Dear Mr. Chairman and Senator Hollings:

On behalf of the National Governors' Association, we are writing to oppose S. 2255, which would extend the provisions of the Internet Tax Freedom Act (ITFA) for an additional five years beyond its expiration date. Since the current moratorium does not expire until October of 2001, there is no need to act at this time. This is particularly true since the technology is changing rapidly and creates substantial uncertainty with regard to unintended consequences.

Your committee has not held hearings on the impact of the ITFA or the potential impacts of extending it, while the ITFA specifically anticipated 18 months for Congress to consider and act on any valid findings or recommendations before the current moratorium expires. We believe such an inquiry is important and appropriate. A rush to judgment on this matter could be detrimental to the Internet and electronic commerce industry, to Main Street America, as well as to state and local governments and all of our citizens who rely on government services every day.

Some of the technology issues that create uncertainty with respect to impacts include:

• Bundled services. Increasingly, Internet access service is being offered as part of a "bundle" of services that may include cable television, long distance telecommunications, satellite television, or even residential electricity. The ITFA, however, is silent on the expected treatment of bundled services, part of which are currently taxable and some of which are not. If the issue of bundling is not clearly addressed, not only will litigation result, but also some Internet access services may be inadvertently subjected to tax, despite the wishes of Congress.
• Discriminatory Tax Definition. There are aspects about the definition of "discriminatory tax" that were not considered problematic when the ITFA had only a three-year life. If extended for a longer period of time, some firms could change their business structure and operations to exploit the lack of specificity and clarity in these provisions. This would definitely result in litigation, a dramatic erosion of state and local revenues, and a considerable imbalance in the tax requirements of smaller Mom and Pop stores.
• Internet Telephony. In recent months, Internet telephony technology has started to come into its own. Unfortunately, the ITFA did not envision and does not address Internet telephony. Questions that should be addressed include the impact of Internet telephony on the definition of Internet access as well as its impact on federal, state, and local taxes on telecommunications. Failure to address the issue could again result in unintended consequences as well as congressionally sanctioned discrimination against traditional telecommunications providers.

As you can see, these issues have little or nothing to do with the sales tax collection issue that has dominated debate on extension of the ITFA. They are, instead, the result of the rapid pace of technological change and developments since the ITFA was originally enacted. We believe it is important to the Internet industry as well as state and local governments that you address these issues as part of any extension of the ITFA. Failure to address them is likely to mean that the ITFA does not meet the expectations of Congress.

Thank you for your consideration of this matter. Please do not hesitate to contact any of us should you have questions or comments.

Sincerely,

cc. Committee Members

(signatures on file)