2 June 1997
Source: http://www.treas.gov/treasury/press/pr052297a.html

FOR RELEASE AT 2 P.M. (EDT)
May 22, 1997

STATEMENT OF LAWRENCE H. SUMMERS DEPUTY SECRETARY DEPARTMENT OF THE TREASURY BEFORE THE COMMITTEE ON COMMERCE SUBCOMMITTEE ON COMMUNICATIONS UNITED STATES SENATE

Mr. Chairman and members of the Committee:

I am pleased today to have this opportunity to present the views of the Treasury Department on the Internet Tax Freedom Act, S. 442. The Internet Tax Freedom Act would impose an indefinite moratorium on subnational taxation of the Internet, interactive computer services, and electronic commerce. The restrictions would not apply to income taxes, franchise taxes, and generally applicable sales and use taxes, administered in a neutral manner. The Secretaries of the Treasury, Commerce, and State, in consultation with other interested parties, would be required to study the domestic and international taxation of the Internet and electronic commerce and to develop appropriate policy recommendations. Finally, the Bill declares that it is the sense of the Congress that the President should seek bilateral and multinational agreements to establish that "activity on the Internet and interactive computer services is free from tariff and taxation."

Treasury fully supports the goals and underlying objectives of this Bill.

The growth of the Internet, and the resulting growth in electronic commerce, is one of the most exciting technological and business developments of our era. As President Clinton has said, "The day is coming when every home will be connected to it, and it will be just as normal a part of our life as a telephone and a television. It’s becoming our new town square, changing the way we relate to one another, the way we send mail, the way we hear news, the way we play." The Administration’s goal is that every school and library in the United States will be connected to the Internet by the year 2000.

The Internet, which is part of the "Information Superhighway" or Global Information Infrastructure, is not a single computer network or means of communication but instead refers to the convergence of previously separate communications and computing systems into an interoperable, global network of networks. The Internet has been described as

a world-wide network of networks with gateways linking organizations in North and South America, Europe, the Pacific Basin and other countries . . . .The organizations are administratively independent from one another. There is no central, worldwide, technical control point. Yet, working together, these organizations have created what to a user seems to be a virtual network that spans the globe.

The Internet has grown from a computer network linking a handful of universities to a rapidly-growing worldwide network linking over 16 million computers that is used for education, commerce, and entertainment.

The Internet permits information to be created, transmitted and used at speeds and in ways never before imagined. Information is one of the nation’s most critical economic resources, for service industries as well as manufacturing, for economic as well as national security. By one estimate, two-thirds of U.S. workers are in information-related jobs, and the rest are in industries that rely heavily on information. In an era of global markets and global competition, the technologies to create, manipulate, manage and use information are of strategic importance for the United States. Those technologies will help U.S. businesses remain competitive and create challenging, high-paying jobs. They will also fuel economic growth which, in turn, will generate a steadily-increasing standard of living for all Americans.

The Internet will have a significant impact on our lives in almost every area imaginable. Using the Internet and other elements of the global information infrastructure:

The best schools, teachers and courses will be available to all students, without regard to geography, distance, resources or disability.

The vast resources of art, literature, and science will be available everywhere, not just in large institutions or big-city libraries and museums.

Services that improve America’s health care system and respond to other important social needs will be available on-line, without waiting in line, when and where you need them.

You will be able to live in many places without foregoing opportunities for useful and fulfilling employment, by "telecommuting" to your office through an electronic highway instead of by automobile, bus or train.

Small manufacturers will be able to get orders from all over the world electronically — with detailed specifications — in a form that the machines will use to produce the necessary items.

You will be able to see the latest movies, play the best video games, or bank and shop from the comfort of your home whenever you chose.

You will be able to obtain government information directly or through local organizations like libraries, apply for and receive government benefits electronically, and get in touch with government officials easily.

Individual government agencies, businesses and other entities all will exchange information electronically — reducing paperwork and improving service.

The growth of electronic commerce —the ability to perform transactions involving the exchange of goods or services between two or more parties using electronic tools and techniques — is one of the most exciting aspects of the Internet. Electronic commerce will play a significant role in our economy in the years and decades to come. Electronic commerce will provide an integrated collection of low-cost, reliable services to handle tremendous volumes of business and technical transactions and to amass, analyze, and control large quantities of data. Organizations will be able to improve efficiency and accuracy, and reduce costs, while providing faster, more reliable, and more convenient services. U.S. companies will be able to reengineer their business processes, and then use the Internet to realize the productivity potential of their current and future information technology investments. Smaller firms will be able to enter and participate at lower cost and with greater efficiency in new markets, and larger firms will be able to evaluate, select, and more readily work with other companies. New ways of doing business and new forms of economic activities will become commonplace, including telecommuting, global sourcing arrangements, new training and education capabilities, and disaggregated alliances or networks of companies.

Already, millions of dollars of goods are being bought and sold over the Internet every day and although forecasts vary, electronic commerce could account for tens of billions of dollars in sales by the year 2000. Electronic commerce is exciting because it allows businesses, both big and small, to do businesses around the clock and around the world. For example, industrial companies are now buying billions of dollars of goods annually from their suppliers on-line and many of these purchases are from small suppliers that they had not previously dealt with. Computer-equipment manufacturers are selling billions of dollars of products annually. And a one-woman book shop specializing in hard-to-find needlework books is now doing business with customers all over the world as a result of the Internet. This is just the beginning and as entrepreneurs develop new businesses and scientists create new technologies, electronic commerce will continue grow in ways that we cannot now imagine.

In order to encourage the growth of this technology and the resulting social and economic benefits, it is crucial that government take a responsible role toward regulating and taxing the Internet. In the realm of international taxation, the Administration’s key objectives are: no new Internet taxes, neutrality in taxing electronic commerce as compared with economically similar transactions and above all, no tax rules at the national international, federal or subfederal levels which inappropriately impede the full developments of these exciting new technologies.

Treasury has been a leader in adapting international tax rules to electronic commerce. In November 1996, Treasury published Selected Tax Policy Implications of Global Electronic Commerce, an issues paper which set forth both the major international tax issues created by electronic commerce and the general tax policy principles that will be applied in this area. This paper has been very well-received and has been widely read both in the United States and abroad. The paper requested comments on the issues raised and these comments will be used in formulating specific administrative guidance and any necessary legislative proposals. Treasury has also been active in the work of the Organization for Economic Cooperation and Development, which has been at the forefront in developing international rules in order to achieve our mutually desired objectives.

In addition to Treasury’s efforts, the administration as a whole is committed to encouraging the growth of electronic commerce. We recognize that the success of electronic commerce will require an effective partnership between the private and public sectors. Government participation will be coherent and cautious, avoiding the contradictions and confusions that can sometimes arise when different governmental agencies individually assert authority too vigorously and operate without coordination. For the past year, Ira Magaziner, Senior Advisor to the President for Policy Development, has been leading an interagency working group that is developing a set of principles to guide government’s role in promoting electronic commerce. These principles deal with financial issues, such as tariffs, taxation and electronic money; legal issues, such as a "Uniform Commercial Code" for electronic commerce, intellectual property protection, privacy, and security; and market access issues, such as telecommunications infrastructure and information technology, content regulation, and technical standards. These principles, which are contained in a document titled A Framework For Global Electronic Commerce, were released in draft form last December and are expected to be finalized shortly.

While recognizing that government has an important role to play, we also recognize that the private sector must lead this growth. Furthermore, as stated in the draft Framework for Global Electronic Commerce, "Innovation, expansion of services and participants, and lower prices will depend upon the Internet remaining a market-driven arena, not one that operates as a regulated industry." Government’s role should be limited to extending appropriate regulatory policies to the Internet and electronic commerce. For example, businesses need to know that contracts entered into on-line are valid, consumers need to know that goods and services purchased on-line are subject to consumer protection laws, and government needs to know that the Internet is not being used to further criminal activity. This must be accomplished while recognizing the unique qualities of the Internet and electronic commerce.

In this context, we note that section 5 of the bill states that it is the sense of the Congress that the President should seek multilateral agreements through the World Trade Organization, the Organization for Economic Cooperation and Development (OECD), the Asia Pacific Economic Cooperation Council, or other appropriate international fora to establish that activity on the Internet and interactive computer services is free from tariff and taxation. The Administration is already working to achieve these goals. In the tax area, Treasury is currently working in the OECD to develop neutral and uniform principles for the taxation of electronic commerce. With regard to tariffs, the United States Trade Representative will advocate in appropriate international fora, such as the World Trade Organization, that the Internet be declared a tariff-free environment whenever it is used to deliver products or services.

One of the most important areas in which government must adopt appropriate rules is in the field of taxation. Unreasonable taxation of the Internet, or even the fear of unreasonable taxation, could be a significant impediment to the growth of the Internet and electronic commerce. Some are tempted to view the Internet as a source of new tax revenues. We believe this strategy will be counterproductive in the long-term. The Internet has a major role to play in ensuring the continuing vitality of our economy and our global competitiveness. The imposition of new taxes that are limited to the Internet or electronic commerce will inevitability discourage the growth and use of the Internet. While new taxes will raise some revenue, they will impede the growth of the economy. Instead of seeking to impose new taxes on the Internet, we should encourage the growth and use of the Internet, which will result in a growing economy and greater revenues from existing taxes.

Therefore, Treasury is opposed to any new taxes specifically imposed on electronic commerce, whether imposed by other countries or at either the federal or subfederal level. This position is also shared by many of our major trading partners. Although proposals have been made for a European "bit tax," these proposals have been rejected. For example, EC Commissioner Mario Monti recently stated that he sees no need for a "bit tax" because the tax burden on electronic commerce should not be heavier than the tax burden on traditional commerce — confirming our neutrality concept.

Instead of enacting new taxes on the Internet or electronic commerce, Treasury believes that neutrality should be the fundamental principle guiding the development of tax rules in this area. Neutrality requires that the tax system treat economically similar transactions equally, regardless of whether such transactions occur through electronic means or through more conventional channels of commerce. Ideally, tax rules should not affect economic choices about the structure of markets and commercial activities. This will ensure that market forces alone determine the success or failure of new commercial methods. The best means by which neutrality can be achieved is through an approach which adopts and adapts existing principles — in lieu of imposing new or additional taxes. In addition, tax rules should be uniform across jurisdictions, so as to minimize the possibility of multiple or no taxation and these rules should be transparent and easy to administer.

Adapting existing tax rules to deal with electronic commerce raises a number of novel issues in international, federal and local income taxation because all systems must seek to allocate taxing jurisdiction over income that crosses jurisdictional boundaries. The relevant tax rules generally require that income first be classified as to type and then this classification is used to assign a geographical source to this income. The jurisdiction of source generally has a right to tax income arising within it although in many cases this right to tax is ceded to the country in which the person earning the income resides. Income derived from electronic commerce poses a number of problems under this traditional framework. In the world of electronic commerce, it is often difficult, if not impossible, to link an item of income with a specific geographic location. Therefore, traditional source rules become more difficult to apply. In addition, electronic commerce often involves income from "digitized information," i.e. information expressed in the binary format of ones and zeros. This type of income can be difficult to classify under traditional rules, which were developed for an economy based on manufacturing. Treasury is working to resolve these issues in the international arena and it looks forward to working with the states to resolve these issues at the state level. However, Treasury recognizes that the implementation of basic principles of tax policy may vary at the state level.

The goals of the Internet Tax Freedom Act are consistent with the general tax policy principles I have described. The Act would prohibit new state or local taxes specifically imposed on the Internet or electronic commerce, while income derived from and transactions effected through electronic commerce would remain subject to existing taxes, neutrally applied. The bill would also require the Administration to establish a consultative group to develop policy recommendations on the taxation of electronic commerce, so that existing taxes can be applied in a neutral and uniform manner. Treasury wholeheartedly supports the goals and underlying objectives of the Internet Tax Freedom Act and we are prepared to work with the Committee in order to assure the realization of our shared objectives.

[End]