do with a wider range of taxation and the value-added tax, on which the Europeans depend so heavily, and its effect on the topics that we're talking about here today.

MR. MILLER: Well, really the problems in the European Union and Japan and other countries is not just the taxation system, but it's the whole method of charging individual subscribers.

REP. SAWYER: Right.

MR. MILLER: So you're paying every time the second rolls over, even if it's a local call, as opposed to in the U.S., where it's been primarily long distance, until recently, that you had different charges. So on top of that, they have discriminatory taxes. So you have a problem, not only do you have to change the tax regime, but you have to get many of the monopolistic telephone companies -- REP. TAUZIN: We're down to two minutes, so we're going to have to really wrap up. Mr. Norquist?

MR. MILLER: The telephone companies to change their charging system.

REP. SAWYER: Mr. Chairman, I can hear them in writing.

REP. TAUZIN: Thank you, sir. Mr. Norquist, quickly, because I've got to go.

MR. NORQUIST: Yes. The European Union's harmonization puts a floor in the value-added tax of 15 percent. When the states get together in restraint of trade by setting floors under taxes, this is bad, not good.

Second, the National Governors' Association is saying they put out a statement signed by 36 governors. I asked them for signatures. They could only deliver two signatures. I talked to the governor's chief of staff of Pennsylvania who says they never signed it, although their name is on it. So I would suggest that the taxpayer subsidized lobby that legally or illegally uses your federal grants to lobby for higher taxes in the state level, you might ask them to see those signatures.

REP. TAUZIN: Interesting. Gentlemen, thank you very much. The chair has to declare this hearing over. We have a vote on the floor. Without objection, the hearing is declared over. And we thank you very much for your contribution.

END.

LOAD-DATE: April 26, 2000

Document 72 of 142.


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