Internet Tax Bills in the 105th Congress

Internet Tax Bills in the 105th Congress

98-509 E
CRS Report for Congress
Received through the CRS Web
Internet Tax Bills
in the 105th Congress
Updated August 21, 1998
Nonna A. Noto
Specialist in Public Finance
Economics Division
Congressional Research Service ˜ The Library of Congress

ABSTRACT
This report tracks the evolution and content of the Internet tax freedom bills. In
general, the bills would impose a federal moratorium on the ability of state and local
governments to impose taxes on certain aspects of the Internet and would establish a
temporary federal commission to study selected issues and make policy recommendations.
This report traces the bills introduced in the 105th Congress, including H.R. 1054, H.R.
3529, H.R. 3849, H.R. 4105 (passed by the House on June 23, 1998), and S. 442, S. 442 as
approved by the Commerce Committee, S. 442 as amended by the Finance Committee, and
S. 1888. The report presents background on issues of concern to different interest groups
regarding state and local taxation of the Internet; identifies the major components of the
legislation and compares the positions taken in each of the bills; explains reactions to the
proposals; and summarizes congressional activity to date on each of the bills. This report
will be updated as events warrant. For a description of the main elements of H.R. 4105, see
CRS Report 98-597, Internet Tax Freedom Act: H.R. 4105 as Passed by the House, by
Nonna A. Noto.

Internet Tax Bills in the 105 Congress
th
Summary
Several bills to regulate state and local taxation of the Internet have been
introduced in the 105 Congress. The House passed its version of the Internet Ta
th
x
Freedom Act, H.R. 4105, on June 23, 1998. It was preceded by committee
consideration of H.R. 1054, H.R. 3529, and H.R. 3849. S. 442 and S. 1888 have been
introduced in the Senate. S. 442 has been amended by the Commerce Committee,
and sequentially by the Finance Committee, and may still be revised by its sponsor.
The bill approved by the House and the bills under consideration by the Senate
agree in general structure, but differ in their details. Each bill would place a
temporary moratorium on the ability of state and local governments to impose certain
taxes on the Internet and related activities. In each bill the moratorium is intended to
allow time for a study commission to make recommendations regarding taxation of
the Internet.
Apart from these points of agreement, there are significant differences among the
bills on such basic issues as: the length of the moratorium; which aspects of the
Internet are to be protected from taxation; which types of taxes would be prohibited
and which permitted; whether existing taxes would be grandfathered; whether past tax
liabilities could be enforced; the focus of the advisory commission; whether the issue
of collecting taxes on out-of-state sales will be addressed; the membership of the
commission; and what policy actions are expected at the end of the moratorium.
The House-passed bill addresses the issue of sales and use taxation of remote
(interstate) commerce: before the end of the moratorium, an advisory commission
would propose legislation to Congress that would enable a state to require out-of-state
vendors to collect sales and use taxes—if the state simplifies its state and local tax
administration procedures. H.R. 4105 also addresses Federal Communications
Commission (FCC) and telecommunications issues and international electronic
commerce.
The Senate is expected to take up the issue after the August recess, but it is not
year clear which version of the bill will come to the floor. One version of S. 442 was
approved by the Senate Commerce Committee on November 4, 1997. On July 30,
1998, the Senate Finance Committee reported an amended version of S. 442. S. 442
also continues to be revised by its sponsor, Senator Wyden, but no official language
has been introduced. S. 1888, introduced in May 1998, draws heavily upon the
original March 1997 bill language of S. 442 describing the moratorium and
exemptions. S. 1888 contains a detailed description of the membership and the
agenda of the study commission, including developing a uniform commercial code for
electronic commerce. The bills in the Senate do not require the advisory commission
to draft federal legislation addressing sales and use taxation of remote commerce and
do not address FCC regulation of the Internet. Among the Senate bills, only S. 442
as reported by the Finance Committee addresses the study of foreign electronic
commerce and federal taxation of the Internet. The Senate leadership may introduce
still another version of the bill. The Clinton Administration has indicated its general
support for the Internet tax freedom bills.

Contents
State and Local Taxation of the Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Contents of the Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
House of Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Points of Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Length of the moratorium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
What aspects of the Internet would be protected from taxation? . . . . . . 5
Would existing taxes be grandfathered? . . . . . . . . . . . . . . . . . . . . . . . . 6
Could past tax liabilities be enforced? . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Focus of the consultative group or commission . . . . . . . . . . . . . . . . . . 7
Membership of the consultative group or commission . . . . . . . . . . . . . . 8
Staffing and funding the commission . . . . . . . . . . . . . . . . . . . . . . . . . 11
International taxation and tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Federal taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FCC and telecommunications issues . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Timetable for recommendations and actions . . . . . . . . . . . . . . . . . . . . 14
What policy actions are expected at the end of the moratorium? . . . . . 14
Reactions to the Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Arguments For and Against a Moratorium . . . . . . . . . . . . . . . . . . . . . . . . . 15
Collecting Out-of-State Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Nexus rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The states want Congress’s help . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
New issues raised by electronic commerce . . . . . . . . . . . . . . . . . . . . . 17
Simplifying compliance for sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Unfunded Mandate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Ambiguity of Bill Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Congressional Action on the Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
House of Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Congressional Hearings, Reports, and Documents . . . . . . . . . . . . . . . . . . . . . . . 25
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Internet Tax Bills in the 105th Congress
Several bills to regulate state and local taxation of the Internet have been
introduced in the 105 Congress. The House passed its version of the Internet Ta
th
x
Freedom Act, H.R. 4105, on June 23, 1998; it was preceded by committe
1
e
consideration of H.R. 1054, H.R. 3529, and H.R. 3849. S. 442 and S. 1888 have been
introduced in the Senate. S. 442 has been amended by the Commerce Committee, and
sequentially by the Finance Committee, and may still be revised by its sponsor.
Each bill would place a temporary moratorium on the ability of state and local
governments to impose certain taxes on the Internet and related activities. In each bill
the moratorium is intended to allow time for a study commission to develop and make
recommendations regarding taxation of the Internet.
Apart from these points of agreement, there are significant differences among the
bills on such basic issues as: the length of the moratorium; which aspects of the
Internet are to be protected from taxation; which types of taxes would be prohibited
and which permitted; whether existing taxes would be grandfathered; whether past
tax liabilities could be enforced; the focus of the advisory commission; whether the
issue of collecting taxes on out-of-state sales will be addressed; the membership of the
commission; and what policy actions are expected at the end of the moratorium.

This report begins by highlighting issues underlying the legislation, represented
by the concerns of four different interest groups. It then identifies the major
components of the legislation and compares the positions taken in each of the bills.
Next, it explains reactions to the proposals Finally, it summarizes congressional
activity to date, by bill number.
State and Local Taxation of the Internet
The current debate over state and local taxation of the Internet involves several
quite different concerns, including those of the following four groups: the Internet
business community, the Clinton Administration, state and local revenue officials, and
competing sectors of the economy subject to tax.
The Internet business community has expressed concern that the states will
design discriminatory taxes tailored to the Internet. It is also concerned that because
Internet commerce transcends state boundaries, it will be subjected to multiple
taxation, or taxes levied in a haphazard, nonuniform manner by myriad state and local
taxing jurisdictions. It suggests that the high cost of complying with disparate state
For
1
summary of the bill, see CRS Report 98-597, Internet Tax Freedom Act: H.R. 4105 as
Passed by the House, by Nonna A. Noto.

CRS-2
and local tax laws will discourage the development of Internet enterprises, especially
by small businesses. Some interpret this position as a request for a uniform system
of state and local taxation, with simplified compliance procedures. Others interpret
it as a request for no taxation at all.
The Clinton Administration is concerned with promoting U.S. economic
development and international trade by nurturing the development of electronic
commerce in the United States. The Administration is sympathetic to the infant
industry argument that fledgling efforts to develop Internet-related businesses could
be stifled by complicated taxation and regulation of the Internet. The Administration
is particularly concerned with protecting from taxation services that are delivered
entirely over the Internet, as distinguished from products that are ordered over the
Internet but delivered separately in tangible, physical form. Internationally, the
Administration wants to forestall efforts by other countries to impose taxes, tariffs,
and regulations on Internet commerce. Pre-empting state and local government
taxation of the Internet is a way of setting at home the example the United States
would like other countries to follow.2
For the federal government, opposing new forms of taxes on the Internet
currently appears to pose relatively little threat of revenue loss. Unlike many other
industrialized countries which depend heavily on value added taxes, and the states
which depend heavily on sales taxes, the U.S. Treasury does not depend much on sales
or other transactions taxes. The federal government feels it will receive its fair share
of revenues from business conducted over the Internet through income taxation of
business profits. The Governors of some states (California, New York, Texas, South
Carolina, and Virginia, among others) agree with this position.
State and local revenue officials are concerned with retaining the authority to
determine their own tax policy and adapt it to a changing economy. They have
generally opposed the idea of a federally imposed moratorium. They are particularly
concerned about stemming further erosion of their sales tax base, as has occurred with
mail order sales. State and local governments worry that the growth of commerce
conducted over the Internet will increase the share of purchases their residents make
out-of-state, tax-free, unless Congress changes the nexus rules governing interstate tax
collection requirements. Under the proposed moratorium, they could also lose the
ability to tax within-state sales transacted entirely over the Internet. State and local
governments are also concerned about erosion of their telecommunications tax base.
Sectors of the economy that are otherwise subject to tax are concerned that
they will face a competitive disadvantage and thus lose sales to business conducted
tax-free over the Internet. The taxed group includes “Main Street” (storefront)
retailers, businesses that deliver their product in tangible rather than electronic form,
and communications industries such as telephone and cable television. These
competing sectors seek equal treatment under the tax laws.
The
2
Clinton Administration’s position is set forth in: The White House, “A Framework for
Global Electronic Commerce,” together with Background Paper, released July 1, 1997.

CRS-3
The state and local sales tax is already considered regressive -- that is, it takes a
larger percentage of income from low income than high income people. The proposed
moratorium is likely to make the tax even more regressive. That is because higher
income people are more likely to subscribe to Internet access, which would be
protected from taxes, and to be able to take advantage of tax-free shopping over the
Internet. Lower income people are more likely to continue to shop at local stores
which are required to collect sales taxes from the customer.3
A basic conflict underlying the debate over state and local taxation of the
Internet is between:
! what tax base will remain available to state and local governments as a growing
fraction of the economy operates over the Internet;
versus
! the potential tax compliance burden for businesses conducting commerce over
the Internet throughout the nation and the world if they are subject to the laws
and filing requirements of numerous distinct taxing jurisdictions.
Among the tax administration issues of concern are:
! inconsistencies among tax jurisdictions in the terminology defining the tax
base; and
! how to determine which jurisdiction is entitled to impose a tax when the
geographic location of the Internet activity is ambiguous.
Contents of the Bills
Before taking a closer look at the contents of the bills, the reader is cautioned that
the bills before the Senate may still be revised. Although the House has passed its
bill, the description of earlier House bills has been retained to help trace the evolution
of the bill and the range of proposals that have been considered. The discussion that
follows is based on the most recent official versions of the bills available as of this
writing:
3 Analysts point out that higher income consumers are more likely to have computer, a
modem connection, Internet access, and a credit card needed to charge purchases. In
addition, the Internet is increasingly being used to purchase luxury items such as customized
golf clubs and bicycles, and specialty wines and beers. The low income may also suffer
disproportionately if public services must be cut because of a loss in sales tax revenues.
See: Maserov, Michael and Iris J. Lav. A Federal “Moratorium” on Internet Commerce
Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income
Households. Washington, Center on Budget and Policy Priorities, May 11, 1998.
http://www.cbpp.org/512webtax.htm. Also published as: Problems with a ‘Moratorium’ on
Internet Commerce Taxation. Special Report. Tax Notes, v. 79, no. 10, June 8, 1998. p.
1327-54.

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House of Representatives
! H.R. 1054 (Cox) as approved by the House Commerce and Judiciary
subcommittees on October 9, 1997;
! H.R. 3529 (Chabot) as introduced in the House Judiciary Committee on March
23, 1998;
! H.R. 3849 (Cox and White/Commerce) as reported by the House Commerce
Committee on May 14, 1998;4 and
! H.R. 3529 (Judiciary substitute) as reported by the House Judiciary Committee
on June 17, 1998.
! H.R. 4105 (Cox) as passed by the House on June 23, 1998.
Senate
! S. 442 (Wyden/Commerce substitute) as approved by the Senate Commerce
Committee on November 4, 1997;
! S. 442 (Wyden/Finance substitute, from a sequential referral) as reported by the
Senate Finance Committee on July 30, 1998; and
! S. 1888 (Gregg and Lieberman) as introduced on March 31, 1998.
For further details on the chronology of the bills, see the section Congressional
Action on the Bills at the end of this report.

As explained above, the general approach taken in all the bills is to place a
moratorium on the ability of state and local governments to impose certain taxes on
the Internet and related activities. During the moratorium period, state and local
governments would be prohibited or preempted from levying the taxes specified in the
particular bill. The moratorium is intended to provide time for an appointed group to
study the issues and make recommendations regarding taxation and regulation of the
Internet. The justification for congressional intervention, expressed in the findings
section of the original S. 442 and the Senate Commerce Committee version, is
Congress’s authority over interstate and foreign commerce, as provided by the
Commerce Clause of the United States Constitution (article I, section 8, clause 3).
Points of Difference
Apart from agreement on the above points, there are significant differences
among the bills on such basic issues as:

! the length of the moratorium;
! which aspects of the Internet are to be protected from taxation;
! which types of taxes would be prohibited and which permitted;
! whether existing taxes would be grandfathered;
! whether past tax liabilities could be enforced;
! the focus of the advisory commission;
The
4
amended version of H.R. 3849 reported by the Judiciary Committee on June 17, 1998,
dropped entire sections of the bill reported by the Commerce Committee, but did not
otherwise make changes in the bill language.

CRS-5
! membership of the commission;
! whether the issue of collecting taxes on out-of-state sales will be addressed;
! whether other telecommunications and FCC issues will be addressed; and
! what policy actions are expected at the end of the moratorium.
Length of the moratorium. In the original bills, the moratorium was indefinite.
Under H.R. 1054, it could last 8 years. Under H.R. 3529, H.R. 3529 (Judiciary
substitute), H.R. 3849 (Commerce), and H.R. 4105 as passed by the House, it would
last 3 years from the date of enactment. Under S. 442 as approved by the Commerce
Committee, the moratorium would last until January 1, 2004 (more than 5 years).
Under S. 442 as amended by the Finance Committee, it would last 2 years. Under S.
1888, it would last until December 31, 2001 (more than 3 years).
What aspects of the Internet would be protected from taxation? All of the
bills would prohibit state and local taxation of Internet access and online services,
such as America Online’s or Erol’s monthly access charge.5 H.R. 3849 (Commerce),
H.R. 3529 (Judiciary substitute), H.R. 4105, and S. 442 (Finance) would exempt from
the moratorium taxes on Internet services offered as part of a bundled package of
services, only if the service provider separates the billing for services other than
Internet access or online services.
H.R. 3529, H.R. 3529 (Judiciary substitute), H.R. 3849, H.R. 4105, and S. 442
(Finance) also would prohibit bit taxes (on the volume of digital information
transmitted over the Internet) and multiple or discriminatory taxes on electronic
commerce. All these bills would prohibit sales and use taxes where the use of a
computer server is used to determine nexus or agent status for a remote seller
(included in the definition of discriminatory taxes). H.R. 3529 (Chabot) also would
prohibit bandwidth taxes (on the capacity to transmit data over the Internet).
6
Under H.R. 3529, H.R. 3529 (Judiciary substitute), H.R. 3849, H.R. 4105, and
S. 442 (Finance) the prohibition against discriminatory taxation would prevent state
and local governments from taxing products or services that are delivered uniquely
over the Internet, in electronic form only. Under all the Internet bills (House and
Senate), transactions arranged over the Internet but delivered separately in tangible
form would be treated like mail order or telephone sales. This means that for most
interstate sales arranged over the Internet, sellers could not be required to collect sales
and use taxes from the customer.
It has been pointed out that a combination of language in H.R. 4105 opens the
possibility for retail stores to set up "Internet sales subsidiaries" and encourage
customers to place orders with the Internet subsidiaries from in-store computer
5 H.R. 3529 (Judiciary substitute) and H.R. 4105 dropped explicit reference to online
services in the list of prohibited taxes, but refer to them in the definition of Internet access.
6 No bit or bandwidth taxes have yet been imposed in the United States. They have been
discussed in Europe.

CRS-6
terminals. There would be no obligation to charge the sales tax except in the state
where the subsidiary is located.7
With respect to the taxation of activities conducted over the Internet, H.R. 1054
would also prohibit taxes on the transmission or communication, and use or
consumption, of data acquired through the Internet or online services. S. 442
(Commerce) would prohibit taxes on communications or transactions using the
Internet.
S. 1888 would broadly prohibit taxes directly or indirectly on the use of the
Internet or Internet-related services, as the original versions of H.R. 1054 and S. 442
did. Because this prohibition could be interpreted so broadly, these three bills
specifically exempt from the moratorium a list of types of taxes commonly applied to
businesses.

Would existing taxes be grandfathered? H.R. 1054, S. 442 (Commerce and
Finance), and S. 1888 would place the moratorium (on the types of taxes enumerated
in the bill) on existing as well as new taxes. There is no provision in these bills to
grandfather taxes already in effect for states or local governments.
H.R. 3529 attempted to place the moratorium only on new taxes. An issue was
that the bill language of the original H.R. 3529 (Chabot) exempted existing taxes on
Internet access or online services only if they have been implemented by state statute.
The 12 states now taxing Internet access have done so by applying existing taxes8
through rulings or other decisions made by state revenue departments, and not by
statutory action.
Addressing this issue, H.R. 3849 (Commerce) exempted from the moratorium
taxes on Internet access or online services “generally imposed and actually enforced”
under state law before March 1, 1998. For the tax to remain enforceable, however,
a state would need to enact a law expressly imposing such a tax within one year from
the date of enactment of H.R. 3849. Concern was expressed at the House Commerce
Committee markup that existing local taxes, if any, were not grandfathered as well.
H.R. 3529 (Judiciary substitute) and H.R. 4105 as passed by the House exempt
from the moratorium the taxes on Internet access in effect on the date of enactment
in 8 states enumerated in the bill — if, within one year from enactment of this federal
legislation, the state enacts a law affirming that it imposes such a tax on Internet
access. (Opponents think this provision is tantamount to disallowing the tax because
7"This loophole arises from the combination of a definition of an 'Internet access' provider
that would encompass a store making available to customers a computer linked to the
Internet, and an explicit prohibition on states' requiring Internet merchants to charge sales
tax when they use in-state Internet service providers to 'process orders.'" [The processing
of orders provision is under the definition of discriminatory tax.] See Maserov, Michael.
House Version of the "Internet Tax Freedom Act" Poses Revenue Risks for State and Local
Governments. Washington, Center on Budget and Policy Priorities, July 9, 1998. p. 4.
8 These are typically state sales taxes on telecommunications services or on information or
data-processing services.

CRS-7
it will be difficult to get legislatures to pass such legislation.) The bill would not
grandfather local taxes, including taxes levied by the District of Columbia.
9
Could past tax liabilities be enforced? H.R. 3849 was the only House bill to
explicitly uphold tax liabilities incurred prior to the moratorium. Under H.R. 3849,
tax liabilities accrued prior to March 1, 1998, and related ongoing litigation would
remain unaffected. S. 442 (Finance), by stating that the moratorium begins on July
29, 19998, implicitly upholds tax liabilities incurred before that date. (Numerous
companies have challenged their tax liabilities. America Online, probably the largest
example, has refused to collect from customers and remit to state and local
governments what now amounts to millions of dollars in sales taxes on Internet
services. )
10
Focus of the consultative group or commission. H.R. 1054 and S. 442
(Commerce) would establish a single consultative group and broadly direct it to study
domestic (state and local) and international taxation of the Internet and make
recommendations to the President. The group is not expected to draft proposed
federal or state law. H.R. 1054 goes into a far more detailed description than S. 442
(Commerce) of what topics should be addressed in the study and recommendations.
H.R. 3529 (Chabot) would establish two groups: a consultative group to
examine international tax policy toward the Internet, and a separate commission on
electronic commerce. The commission on electronic commerce would focus on the
application of sales and use taxes to remote commerce. The commission is expected
to develop proposed legislation to submit to Congress regarding expanded authority
for states to require vendors to collect use taxes on out of state sales.
H.R. 3849 (Commerce) would create a single advisory commission on electronic
commerce. The commission is expected to develop proposed legislation to submit to
Congress regarding expanded authority for states to require vendors to collect use
taxes on out of state sales. Unlike H.R. 3529 which refers to all remote sellers, for
committee jurisdictional reasons H.R. 3849 focuses the proposed legislation on sales
conducted using the Internet. H.R. 3849 separately assigns the Secretary of
Commerce the task of examining barriers in foreign markets to U.S. businesses
engaged in electronic commerce or U.S. providers of telecommunications services.
H.R. 3529 (Judiciary substitute) would create an advisory commission on
electronic commerce. As under H.R. 3529 (Chabot) and H.R. 3849 (Commerce), the
commission is expected to develop proposed legislation to submit to Congress
regarding expanded authority for states to require remote sellers to collect use taxes
on out of state sales. The Judiciary Committee separately approved an amended
The
9
8 grandfathered states are Connecticut, Wisconsin, Iowa, North Dakota, South Dakota,
New Mexico, Tennessee, and Ohio. The Governors of South Carolina and Texas reportedly
voluntarily withdrew their states from the exemption. The Judiciary Committee approved
an amendment that eliminated the exemption for the District of Columbia and certain named
home-rule cities in Colorado that had been included in their original substitute language.
1 0Johnston, David Cay. Senate Panel Would Reduce Tax Moratorium on Internet. New
York Times, August 3, 19998. P. D5.

CRS-8
version of H.R. 3849 that retained the abovementioned provision for the Secretary of
Commerce to examine barriers in foreign markets to U.S. electronic commerce or
telecommunications services.

Like H.R. 3849, H.R. 4105 as passed by the House both establishes an advisory
commission on electronic commerce and directs the Secretary of Commerce to study
and prepare a report on foreign electronic commerce. Like H.R. 3529, H.R. 4105
would have the advisory commission examine, and propose federal legislation on,
sales and use taxation of all remote sales, whether arranged by the Internet or other by
means such as mail order or telephone.
S. 1888 would create a commission on Internet taxation and regulation focused
on developing model legislation for a uniform commercial code for the Internet. It
would remain up to each state to adopt the model legislation. The commission is also
to study the effect of current federal statutes and regulations on the Internet and
recommend appropriate modifications, and to identify any inconsistencies in state and
local taxation and regulation of the Internet and Internet-related services.
S. 442 (Finance) would create an advisory commission on electronic commerce
whose duty is to transmit to Congress a report reflecting the results of its study. The
commission is not expected to draft federal legislation regarding taxation of remote
sales (unlike H.R. 4105) or to draft model state legislation for a commercial code for
the Internet (unlike S. 1888). However, these issues are both on the list of topics that
the commission may study. Another issue that may be studied by the commission is
most of the assignment given to the Secretary of Commerce under H.R. 4105 to report
on foreign commerce. The possible topics for the commission includes many of those
listed in H.R. 4105, such as the administration of consumption taxes on interstate
commerce in other countries and the US, comparing when the transaction uses the
Internet and when it does not; ways to simplify the administration of sales and use
taxes on interstate sales; and ways to simplify taxes on the provision of
telecommunications services. S. 442 (Finance) is distinct from the other bills in
including the study of federal (in addition to state and local) tax treatment of the
Internet and of telecommunications, plus an examination of the impact of the Internet
and Internet access (particularly of voice transmission) on the revenue base for the
federal tax on communications services (the telephone excise tax).
Membership of the consultative group or commission. There is some
difference among the bills about which cabinet secretaries would be members of the
commission. There are also differences in the number of members, the method of
selecting the representatives of state and local government interests and business
interests, and the selection of the chair.
All of the bills name the Secretaries of Treasury and Commerce as members of
the consultative groups or commissions. H.R. 1054 and S. 442 (Commerce and
Finance) also include the Secretary of State. H.R. 3529 (Chabot) includes the
Secretary of State in the consultative group to study international tax policy toward
electronic commerce, but not in the (domestic) commission on electronic commerce.
Like H.R. 3529 (Judiciary substitute), H.R. 4105 as passed by the House includes the
Attorney General with the Secretaries of Treasury and Commerce on the advisory
commission on electronic commerce. Like H.R. 3849 (Commerce), H.R. 4105 gives

CRS-9
the Secretary of Commerce, and not the Secretary of State, the responsibility for
studying foreign electronic commerce. S. 442 (Finance) adds the U.S. Trade
Representative.
H.R. 1054 and S. 442 (Commerce) name as members of the consultative group
two organizations that are already independently working on these issues: the National
Tax Association (NTA)-sponsored Joint Communications and Electronic Commerce
Tax Project, and the American Bar Association (ABA)-sponsored National
Conference of Commissioners of Uniform State Laws (NCCUSL). H.R. 4105, like
H.R. 3529 and H.R. 3529 (Judiciary substitute), indicates that its advisory commission
is to consult with the NTA project. S. 1888 and S. 442 (Finance) do not mention
either group.
H.R. 1054 and S. 442 (Commerce) make only general reference to having the
cabinet secretaries consult with representatives of consumer and business groups,
states and political subdivisions thereof, and other appropriate groups. The bills
introduced in the spring of 1998 give much more specific instruction on the
membership of the group to study state and local policies. H.R. 3529's commission
on electronic commerce would have 29 members:
! the Secretaries of Treasury, Commerce, and State;
! 14 representatives of state and local governments, including 2 representatives
each from 7 named state and local organizations;
! 12 representatives of consumers and business, 2 each appointed by the
President and the 5 congressional leaders (Senate majority leader, the Senate
minority leader, the Speaker of the House, the House majority leader, and the
House minority leader).
The chair would be appointed upon joint recommendation of the 4 party leaders, based
on nominations from the National Governors’ Association.
H.R. 3849's (Commerce) temporary Advisory Commission on Electronic
Commerce would be composed of 29 members:
! the Secretaries of Commerce and Treasury, or their respective representatives;
! 14 representatives from state, local, and county governments, comprised of 2
representatives each from 6 named state and local government organizations,
and 1 representative each from 2 other organizations;
! 13 representatives of taxpayers and business, 3 appointed by the President, and
2 each by the 5 congressional leaders.
Two of the members would be named as co-chairpersons. One chairperson would be
a representative selected by the National Governors’ Association from one of the state
and local interest group representatives. The other would be selected jointly by the
Speaker of the House and the Senate majority leader from the taxpayer-business
group. Although 15 members constitute a quorum, 18 members (a supermajority)
would need to approve the proposed legislation. The commission would sunset when
the last of the committees of jurisdiction concludes consideration of the proposed
legislation, or 3 years after the date of enactment, whichever occurs first.

CRS-10
H.R. 4105 adopts the provisions of H.R. 3529 (Judiciary substitute). Under H.R.
4105 as passed by the House, the temporary Advisory Commission on Electronic
Commerce would have 31 members:
! 3 representatives from the federal government:
the Attorney General,
the Secretary of Commerce, and
the Secretary of Treasury, or their respective representatives;
! 14 representatives from state, local, and county governments:
2 each from:
the National Governors’ Association
the National Conference of State Legislatures
the Council of State Governments
the National Association of Counties
the National League of Cities
the United States Conference of Mayors;
1 each from:
the International City/County Managers Association
the American Legislative Exchange Council);
! 14 representatives of taxpayers and business, 7 appointed by the majority
(jointly by the Speaker of the House and the majority leader of the Senate) and
7 by the minority (jointly by the minority leader of the House and the minority
leader of the Senate) leadership of the Congress. (The President would not
make any of the appointments.) Within each group of 7, there should be
3 engaged in providing Internet access, or communications or
transactions that use the Internet;
3 engaged in electronic commerce, including at least 1 in mail
order commerce; and
1 engaged in software publishing.
The chair would be selected from among the membership. Sixteen members would
constitute a quorum, but 19 members (a supermajority) would be needed to approve
the proposed legislation. The commission would sunset when the last of the
committees of jurisdiction concludes consideration of the proposed legislation, or 3
years after the date of enactment, whichever occurs first.
S. 1888's Commission on Internet Taxation and Regulation would have 15
members:
! the Secretaries of Treasury, Commerce, and State;
! 3 Governors (including one from a state that does not impose a sales tax);
! 3 chief executive officers of a political subdivision of a state (including one
from a subdivision that does not impose a sales tax);
! 3 individuals employed by of affiliated with companies engaged in computer
manufacturing activities, software activities, or activities related to the Internet
or the provision of Internet-related services; and

CRS-11
! 3 individuals employed by or affiliated with companies engaged in electronic
commerce (including at least one who is employed by or affiliated with a
company engaged in mail order commerce).
The chair and vice-chair would be selected from among the membership. A majority
of the members would constitute a quorum, but 10 (a supermajority) would need to
approve the model legislation.
Among all the bills, S. 442's (Finance) selection process for commission
members is the most politically influenced among the bills in favor of the majority
party in Congress. Among the bills introduced or approved in the spring of 1998, S.
442 (Finance) is the least specific about describing the representation from state and
local governments and business interests. S. 442's (Finance) Advisory Commission
on Electronic Commerce would have 16 members:
! 4 representatives from the federal government: the Secretaries of Commerce,
State, and Treasury, and the U.S. Trade Representative, or their respective
representatives;
! 6 representatives from state and local governments, and
! 6 representatives of the electronic industry and consumer groups.
! Within each group of 6:
2 appointed by the Majority Leader of the Senate;
1 by the Minority Leader of the Senate;
2 by the Majority Leader of the House; and
1 by the Minority Leader of the House.
(The President would not make any of the appointments.)
The chair would be selected from among the membership. Nine members would
constitute a quorum, but any finding or recommendation included in the final report
must be agreed to by at least 2/3 of the members of the commission serving at the
time. The commission would sunset 18 months after the date of enactment.
Staffing and funding the commission. S. 1888 is the only one of the bills to
explicitly authorize staff, compensation, and travel expenses for the commission.
Other bills permit the commission to receive grants and gifts and to borrow resources
from the agencies whose cabinet secretaries are named to the commission, and to use
the facilities of those agencies for meetings.
International taxation and tariffs. With the exceptions of H.R. 3529 (Judiciary
substitute), all of the bills state that the President should seek bilateral and multilateral
agreements, through certain named international organizations,11 to establish that
commercial activity on the Internet is free from tariffs and taxation. H.R. 4105, like
H.R. 3849, adds a concern for freedom from undue and discriminatory regulation for
Internet access and online services, and from discriminatory regulation and
1 1 H.R. 4105 and H.R. 3849 add the International Telecommunications Union and the Free
Trade Area of the Americas to the list of organizations found in the other bills: the World
Trade Organization, the Organization for Economic Cooperation and Development, the Asia
Pacific Economic Cooperation Council, or other appropriate international fora.

CRS-12
discriminatory taxation (in contrast to the reference to all taxation found in the other
bills) of electronic commerce in the international arena.
S. 442 (Finance) amends section 181 of the Trade Act of 1974 to ensure that the
U.S. Trade Representative will include barriers to U.S. electronic commerce among
the items catalogued in the annual National Trade Estimates report on foreign barrier
to trade. Going beyond the general statement found in the other bills that it is the
sense of Congress that the President seek international agreements to remove barriers
to global economic commerce, the Finance Committee bills lays out the objectives
(which are similar to those in H.R. 4105) as negotiating objectives. These are: to
assure that electronic commerce is free from a) tariff and nontariff barriers; b)
burdensome and discriminatory regulation and standards; and c) discriminatory
taxation. Another objective is to accelerate the growth of electronic commerce by
expanding [presumably international] opportunities for four specified industry sectors,
many of which are related to telecommunications (see section on FCC and
telecommunications issues.).
H.R. 1054 and S. 442 (Commerce and Finance) instruct their consultative group
to study international as well as domestic taxation of the Internet. H.R. 3529 (Chabot)
establishes a separate consultative group to focus exclusively on the international
taxation of electronic commerce. H.R. 3849 and H.R. 4105 assign the Secretary of
Commerce the task of examining barriers in foreign markets to U.S. businesses
engaged in electronic commerce or U.S. providers of telecommunications services.
S. 1888 does not list international taxation as a topic for its commission on regulation
and taxation to study.
For jurisdictional reasons, H.R. 3529 (Judiciary substitute) does not mention the
study of international issues, except for having the advisory commission examine the
collection and administration of consumption taxes on remote commerce in other
countries and the United States. However, the Judiciary Committee separately
approved an amended version of H.R. 3849, which preserves the provision for the
Secretary of Commerce to examine barriers in foreign markets and the declaration
regarding international treatment of the Internet. H.R. 4105 as passed by the House
includes these two foreign provisions from H.R. 3849.
Federal taxation. The review of federal taxation of the Internet is not a point
of emphasis in any of the bills except S. 442 (Finance). H.R. 1054 and S. 442
(Commerce) refer to studying domestic taxation of the Internet, but they do not
specifically mention federal taxes. H.R. 3529 recommends that there be no federal
taxation of the Internet and does not assign the subject of federal taxation for
evaluation. H.R. 3849 refers to identifying taxes, fees, and charges on electronic
commerce in the U.S. but does not specifically mention federal taxes. H.R. 3529
(Judiciary substitute) and H.R. 4105 do not mention studying federal taxes. S. 1888
recommends no federal, state, or local taxation of the Internet; although taxation is in
the name of the commission on regulation and taxation, it is not enumerated as an area
to be studied. S. 442 (Finance) explicitly states that it is the sense of Congress that no
new federal taxes similar to the taxes under the moratorium for state and local
governments should be enacted with respect to the Internet and Internet access during
the moratorium. S. 442 (Finance) also is the only bill to explicit mention federal
taxation of the Internet as a possible topic for the advisory commission to study.

CRS-13
FCC and telecommunications issues. H.R. 4105 includes provisions from H.R.
3849 (Commerce) specifically addressing telecommunications issues. H.R. 4105, like
H.R. 3849, would prevent both the Federal Communications Commission (FCC) and
state commissions from regulating the prices or charges paid by subscribers for
Internet access or online services. The FCC also would be prevented from imposing
regulatory fees on such services. However, the FCC and state commissions would not
be prevented from otherwise implementing the 1996 Telecommunications Act or from
regulating telecommunications carriers that offer Internet access or online services
bundled with other telecommunications services.
FCC issues and the telecommunications services industry are included in the
instructions for all 3 studies mandated by H.R. 3849 and H.R. 4105. The existing
National Telecommunications and Information Administration is asked to determine
whether any direct or indirect federal regulatory fees are imposed on Internet providers
and make recommendations to Congress regarding whether such fees should be
modified or eliminated. The Advisory Commission on Electronic Commerce (that
would be created by the bill) is asked to examine ways to simplify state and local taxes
imposed on the provision of telecommunications services. U.S. providers of
telecommunications services are specifically mentioned among the topics for the
Secretary of Commerce to examine with respect to barriers in foreign markets.
H.R. 3529 (Judiciary substitute), drafted in recognition of the jurisdictional
conflict with the Commerce Committee includes a few items acknowledging the
telecommunications and FCC regulatory fee concerns of the Commerce Committee.
In addition, the Judiciary Committee reported an amended version of H.R. 3849 which
preserves the abovementioned sections relating to FCC and telecommunications
concerns. H.R. 4105 adopted those provisions.
S. 442 (Commerce) would exempt from the moratorium taxes imposed on or
collected by a common carrier or by a provider of telecommunications services. The
term tax is defined to include any license or fee imposed by a governmental entity.
S. 442 (Finance) lists among the topics that may be studied by the advisory
commission an examination of the barriers imposed in foreign markets on U.S.
providers engaged in electronic commerce and providers of telecommunications
services, and how the imposition of such barriers will affect U.S. consumers,
producers, and the growth and maturing of the Internet. (In H.R. 4105 these topics are
assigned to the report to be prepared by the Secretary of Commerce.) In its listing of
negotiating objectives for international agreements on trade, S. 442 (Finance)
explicitly mentions expanding market access opportunities for a) the development of
telecommunications infrastructure; the procurement of telecommunications
equipment; c) the provision of Internet access and telecommunications services; and
d) the exchange of goods, services, and digitalized information. Among the topics the
advisory commission may examine are ways to simplify federal, state, and local taxes
imposed on the provision of telecommunications services and the impact of the
Internet and Internet access (particularly of voice transmission) on the revenue base
for the federal tax on communications services (the telephone excise tax). Like H.R.
4105 and H.R. 3849 (Commerce), S. 442 (Finance) indicates that nothing in the Act
shall limit the implementation of the Telecommunications Act of 1996 or the
amendments made by the Act.

CRS-14
Timetable for recommendations and actions. Under H.R. 1054, the Secretary
of the Treasury has 4 years from enactment to submit a final report and
recommendations. The Congress is then given 4 years to consider the
recommendations submitted by the President. There is no time limit on the President
to transmit recommendations to Congress, and no requirement for Congress to act.
It is not clear whether the moratorium would go on indefinitely if the President
submitted no recommendations, or sunset if the Congress took no action upon the
President’s recommendations.
Under S. 442, the consultative group would have 18 months from enactment to
submit policy recommendations to the President. The President would have 2 years
from enactment (another 6 months) to transmit recommendations to Congress. The
moratorium would not expire for another 4 years (January 1, 2004). Congress is not
required to take any action.
Under S. 1888, the commission has until December 31, 2000 (approximately 2
years), to submit its report, a year before the end of the moratorium (December 31,
2001). No time or other requirements are set on the President or the Congress to act
on the commission’s recommendations.
Under H.R. 4105 passed by the House, as under H.R. 3529 (Chabot and Judiciary
substitute) and H.R. 3849 (Commerce), the commission would have 2 years from
enactment to develop and transmit proposed legislation. This is 1 year before the end
of the moratorium. The President is given a 45-day review period. The Congress is
given 90 days from the commission’s submission to take some action as described
under the expedited procedure provisions of each bill.
Under S. 442 (Finance) the commission would have 18 months from the date of
enactment to submit a report to Congress reflecting the findings of its study. The
Commission is to terminate 18 months after the date of enactment. This is six months
before the end of the moratorium. The President has no role. Congress is not
required to take any action.
What policy actions are expected at the end of the moratorium? It is not
clear what policy actions any of the bills expect at the end of the moratorium. All of
the bills require that a consultative group conduct a study and make recommendations.
H.R. 1054, S. 442, and H.R. 3529 (Chabot) require that the recommendations be made
to the President and that the President, in turn, submit recommendations to the
Congress. H.R. 4105 as passed, H.R. 3529 (Judiciary substitute), H.R. 3849, and S.
1888 permit their commissions to submit recommendations directly to the Congress
as well as to the President. S. 442 (Finance) requires that the commission's report be
submitted to Congress only.
None of the bills requires Congress to take action regarding the recommendations
submitted by the President or the commission. However, the spring 1998 House bills
include two different forms of expedited congressional procedure for the proposed
federal legislation to be submitted by the commission on electronic commerce
regarding collection of interstate sales taxes.

CRS-15
H.R. 3529 (Chabot) provides that the commission submit its proposed legislation
directly to Congress at the end of a 45-day presidential review period. After 90
legislative days the respective committees would automatically be discharged from
considering the legislation, and it would be placed on the floor calendar of each
chamber. This provision would make it impossible for committees formally to
prevent floor consideration of the legislation, but would not ensure that either house
would actually proceed to consider it. H.R. 3529 does not specify how the legislation
would be formally introduced and referred after being transmitted to Congress in draft.
Like H.R. 3849 (Commerce) and H.R. 3529 (Judiciary substitute), H.R. 4105
provides that not later than 90 legislative days after its transmission to Congress the
proposed legislation shall be considered by the respective committees of jurisdiction
in the House and Senate, and, if reported, referred to the proper calendar on the floor
of each House for final action. Unlike H.R. 3529 (Chabot), H.R. 4105 as passed by
the House provides no guarantee that the proposed legislation will be forwarded from
the committees for floor consideration. The committees would retain control over the
content of any bill that might be forwarded.
Under S. 442 (Finance) the commission is not required to submit any legislative
recommendations with its report to Congress, although it may. There are no expedited
procedures for Congressional consideration of the commission's recommendations,
if any.
Reactions to the Proposals
Arguments For and Against a Moratorium
Supporters of a federally imposed moratorium want to forestall new efforts by
state and local governments to tax the Internet and business conducted over the
Internet and, where possible, prohibit existing taxes on the Internet and Internet
access. Some supporters are committed to using the moratorium period to develop
nationwide standards for state and local taxation of the Internet with reasonable
compliance procedures. Others view the temporary moratorium as setting a precedent
for a permanent prohibition on Internet taxation.
Opponents are concerned that if the moratorium lasts a long time, the Internet
industry will be substantially larger and able to lobby even more strongly than today
against being subject to taxes. Opponents are also concerned that having once
endorsed a moratorium on certain taxes, Congress would be reluctant to permit those
taxes to be imposed in the future and might make the moratorium permanent.
Opponents view the concern about Internet taxation as mostly a prospective one.
Although a few examples of aggressive taxation were cited at congressional hearings,
to date most state and local governments have refrained from imposing taxes on the
Internet. Currently only 12 states tax Internet access. No state or local governments
levy bit taxes. CBO could not identify any current state or local taxes that would

CRS-16
clearly meet the definition in H.R. 3849 (Commerce) of multiple or discriminatory
taxes on electronic commerce.12
State and local representatives generally opposed the initial versions of H.R.
1054 and S. 442, and oppose S. 1888. They object to the idea of a federally imposed
moratorium. Instead, they support an effort already begun by the National Tax
Association’s (NTA) Communications and Electronic Commerce Project to reach a
voluntary government-industry agreement and develop technical guidelines for a
consistent and administratively simplified policy for state and local sales and use
taxation of interstate sales. They are concerned that a moratorium would reduce the
industry’s incentive to participate in the effort to reach an agreement on tax policy.
But supporters of the moratorium are concerned that haphazard taxes would
proliferate during the many years it could take for the NTA group to reach an
agreement and then to get the states to adopt and implement those policies.
Collecting Out-of-State Sales Taxes
Nexus rules. For many years, the states have been looking to Congress for help
in collecting sales and use taxes due on out-of-state mail order sales. Under the
current legal interpretation of nexus rules, a seller is required to collect and remit sales
taxes only on behalf of the jurisdiction in which it has a “physical presence.” Thus,
13
a retailer is responsible for collecting and remitting sales taxes only to the
jurisdiction(s) in which it is physically located (the state and possibly the county or
city, if it levies a sales tax). This tax collection rule applies to mail-order or telephone
vendors as well as store-front retailers.14
If a sale is made and delivered to a purchaser in another state, the seller is not
obligated to collect a sales tax on the transaction. Technically, under state law, it
remains the purchaser’s obligation to remit a parallel “use” tax to his home
jurisdiction, equivalent to the sales tax that would be due if the purchase had been
made in the home state. In practice, however, it is difficult for governments to enforce
and collect use taxes from individual purchasers; businesses purchasers are more
likely to comply. States would like Congress to change the nexus rules regarding
interstate sales so that more sellers (large sellers in particular) could be required to
collect the use tax from the customer at the time of the purchase and then remit the
revenues to the customer’s home state.
1 2Congressional Budget Office Mandates Statement, reprinted in: U.S. Congress. House.
Committee on Commerce. Internet Tax Freedom Act. Report together with Additional
Views to accompany H.R. 3849. 105 Cong., 2d Sess., Report
th
105-570, Part I, June 5, 1998.
Washington, 1998. p. 19.
See
13
CRS Report 92-487, Quill v. North Dakota: The Mail Order Tax Case, by Thomas B.
Ripy.
1 4 For example, if a mail-order purchase is being made from a vendor located solely in
California, the instructions on the order form are likely to indicate, “Residents of California,
add 6.0% sales tax.” Residents of other states do not need to include any payment for a
sales or use tax.

CRS-17
It is because of these current nexus restrictions that state and local governments
found little consolation in the proposed exemption from the moratorium for sales or
use taxes found in the early versions of H.R. 1054, S. 442, and S. 1888. These three
bills make no effort to reconsider the nexus rules governing tax collection on remote
(interstate) sales made by mail order or over the Internet. The exemption from the
moratorium proposed in those bills would apply to sales or use taxes on sales or other
transactions effected over the Internet — but only if they are levied in the same way,
and on the same person or entity, as in the case of sales or transactions effected by
mail order, telephone, or other remote means within its taxing jurisdiction. Thus, as
with mail-order sales, states would not be able to require Internet vendors to collect
and remit use taxes on out-of-state sales.
The states want Congress’s help. State and local officials are more willing to
support a bill like H.R. 3529 (Chabot and Judiciary substitute), H.R. 3849
(Commerce), or H.R. 4105 as passed by the House. These bills include provisions not
found in the original bills, reflecting the compromise reached with state Governors in
March 1998 on addressing out-of-state sales tax collection issues. These bills would
create a temporary commission on electronic commerce and direct it to examine
certain topics and develop proposed federal legislation including specified elements.
The legislation to be proposed could authorize a state to impose on remote sellers the
duty to collect sales or use tax from the customer and remit the revenue to the
purchaser’s home state. However, the duty of sellers to collect would apply if, and
only if, the state had adopted a single, combined state and local sales and use tax rate
for remote commerce, as well as other simplified procedures for the administration of
its sales and use tax.
15
For committee jurisdictional reasons, under H.R. 3849 (Commerce), the term
remote seller is restricted to a person selling interstate using the Internet. Under H.R.
3529 (Chabot and Judiciary substitute) and H.R. 4105, a remote seller includes any
person selling from one state to a purchaser in another state, without regard to the
method of sale. Thus, under H.R. 4105 as passed by the House, the proposed
obligation for the seller to collect and remit taxes would apply to mail order sales as
well as sales arranged over the Internet. The term “mail order” is used here in a
general sense that encompasses catalog sales, and sales arranged by telephone or fax,
as well as by mail.
New issues raised by electronic commerce. A new question is whether there
should be a difference in the sales tax treatment of:
! communications or transactions transmitted entirely over the Internet (e.g.,
products, services, information, or data delivered in electronic form);
versus
The
15
streamlined interstate sales tax collection proposal within these Internet tax bills partly
reflects ideas advanced in several Congresses by Senator Dale Bumpers, most recently as
S. 1586, the Consumer and Main Street Protection Act of 1998, introduced on January 29,
1998. S. 1586 focuses on mail-order sales and does not address electronic commerce.

CRS-18
! transactions arranged over the Internet, but delivered separately in physical
form (the Internet-equivalent of mail-order or telephone sales of tangible
items).

Under H.R. 4105's and S. 442's (Finance) definition of discriminatory taxation,
during the moratorium, products or services delivered uniquely over the Internet could
not be taxed at all. Sales arranged over the Internet but delivered separately in
physical form would be treated like mail order or telephone sales. This means that
sales and use taxes could not be collected on interstate transactions of goods arranged
over the Internet (unless the out-of-state vendor also had a physical presence in the
buyer's state), but states could require Internet vendors to collect sales taxes on within-
state sales.
Simplifying compliance for sellers. The world of mail-order, telephone, fax,
and now Internet sales has opened up the possibility that even a small business may
be selling to customers anywhere in the United States or, for that matter, anywhere in
the world. Even the states are willing to admit the potential legal complexity and high
administrative costs facing an entity that conducts business in numerous state, let
alone local, taxing jurisdictions. In the interest of reducing tax compliance costs,
voluntary membership organizations like the Multistate Tax Commission (MTC) and
the American Bar Association’s National Conference of Commissioners on Uniform
State Laws (NCCUSL) have long been working toward the goal of getting the states
and their local jurisdictions to adopt more nationally uniform definitions in their tax
codes. But state and local governments have often resisted cooperating with these
uniformity efforts in the interest of maintaining their independence in setting tax
policy.
Simplifying the process of state, and especially local, tax collection and
remittance was part of the sales tax proposal advanced by the National Governors’
Association and is included in the instructions that H.R. 3529 (Chabot and Judiciary
substitute), H.R. 3849 (Commerce), and H.R. 4105 give to the commission drafting
proposed federal legislation. Remote sellers would not be expected to administer the
sales taxes of individual local jurisdictions.
To benefit from any expanded nexus rules proposed by the commission, each
state could choose its own combined state-local sales tax rate, but that rate would have
to apply uniformly for all local jurisdictions throughout the state. (A state without
sales taxes could choose a zero rate.) In addition, a state would need to agree to
certain streamlined procedures for the administration of its sales and use taxes,
including uniform registration, tax returns, remittance requirements, and filing
procedures. States which did not adopt a single tax rate and simplified administrative
procedures within four years of enactment would be considered to have a zero sales
tax rate on remote commerce.
H.R. 3529 (Chabot and Judiciary substitute), H.R. 3849 (Commerce), and H.R.
4105 instruct the commission to examine a method of distributing an appropriate
share of the revenues to individual local governments within a state. The commission
is also to examine the possibility of using an independent third-party tax-collection
system (so that sellers could remit taxes to a single collection entity that would be
responsible for forwarding the revenues to the appropriate state, and possible local,

CRS-19
government). The commission is also expected to recommend criteria for establishing
sufficient nexus for imposing the duty to collect taxes on the seller.
Unfunded Mandate
The Congressional Budget Office has reviewed several versions of the Internet
tax bills and concluded the federal preemption of state and local governments’ ability
to levy certain taxes, without offsetting federal compensation, would be an
intergovernmental mandate. Consequently, under the terms of the Unfunde
16
d
Mandates Reform Act of 1995 (UMRA, P.L 104-3, U.S.C. 1501-1571), a point of
order could be raised against the Internet Tax Freedom bill when it comes to the
Senate floor for a vote.17

Ambiguity of Bill Language
It has proven difficult to draft bill language that expresses the intent of the
legislation in a simple yet legally unambiguous way. There has been a particula
18
r
problem with enumerating the taxes which would be exempt from the moratorium
under H.R. 1054, S. 442 (Commerce), and S. 1888 which place a broad ban on taxing
the Internet. The stated intent of the sponsors was that the moratorium would prohibit
discriminatory taxes on the Internet, but permit the taxes typically paid by other types
of businesses. The problem is that with so many possible state and local tax
structures, the list of exempted taxes under H.R. 1054 and S. 442 (Commerce) has
grown long and may still be insufficient to accomplish the bills’ intent. In its
mandates statement evaluating the November 4, 1997 version of S. 442 (Commerce),
the Congressional Budget Office (CBO) noted that it was unclear how the criteria in
the bill regarding exemptions would apply to the state and local taxes that are

16 CBO has prepared a mandates statement on S. 442 as introduced and as ordered reported
by the full committee, H.R. 1054 as approved by the subcommittee, and H.R. 3849 as
approved by the full committee. Because of ambiguities, CBO could not in all cases
determine whether the $50 million threshold for an intergovernmental mandate was
exceeded. U.S. Congress. House. Committee on Commerce. Internet Tax Freedom Act.
Report together with Additional Views to accompany H.R. 3849. 105th Cong., 2d Sess.,
Report 105-570, Part I, June 5, 1998. Washington, 1998. p. 16-19.
The
17
unfunded mandate issue did not come up in the House because H.R. 4105 was brought
to the floor under a suspension of the rules under which no point of order may be raised. For
an explanation of congressional procedures required under UMRA, see CRS Report 97-238.
Unfunded Mandates Reform Act of 1995, by Sandra Osbourn, January 24, 1997. pp. 2-7.
See also, U.S. Congressional Budget Office. An Assessment of the Unfunded Mandates
Reform Act in 1997. February 1998. Box 1. Available through the CBO Home Page at
http://www.cbo.gov.
1 8 For detailed examples of ambiguities and possible unintended consequences in the bill
language, see Maserov, Michael and Iris J. Lav. A Federal “Moratorium” on Internet
Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-
Income Households. Washington, Center on Budget and Policy Priorities, May 11, 1998.
http://www.cbpp.org/512webtax.htm.

CRS-20
currently levied on Internet-related transactions or services. CBO anticipated that this
was likely to be the subject of litigation.
19
Congressional Action on the Bills
This section summarizes congressional activity on each of the several bills
introduced in the 105 Congress addressing state and local taxation of the Internet
th
.
H.R. 1054, H.R. 3529, H.R. 3849, H.R. 4105, and S. 442 (Commerce and Finance)
are all called the Internet Tax Freedom Act. S. 1888 is called the Internet Fairness and
Interstate Responsibility Act (Net FAIR Act). Although all of the bills would place
a moratorium on state and local taxation of the Internet, the bills differ in many
specific respects (discussed in the section Contents of the Bills).
In brief, the original companion bills, H.R. 1054 and S. 442, were introduced in
March 1997. Subsequently, both were revised in response to criticisms by state and
local government organizations. In the spring of 1998, in the House, two new bills
were introduced in place of H.R. 1054: H.R. 3529 in the House Judiciary Committee
and H.R. 3849 in the House Commerce Committee. Each bill incorporated a version
of the proposal advanced by the National Governors’ Association in February 1998:
before the end of the moratorium, a study commission would propose legislation to
Congress to help a state require out-of-state vendors to collect sales and use taxes—
if the state simplifies its state and local tax administration procedures. H.R. 3849 also
addressed telecommunications issues and regulation of the Internet.
The Commerce Committee reported H.R. 3849 on May 14, 1998. On June 17,
1998, the Judiciary Committee adopted an amendment in the nature of a substitute to
H.R. 3529. Challenging the jurisdiction of the Commerce Committee over interstate
tax matters, the Judiciary Committee also approved an amendment to H.R. 3849
which removed the Commerce Committee provisions relating to the tax moratorium
and the advisory commission on electronic commerce. The Judiciary Committee
reported both bills as amended, H.R. 3529 and H.R. 3849, on June 17.
On June 22, Representative Cox introduced H.R. 4105. This new consensus bill
combined elements from H.R. 3529 and H.R. 3849. H.R. 4105 was brought to the
House floor under a suspension of the rules and was approved by voice vote on June
23.

In the Senate, one version of S. 442 approved by the Senate Commerce
Committee in November 1997. In July 1998, the bill was sequentially referred to the
Finance Committee, which reported its substitute amendment on July 30. Senator
1 9 U.S. Congressional Budget Office. S. 442: Internet Tax Freedom Act. Mandates
Statement, as ordered reported by the Senate Committee on Commerce, Science, and
Transportation on November 4, 1997. Washington, Jan. 21, 1998. At issue, in particular,
are existing sales, use, or other transaction taxes on Internet access and online services and
on information and data processing services. The question is whether the taxes are also
imposed and collected in the case of “similar sales, uses, or transactions not using the
Internet, online services, or Internet access service,” in which case they would be exempt
from the moratorium.

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Wyden, original sponsor of S. 442 continues to consider revisions to the bill but has
not introduced official bill language. S. 1888 was introduced in May 1998 in
objection to some of the revisions made to the original S. 442. The Senate leadership
may yet introduce a new bill.
In the remainder of this section, the bills are discussed in chronological order of
their introduction within each house.
House of Representatives
H.R. 1054 (Cox). Internet Tax Freedom Act. H.R. 1054 was introduced on
March 13, 1997, as a companion bill to S. 442. The original bill included a section
(dropped from subsequent versions of H.R. 1054) that would ban the regulation of
Internet prices by the Federal Communications Commission (FCC). Because of that
provision, the bill was referred to the House Committee on Commerce, in addition to
the Committee on the Judiciary. A hearing on H.R. 1054 was held by the House
Commerce Committee, Subcommittee on Telecommunications, Trade, and Consumer
Protection, on July 11, 1997. The House Judiciary Committee, Subcommittee on
Commercial and Administrative Law, held a hearing on July 17, 1997.
State and local interest groups objected to H.R. 1054 and S. 442, particularly to
the language describing which taxes would be subject to the moratorium and which
would be exempt. On October 9, 1997, revised versions of H.R. 1054 bill were
approved by two House subcommittees: the Telecommunications, Trade, and
Consumer Protection Subcommittee of the House Commerce Committee and the
Commercial and Administrative Law Subcommittee of the House Judiciary
Committee.
H.R. 1054 did not receive further consideration. Instead, the full House
Commerce Committee reported H.R. 3849 on May 14, 1998. The full House
Judiciary Committee substantially amended and reported H.R. 3529 and H.R. 3849
on June 17, 1998.
H.R. 3529 (Chabot). Internet Tax Freedom Act. H.R. 3529 was introduced
March 23, 1998, and referred to the Committee on the Judiciary. H.R. 3529 was also
referred to the House Ways and Means Committee (because of provisions regarding
the study of international taxation) and the Committee on Rules (because of provisions
regarding expedited congressional procedure of legislation to be proposed under the
bill). Unlike H.R. 1054 and H.R. 3849, H.R. 3529 was not referred to the Committee
on Commerce.
H.R. 3529 represents a compromise with the National Governors’ Association.
It includes a proposal for a commission to develop federal legislation to require
remote (out-of-state) sellers to collect sales taxes and remit them to the home state of
the purchaser, in exchange for a state’s simplifying the administration of its sales tax.
The tax proposed collection requirement would apply to sales arranged by mail order
and telephone as well as over the Internet.
H.R. 3529 (Judiciary Committee substitute for Chabot bill). Internet Tax
Freedom Act of 1998. On June 17, 1998, the House Judiciary Committee adopted an
amendment in the nature of a substitute to H.R. 3529, previously introduced in that

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committee by Representative Chabot. The Committee approved one amendment that
eliminated the proposed grandfathering of taxes on Internet access by certain local
governments in Oregon and the District of Columbia. In an effort to develop a
consensus bill, the substitute bill drew upon elements of several bills: H.R. 3529, H.R.
3849, and S. 1888. The Judiciary Committee substitute for H.R. 3529 addresses a few
of the concerns related to taxation of telecommunications and Federal
Communications Commission (FCC) fees that were raised by the Commerce
Committee in H.R. 3849. It also raises special concerns about small sellers in the
examination of sales taxation of remote commerce. It was expected that the bill
would be revised further and considered in conjunction with the Judiciary Committee
amendment to H.R 3849 (see below).
H.R. 3849 (Cox and White/Commerce Committee). Internet Tax Freedom
Act. H.R. 3849 was introduced May 12, 1998, and referred jointly to four
committees: Commerce, Ways and Means, the Judiciary, and Rules. It was approved
unanimously by the Commerce Committee by a vote of 41-0, with one technical
amendment, on May 14, 1998.
Like H.R. 3529, H.R. 3849 represents a compromise with the National
Governors’ Association. It includes the proposal for a commission to develop federal
legislation to require remote (out-of-state) sellers to collect sales taxes and remit them
to the home state of the purchaser, in exchange for a state’s simplifying the
administration of its sales tax. Under H.R. 3849, however, any nexus changes for
remote sellers in the proposed legislation would apply only to sales arranged over the
Internet, and not by mail order or other means. H.R. 3849 differs from the other bills
in including provisions related to telecommunications and emphasizing freedom from
regulation for the Internet.
H.R. 3849 (Judiciary Committee amendment to Commerce Committee bill).
The Judiciary Committee challenged the jurisdiction of the Commerce Committee
over matters related to state taxation of interstate commerce. On June 17, 1998, the
Judiciary Committee, by voice vote, adopted and reported an amendment to H.R. 3849
which removed from the bill approved by the Commerce Committee the sections
related to the tax moratorium and related definitions, the creation of the advisory
commission on electronic commerce, and the recommendations for the commission’s
research agenda and legislative proposal. It left the sections relating Federal
Communications Commission issues; the report on foreign commerce to be prepared
by the Secretary of Commerce; the Congress’s position on minimizing international
regulations, tariffs, and discriminatory taxation; and expedited congressional
consideration for the legislation to be proposed by the advisory commission. It was
expected that the amended version of H.R. 3849 would be considered in conjunction
with the substitute amendment for H.R. 3529 (also reported by the Judiciary
Committee on June 17) to develop a comprehensive consensus bill.
H.R. 4105 (Cox). Internet Tax Freedom Act. H.R. 4105 is the consensus bill
passed by the House. It drew upon elements from H.R. 3529 and H.R. 3849, both as
amended by the Judiciary Committee, and from H.R. 3849 as originally approved by
the Commerce Committee. H.R. 4105 was introduced on June 22. The bill was
considered so non-controversial that it was brought to the House floor under a
suspension of the rules and was approved by voice vote, without dissent, on June 23.

CRS-23
H.R. 4105 includes concerns of the Commerce Committee, included in H.R.
3849, about Federal Communications Commission regulations and fees not applying
to the Internet, and about foreign commerce, together with the tax moratorium, the
creation of the advisory commission on electronic commerce, and the
recommendations for the commission’s research agenda and legislative proposal
endorsed by the Judiciary Committee in H.R. 3529. The House-passed bill retains the
compromise included in H.R. 3529 and H.R. 3849 between House supporters of a tax
moratorium and state and local interest groups’ concerns about having Congress
consider the issue of interstate sales and use taxation of mail order sales and sales
arranged over the Internet, narrowing the definition of the taxes subject to the
moratorium, and grandfathering existing taxes.
20
Senate
S. 442 (Wyden). Internet Tax Freedom Act. S. 442 was introduced on March
13, 1997, as a companion bill to H.R. 1054. It was initially referred to the Senate
Committee on Commerce, Science, and Transportation, and sequentially to the
Committee on Finance. The Commerce Committee approved a revised version of the
bill on November 4, 1997. Reportedly, since November 1997, there have been
several revisions of the bill under the auspices of Senator Wyden, who may yet
introduce a new version himself. No new bill language was officially available as of
this writing, however.
S. 442 (Senate Commerce Committee). Internet Tax Freedom Act. S. 442 was
initially referred to the Senate Committee on Commerce, Science, and Transportation.
The Communications Subcommittee held a hearing on May 22, 1997. The bill was
subsequently revised in response to objections by state and local government
organizations. A revised bill was approved by the full Commerce Committee on
November 4, 1997, and reported by Sen. McCain, with an amendment in the nature
of a substitute, on May 5, 1998. See S. 442 and S. Rpt. 105-184, both Calendar No.
357.
S. 442 (Senate Finance Committee). Internet Tax Freedom Act. Following a
unanimous consent agreement obtained by Senate Majority Leader Lott on July 17,
1998, on July 21, 1998, S. 442 was ordered referred to the Senate Committee on
Finance until the close of business on July 30, 1998. This meant that if the Finance
Committee did not report the bill by the deadline, the Senate Commerce Committee
version would be automatically discharged and placed on the legislative calendar. On
July 28 the Finance Committee held a markup of the proposed Chairman's amendment
in the nature of a substitute. The Committee considered several amendments to the
Chairman's Mark, adopting some and rejecting others. The Committee approved a
substitute version of the legislation on July 28, although the specific bill language was
not yet drafted. On July 30, the Finance Committee reported a new version of S.442
in the form of an amendment in the nature of a substitute to the Commerce Committee
version of S. 442. Because this was a sequential referral of the bill, the Finance

20 For a summary of the bill, see CRS Report 98-597, Internet Tax Freedom Act: H.R. 4105
as Passed by the House, by Nonna A. Noto.

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Committee version is viewed as superceding the Commerce Committee version of
S. 442.
S. 1888 (Gregg and Lieberman). Internet Fairness and Interstate Responsibility
Act (Net FAIR Act). S. 1888 was introduced March 31, 1998. Although the bill was
officially referred to the Committee on Commerce, Science, and Transportation, it is
unlikely to be considered by that committee, which has already approved S. 442. A
few elements of S. 1888 were incorporated into S. 442 as amended by the Finance
Committee.
S. 1888's description of the moratorium is similar to the original March 1997 bill
language of H.R. 1054 and S. 442. S. 1888 does not address the issue of interstate
sales. The bill downplays the development of standards for international and state and
local taxation. In place of a consultative group on tax policy, S. 1888 substitutes a
proposal to establish a commission to develop a uniform commercial code for the
Internet (a uniform set of definitions and principles for state and local jurisdictions to
utilize regarding regulation and taxation of commercial transactions on the Internet).
The bill addresses detailed operational matters for the commission, such as
compensation rates, staff, and powers to require information.

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Congressional Hearings, Reports, and Documents
U.S. Congress. House. Committee on Commerce. Subcommittee on
Telecommunications, Trade, and Consumer Protection. The Internet Tax
Freedom Act. Hearing on H.R. 1054. 105th Cong., 1st Sess., Serial No. 105-33,
July 11, 1997. Washington, U.S. Govt. Print. Off., 1997.
___. House. Committee on Commerce. Internet Tax Freedom Act. Report together
with Additional Views to accompany H.R. 3849. 105 Cong., 2d Sess., Report
th
105-570, Part I, June 5, 1998. Washington, 1998.
___. House. Committee on the Judiciary. Subcommittee on Commercial and
Administrative Law. Internet Tax Freedom Act. Hearing on H.R. 1054. 105th
Cong., 1st Sess., Serial No. 25, July 17, 1997. Washington, U.S. Govt. Print.
Off., 1997.
___. Senate. Committee on Commerce, Science, and Transportation. Internet Tax
Freedom Act. Report to accompany S. 442. 105 Cong., 2d. Sess., S.Rpt. 105-
th
184, May 5, 1998. (Related to the version of S. 442 approved by the Senate
Commerce Committee on Nov. 4, 1997.)
___. Senate. Committee on Commerce, Science, and Transportation. Subcommittee
on Communications. S. 442, The Internet Tax Freedom Act. Hearing. 105th
Cong., 1 Sess.,
st
S.Hrg. 105-435, May 22, 1997. Washington, U.S. Govt. Print.
Off., 1998.
___. Senate. Committee on Finance. Internet Tax Freedom Act. Report to
accompany S. 442. 105 Cong., 2d Sess., S.Rept. 105-276, July 30, 1998.
th
___. Joint Committee on Taxation. Description of S. 442, The "Internet Tax
Freedom Act," and a Proposed Chairman's Amendment in the Nature of a
Substitute. Scheduled for Markup by the Senate Committee on Finance on July
28, 1998. 105 Cong., 2d Sess., JCX-58-98, July 24, 1998.
th
For Additional Reading
Bonnett, Thomas W. Is the New Global Economy Leaving State-Local Tax Structures
Behind? Washington, National League of Cities, National Conference of State
Legislatures, and National Governors’ Association, 1998.
Maserov, Michael and Iris J. Lav. A Federal “Moratorium” on Internet Commerce
Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-
Income Households. Washington, Center on Budget and Policy Priorities, May
11, 1998. http://www.cbpp.org/512webtax.htm. Also published as: Problems
with a ‘Moratorium’ on Internet Commerce Taxation. Special Report. Tax
Notes, v. 79, no. 10, June 8, 1998. p. 1327-54.

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U.S. Congressional Budget Office. An Assessment of the Unfunded Mandates Reform
Act in 1997. February 1998. Available through the CBO Home Page at
http://www.cbo.gov.
—— S. 442: Internet Tax Freedom Act. Mandates Statement, as ordered reported by
the Senate Committee on Commerce, Science, and Transportation on November
4, 1997. Washington, January 21, 1998.
CRS Reports
CRS Report 98-597. Internet Tax Freedom Act: H.R. 4105 as Passed by the House,
by Nonna A. Noto.