TUESDAY, MARCH 21, 2000
FOR IMMEDIATE RELEASE
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McCAIN BILL TO EXTEND INTERNET TAX MORATORIUM FOR FIVE YEARS

WASHINGTON, D.C. -- Convinced that more time is needed to determine how state and local governments would be affected by a permanent ban on Internet taxes, and calling our current tax system an "overwhelming morass of archaic rules," Senator John McCain (R-AZ), Chairman of the Committee on Commerce, Science, and Transportation, today introduced a bill to extend the moratorium on Internet taxes through 2006. The current moratorium expires in 2001. Following is his statement:

"I am pleased to introduce legislation today to extend the moratorium on Internet taxes through 2006. This will ensure that Internet commerce remains free from burdensome, anti-consumer taxation while we discuss a fair and equitable tax structure for our new economy. This bill simply extends the law passed by Congress and signed by the President in October 1998.

"The 1998 legislation imposed a moratorium and provided for a commission to report to Congress. While the Commission has not yet reported its recommendations, it is clear from published reports of their deliberations and from interviews with the members that a clear consensus is not imminent. More discussion and more time is necessary to arrive at a fair conclusion. Although I feel strongly that in the end a permanent moratorium is the best policy, which is why I introduced legislation to impose a permanent ban on Internet taxes, I also have become convinced that we need more time to determine how state and local governments will be affected. We need to consider whether the macroeconomic benefits of the new economy will outweigh the potential losses in direct revenues, how to ensure a level playing field for all venues of commerce, and how to simplify the overwhelming morass of tax rules, regulations and paperwork so that opportunities for new or small businesses are not lost in complex and archaic bureaucracy.

"The compromises being discussed by the Commission are a good start to the debate, but more time is necessary to pursue these and other possible options. It is becoming increasingly clear that the answer to taxation of the Internet must affect taxation of other commerce media, such as catalog sales, as well. We need to reexamine the level of services which the public wants to be provided by government and determine how to provide necessary revenue to accomplish the people's will. We need to ensure that taxation is not simply imposed to increase government bureaucracy.

"Recent studies indicate that state and local governments will not suffer during this interim period. A June 1999 report by the business consulting firm of Ernst & Young concludes that total sales and use taxes not collected by state and local governments from Internet e-commerce transactions in 1998 amounted to only ‘one-tenth of one percent of total state and local sales and use tax collections.' Another May, 1999 analysis of Internet commerce transactions through 2003 by Austan Goolsvee and Jonathan Zittrain, published in the National Tax Journal, predicts ‘even with a 70 percent rate of growth in retail e-commerce transactions, a revenue loss of less than 2 percent of sales tax revenue.'

"There are multiple reasons for this very marginal impact on state and local revenues. First, most of the e-commerce transactions are either business-to-business transactions, or for services, such as financial services and travel, which are exempt from sales and use taxes in most states. Ernst & Young estimated only 13 percent of the total e-commerce sales transactions were of a type which would be subject to sales and use taxes if conducted in person.

"Second, as pointed out by Austan Goolsvee and Jonathan Zittrain, the Internet is a ‘trade creator' -that is, many transactions which occur through e-commerce would not take place at all without the Internet.

"Third, the Internet does not divert sales only from brick and mortar retailers, but also from mail order catalogs. Those sales are also subject to sales and use tax only where there is a nexus, a physical presence, in the taxing state.

"We are currently seeing a continued rise in state and local revenues. Many states are currently debating how to refund money to their citizens: whether to cut sales taxes or income taxes. Thus, this moratorium should not negatively impact their ability to provide services during the interim.

"It is important to look at the full picture here. The Internet is filled with web sites of small businesses which are expanding in ways which would never have before been economically feasible. For example, a small store in a small town which has historically had a limited market for its goods, now has a website that allows it to market and sell to people all over the country -- all over the world. It increases its business and needs to hire more employees, and pays taxes on its increased revenues. The state and local governments benefit, not only from the additional taxes paid on the revenues, but in the economic benefits of additional jobs.

"The potential burden of complying with tax regulations and the paperwork involved under current law for as many as 7,500 estimated taxing units in this country would overwhelm many businesses, especially small businesses. An example in the March 13, 2000 edition of Interactive Week is instructive: ‘If you're a raw peanut, five states would require that sales taxes are paid on your purchase. If you're roasted, 11 states charge a sales tax. Add some honey to that roasting, and now 21 states say you're taxable. Get drenched in caramel and mixed with caramel-coated popcorn and suddenly you're a snack, and 31 states will call the tax man.'

"While I hope that the debate will conclude with a decision to leave the Internet as a ‘tax-free zone,' I believe that it is important to continue the discussion and to move all stakeholders toward a consensus. This temporary extension of the moratorium already approved by Congress and the President will allow us to do that. This is a good compromise which will serve as a catalyst for consideration of the broader tax policy issues which need to enter into this discussion to ensure a fair and equitable tax system in this country.

"I intend to move this bill through Committee expeditiously and look forward to debating it on the Senate floor." # # #