Information Technology Association of
I am Harris N. Miller, President of the
Information Technology Association of America (ITAA), representing over 400
companies in the information technology (IT) industry - the enablers of the
information economy. Our members are located in every state in the
ITAA appreciates the opportunity to express our Association’s strong support for the legislation being considered today, H.R. 49, the Internet Tax Nondiscrimination Act, to extend permanently the tax moratorium on Internet access services and, from a tax fairness perspective, to preserve a level playing field for companies involved in electronic commerce. I commend the Subcommittee for holding this hearing today because much is riding on your deliberations. And I commend Congressman Christopher Cox (R-CA) and Senator Ron Wyden (D-OR) for their continued leadership in this area.
The good news is that the Internet is
strong and growing stronger. Over 150
million people in the
The bad news is that the tech sector has been rocked in the past two years and Internet commerce is not growing nearly as fast as anyone had predicted, with dotcoms and telecoms at the leading edge of a downward plunge in IT spending growth and capital investment. In fact, most of the analysis of Internet growth from years ago showed predictions that even then were laughable, and now are just clearly horribly wrong. Double-digit increases in business spending on IT have been cut to single digits and even gone negative in some customer sectors. CEOs and CFOs are taking a far more cautious approach to new system investments. Technology refreshment cycles are being stretched over longer periods. And the pressure to look overseas for better labor rates and fatter margins is growing.
Why should our lawmakers care so much
about the health of the IT industry?
Source: Digital Planet/IDC
Source: Digital Planet/IDC
the previous eight recessions, productivity growth turned negative. During the economic downturn of 2001, productivity growth remained robust at about 2%, jumping 5.2% in the 4th quarter of 2001 and continuing at 5.1% in third quarter 2002, in large part due to the contribution of IT. And, while IT-producing industries represent only 7% of all businesses, they accounted for roughly 28% of overall real economic growth between 1996-2000.
Given these numbers, we do not need a crystal ball to predict that the future of the IT industry, the Internet and the U.S. economy overall are linked—and that the steps you take in terms of Internet taxation will have far reaching consequences for the American people.
My message is simple and straightforward. The Internet does not deserve carve outs or special treatment. Neither does it deserve to become the tax piñata of 2003, hit by every revenue starved taxing jurisdiction in the country.
ITAA believes the Internet tax moratorium should be made permanent because it promotes across the board fairness, not special advantages for one group over another. Contrary to popular belief, the moratorium does not affect the ability of states to collect sales and use taxes. The Moratorium prohibits states 1) from imposing multiple and discriminatory taxes on electronic commerce and 2) from imposing taxes on Internet access.
So, using this same logic, let me partition my arguments into two groups: fairness and access.
If Congress does not act, the situation will revert to where it was years ago where different rules could apply based only on either the means of delivery of the product (electronic instead of tangible) or based on the means in which an order is placed (via an Internet Web site instead of by calling a 1-800 number or even over the counter). For instance, states would be free to levy discriminatory taxes on the on-line delivery of goods, such as “newspapers,” which are explicitly exempt from sales and use taxes if delivered over-the-counter, just as they started to do in the years before the original Act was put in place.
Allowing the moratorium to lapse will also set the stage for discrimination in terms of delivery mode. Currently, out of state sales conducted by 800 number, mail order or electronic commerce are not subject to mandatory collection of sales tax by the merchant because of Supreme Court decisions. Rather the consumer is obligated to remit the same amount of sales tax directly to the state of the product’s use. Changing standards for the Internet, which could happen if the moratorium is not extended, makes no sense and is not fair. To be clear, I am saying that any move to impose taxes must be done in a manner that is fair to all parties, regardless of business model or delivery mode.
So how do we accomplish fairness? First, pass the Constitution’s test for moving forward. Supporting the view of the U.S. Supreme Court, ITAA believes that the states must simplify their tax systems and provide bright line business activity tax nexus standards before seeking the authority to require remote sellers to collect sales tax on their behalf.
Unfortunately, idle hands and lapsed tax moratoria are apt to become the devil’s work. If H.R. 49 is not enacted to extend the moratorium, some state lawmakers could seize the opportunity to generate tax revenues with new laws that appear on their face to remedy false disparities between online and offline commerce. These laws could be challenged in the courts, but that would be a lengthy, confusing, and unnecessary process. Recent legislative proposals, for instance, would have allowed a “tax first, simplify later” approach.
This approach does not pass Constitutional muster. Any attempt by the states to overturn the Quill decision and the Commerce Clause proscriptions against undue burdens on interstate commerce by means of an act of Congress requires a rebalancing of the new authority. No greater disaster could evolve in this debate than for a mandatory duty to collect sales tax to be imposed on out-of-state merchants before the states have simplified their sales and use tax provisions in a uniform manner. The current balance of power would be upset if states were allowed to require out-of-state merchants with no physical contacts in the state to collect sales tax in the state before the states simplify their tax systems and Congress and the Supreme Court deem the simplification sufficient to allow this authority.
States must simplify first, and then seek Congressional approval in order to obtain expanded taxing authority. In the interim, keep the tax field level for businesses that do not have nexus and, therefore, tax collection responsibilities.
A final note on fairness: States do have the ability to, and in fact do, tax remote commerce. This power to tax is called the use tax. Sales made in a state by a remote vendor trigger a use tax obligation on the purchaser, rather than an obligation on the remote vendor, to collect and remit a sales tax. Again, states have the authority to collect the use tax from its residents, although it is admittedly a difficult tax to widely enforce. In fact, use taxes are politically unpopular, technologically challenging to administer, and jurisdictionally messy to enforce. Not surprisingly, therefore, states rarely enforce their own mechanisms. This is less--not more--reason to shift the burden to online merchants.
The second key reason ITAA supports H.R. 49 is because it eliminates the opportunity for states to tax Internet access. Let me be clear what we are talking about in this case. We are talking about stopping states from taxing the right to access the information superhighway, not sales taxes on goods or services purchased via the Internet. I emphasize this distinction because too often insufficient attention is paid to these two different ways of “taxing the Internet.”
Taxing Internet access is bad public policy for a variety of reasons:
q Although doing so effectively raises the costs for all income levels, it would inhibit Internet use by those least able to pay, thus hurting efforts to bring Digital Opportunity to all Americans, regardless of income.
q Internet access is what is referred to as an enhanced information service, built on top of existing telecommunications infrastructure, a key distinction long recognized by the Federal Communications Commission. Internet Service Providers and the consumers that use them already pay taxes for their use of telecommunications services. For the consumer, those taxes paid by their ISP are buried in the fees they pay the ISP. Taxing Internet access would force consumers to pay taxes twice—once for the basic telecommunications service and once for the enhanced information service.
q By taxing access and thereby raising the cost of Internet service,
lawmakers risk suppressing demand for broadband and network-enabled innovations
at the edge of the network. ITAA
believes, and this view is widely shared in Congress and in the Administration,
that every dollar invested in broadband use delivers a substantial contribution
to the economy, expressed in terms of new capital spending, productivity gains,
next generation products and services, new business models and employment. It
would be ironic indeed if this Congress, which is rightly so focused on
expanding broadband usage in our country, which lags well behind other
countries such as
As it should be, the attention of most Americans today is on the War in
We urge you to do so. Thank you very much.
The Information Technology Association
of America (ITAA) provides global public policy, business networking, and
national leadership to promote the continued rapid growth of the IT industry.
ITAA consists of over 400 corporate members throughout the
 Digital Planet 2002, the Global Information Economy, February 2002
 Remarks by Bruce P. Mehlman , Assistant
Secretary for Technology Policy,