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Exhibit B

"Plain English" Summary[20] of
The Internet Tax Freedom Act

Included as Titles XI and XII of the Omnibus Appropriations Act of 1998;
Approved as H.R. 4328 by Congress on October 20, 1998;
Signed as Public Law 105-277 on October 21, 1998

Background:

The Internet Tax Freedom Act is based on a simple principle: information should not be taxed. As we enter the digital age, the age of information, establishing this principle in law will have profound and long-lasting consequences. Given the pace of the Internet's growth--the U.S. Commerce Department recently told us that the number of Internet users and the number of web pages are doubling every 100 days--protecting the Internet, and the information and commerce exchanged over the Net, from special and discriminatory taxation on a national basis will prove a further stimulus to the continued technological and commercial development of this dynamic new medium.

The Internet Tax Freedom Act is needed not just to give the Net room and time to grow, but also because the Net is inherently susceptible to multiple and discriminatory taxation in a way that commerce conducted in more traditional ways is not. The very technologies that make the Net so useful and efficient--notably its decentralized, packet-switched architecture--also mean that several States and perhaps dozens of localities could attempt to tax a single Internet transaction. The Internet Tax Freedom Act will protect commerce conducted over the Internet from being singled out and taxed in new and creative ways, and will give Americans the reassurance they need that they will not be hit with unexpected taxes and tax collecting costs from remote governments.

Summary:

The Internet Tax Freedom Act has undergone a number of changes since it was introduced by Rep. Christopher Cox (R-CA) and Sen. Ron Wyden (D-OR) in March 1997. Most of these changes are the result of months of intense negotiations with State and local government leaders. As a result, the legislation has been altered to reflect State and local concerns, and now reflects a balanced compromise between the national interest in protecting this burgeoning marketplace and the importance of guarding against erosion of the State and local treasuries.

In March 1998, Rep. Cox held a news conference to announce the support of the National Governors' Association, the National Conference of Mayors, the National Conference of State Legislatures, the National Association of Counties, and the National League of Cities for the revised legislation. Numerous changes were made to cause state and local governments to drop their opposition, including: shortening the moratorium to 3 years; providing for a more targeted moratorium instead of a blanket prohibition on all Internet-related taxes; and creating a temporary commission to study the complex state and local tax issues relating to electronic commerce.

Highlights of the law:

  • 3-year moratorium of special taxation of the Internet. Bars state or local governments from taxing Internet access (i.e. the $19.95 or so that many Americans pay monthly to America Online, CompuServe, Erol's, or other similar services to access the Internet) from October 1, 1998 until October 21, 2001. A limited "grandfather" clause permits the handful of state already taking steps to tax Internet access--Connecticut, Wisconsin, Iowa, North Dakota, South Dakota, New Mexico, South Carolina, Tennessee, Texas, and Ohio--to continue to do so if they can demonstrate that their taxes had already been "generally imposed and actually enforced" on Internet access providers prior to October 1, 1998. Nevertheless, it is not expected that all of these states will in fact choose to tax Internet access: Connecticut and South Carolina, for instance, have already indicated they intend to abide by the national moratorium.
  • 3-year moratorium on multiple and discriminatory taxes on electronic commerce. Bars state or local governments from imposing taxes that would subject buyers and sellers of electronic commerce to taxation in multiple states. Also protects against the imposition of new tax liability for consumers and vendors involved in commercial transactions over the Internet, including the application of discriminatory tax collection requirements imposed on out-of-state businesses through strained interpretations of 'nexus.' It also protects from taxation, for the duration of the moratorium, goods or services that are sold exclusively over the Internet with no comparable offline equivalent.
  • Establish commission to study question of remote sales. A temporary Advisory Commission of Electronic Commerce will study electronic commerce tax issues and report back to Congress after 18 months on whether electronic commerce should be taxed, and if so, how they can be taxed in a manner that ensures such commerce won't be subject to special, multiple, or discriminatory taxes. State and local elected officials will be given a prominent voice on this commission. Congress, of course, retains full authority to change or discard the Commission's proposals.
  • No federal taxes. Sense of Congress that there should be no federal taxes on Internet access or electronic commerce.
  • Declares that the Internet should be tariff-free zone. Calls on the Clinton Administration to work aggressively through the EU and WTO to keep electronic commerce free from tariffs and discriminatory taxes. Asks Commerce Department to report to Congress on barriers hindering the competitiveness of U.S. businesses engaged in electronic commerce abroad.

Legislative History:

Rep. Cox and Sen. Wyden introduced H.R. 1054/S. 442, the Internet Tax Freedom Act, in March 1997. In the House, the legislation was referred to two main committees, the Commerce Committee and the Judiciary Committee. Hearings were held in both committees in July 1997. In October 1997, the Commerce Subcommittee on Telecommunications and the Judiciary Subcommittee on Commercial and Administrative Law each approved amended versions of the legislation. Subsequent to these markups, Rep. Cox negotiated an agreement with state and local leaders and introduced a new bill (H.R. 3849) in May 1998 reflecting this agreement, which was approved on May 14, 1998, by the Commerce Committee on a 41-0 vote. On June 17, 1998, the Judiciary Committee reported out virtually identical legislation (H.R. 3529, introduced by Rep. Steve Chabot) by voice vote. The main difference between the two bills was that, on the latter bill, Judiciary was the primary committee of jurisdiction, whereas the Commerce Committee was the primary committee on H.R. 3849. To reconcile these jurisdictional difference, on June 22, 1998, Rep. Cox introduced a new version (H.R. 4105) that merged these two separate bills into one unified version, taking the state and local tax provisions from the Judiciary Committee's bill and import FCC language from the Commerce Committee's bill. On June 23, 1998, H.R. 4105 was brought up and approved by the full House by voice vote.

In the Senate, S. 442 was referred to the Commerce Committee, which held hearings in May 1997 and approved the legislation in November 1997 by a 14-5 vote. Following the House's unanimous approval of H.R. 4105, in July 1998 the Finance Committee--which had recently obtained a sequential referral on S. 442--held hearings on the legislation, and voted 19-1 to approve amendments to S. 442 that reflected the consensus reflected in the House-passed language. The full Senate took up S. 442 in September 1998, and spent two and a half weeks debating the legislation before approving it on October 8 by a 96-2 vote. The Senate language was subsequently rolled into the Omnibus Appropriations bill that was approved by Congress on October 20. Bill Clinton signed the entire package--including the Internet Tax Freedom Act-- into law of October 21. Under the terms of the new law, the Internet tax moratorium is officially in place, and will be in effect from October 1, 1998 until October 21, 2001.


20. From "The Internet Tax Freedom Act Home Page," http://cox.house.gov/nettax, by the Office of U.S. Representative Christopher Cox.

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