Zittrain

HA102

10.8.97

P: All right. Welcome. There's a sign-up sheet going around, just basically taking attendance, see who's here and who's not, always good to know. Shouldn't discipline anybody here.

I'll say a quick word about next week too. I think next week is going to be basically a day among our class, where we'll have a chance to talk about how papers are going in a sort of public fashion. People are already like, Oh no. That's part of the reason why this is a good motivator, and also just a good way to be sharing ideas among all of us. There's so much expertise within this group there's no reason actually not to be collectively working on a paper topics and otherwise applying some thematic unity to some of the classes we've had so far. So it'll be basically a day in which we can catch our breaths and do just that.

Today we're blessed to have several guests offering different views on the issue of internet taxation, and specifically sales and local taxes on the internet, and break that down roughly into the taxation of internet access provisions, actually taxing your ISP, somebody who's going to get you onto the 'net maybe via a modem. And the second, perhaps thornier issue of the taxation of goods delivered electronically over the 'net.

And there's all sorts different dimensions to it: legal, constitutional, policy, and hopefully we'll get a chance to touch on each of those today, and maybe in a way that will inspire some paper topics.

So I'll do some quick introductions of who we have helping us out. At the end of the table, Professor Oliver Oldman, an expert on taxation in general, and sales and local tax in particular, has literally written the book on the subject and has taught for many years here a course on state and local taxation issues.

Alice Johnson, our very own, from within the class; she is a state legislator in Minnesota, and I believe is the chair of the tax writing committee.

Alice Johnson: Sales taxes.

P: Sales tax. Oh, they actually have a sales tax, OK, the sales tax division within Minnesota, and she is the one who, at least, is the named author of the legal-sized proposal within the packet that has met, as we saw from some of the articles that she graciously provided, has met with some resistance and opposition.

We also have with us Michelle Spaulding, who has made herself of sorts an expert on these taxation issues, particularly taxation on the internet, has helped us assemble of the materials and will be lending her expertise to the discussion today.

I should also add, we're blessed by the presence of Rex DuPont, who has been a finance professor at Boston University, and may have something to add as well.

The presence of these luminaries should not mean that you all should not be jumping in early and often. We're going to have less of the fireside chat format that we did last week today, in favor of getting some discussion in there. And at least some of the people who have long worked at the internet ought to be feeling sufficiently aggrieved by some of the ideas contained within this packet to want to share their rage in their pain, and perhaps do so in a fashion that invites legal argument rather than --

__: No tomatoes.

__: Exactly.

__: They're also ...(inaudible) offer alternatives.

P: Yes, exactly. So let's just get started, first looking at this taxation of internet service providers. Now, Alice works state of Minnesota, she represents the people of the state of Minnesota, and she has to worry about the tax base. Normally they have a sales tax, right? and somebody sells a good to somebody, particularly to an end user, a tax gets collected by the person who sold it, and that tax is remitted to the state. And I guess the state's justification for collecting the tax is?

AJ: The regular sales tax?

P: Yeah.

AJ: A way to raise money.

P: Banks are where the money is, and in this case the money is in this transaction.

AJ: The sales tax is actually considered to be one of the most progressive taxes, if it's broad-based.

P: And broad-based means it's applied to a whole series of goods and services rather than a specific things.

__: But it's worth adding that one of the reasons why these states have these taxes besides they need the money is that consumption is a very important, pervasive activity of the state which is supported by a great variety of government services. It doesn't ...(inaudible) you can't consume anything seriously without a legal system, all of that has to be there, the market has to be maintained, ...(inaudible) and so on.

So consumption, as distinguished from the income generally, and various other things, represent a reason for taxing and for having government so you can consume.

P: So you figure there's some non-arbitrary justification for picking the point of consumption as a point of applying tax.

__: And it's in the state, and if you're consuming in the state, the state would have some connection. The problems become bigger when you start thinking about, a lot of people in Massachusetts travel outside of the state -- Two things: 1) they spend money traveling; 2) they bring stuff back, and how are you going to tax that consumption?

And some of that, in the end, turns out to have something to do with the (internet).

P: Right. So now, Alice has a simple proposition, or so it seems, and in a little while we might actually get to the text of the proposition, but her proposition is, you want to get yourself onto the internet, that's something of value being delivered to you by whomever your internet service provider is, they provide you for it, you consume that access, why shouldn't you have to pay a tax on it? What's so hard about this from a policy standpoint?

I mean, is there any reason not to just tax that transaction? Everybody's convinced. Ellen?

Ellen: You want small businesses to get on the internet because you want the internet to grow, and so one argument is that if you have a lot of taxes on your internet, then small businesses will be deterred from starting up.

P: Now, small businesses, you can say that to mean two things: small businesses getting on the internet, as in they want to sell their goods through the internet or something, and it'll be harder to sell their goods if it's more expensive for their customers to get on.

The other thing you might say is, more directly, small businesses might need internet access and when they need internet access they have to get it from somebody, and then they have to pay a tax. So, getting onto the internet is --

Ellen: Well, the second argument might apply more to consumers than to businesses, and I think at this point it's harder to make the second argument for businesses because, in part, the internet isn't used enough -- that's a probable. So, I think you can have business still when you're a small business and didn't need to use the internet. So I think that probably will come later down the road.

P: Now, for a business that uses the internet and it gets access to an ISP and the ISP charges a certain amount, is there any reason you can think of why that's something that should not be taxed? I'm asking you for taxes.

AJ: The ...(inaudible)

__: If you're talking about sales taxes, not income taxes, and a business pays a sales tax to its internet service provider, then that tax is going to be part of it's costs and it's going to be built into the prices of what ...(inaudible)

So imagine a retailer having a lot of internet access just to keep control over the sources of supply, and all that stuff. All those costs connected with that are going to end up as an addition to the retail price they charge for the consumption.

So when I buy from that retailer, I'm paying not only the sales tax to the state on my consumption but I'm paying the sales tax that he paid to his internet service provider.

P: And is that bad?

__: Well, whether it's bad or good depends upon how you answer some other questions. That means that you're paying twice on the same service. The business fund paid it once, when it bought it, ...(inaudible) his costs and his prices, and I pay on that amount again.

Depending upon how many things business buys on which it pays taxes to add to the final retail price, that controls what the final retail price.

If what you intend to tax is only personal consumption, then you're ending up taxing something twice: once when it's bought by the business and once again when it's sold by the business. And what that does -- if some goods have a lot of ..(inaudible) that's taxed twice, then its price is changed by taxes more than the prices of other goods. So that's distortion.

P: So, now double taxation may be somewhat of a problem, and this is not necessarily a problem that has to do with cyber space, this is just a problem that says if Ford, in building a motor car, buys ball bearings from its upstream supplier and then puts them into the car, should it pay sales tax on the ball bearings? If it does, it's forking over some portion of that value, it passes it along, and then you pay sales tax on the car, which includes the price of the ball bearings and the tax.

Now you're paying tax twice. ...(inaudible) says, well, are you intending to tax personal consumption or can you tax everything? Now, if you tax everything, down the line there may be some other problem, right? Because, I guess, if you're Ford maybe you'll make your own ball bearings, sell them to yourself, you don't get taxed on that -- and then firms that aren't vertically integrated have just a built-in disadvantage, because they have to pay tax --

__: You'll be your internet service provider.

P: Exactly. And that might be some kind of competitive distortion that you wouldn't want to have happen, and it doesn't have to necessarily do with the internet but just with the nature of vertical integration.

Tim: I don't see what's unusual about taxing ISPs. I mean, don't a lot of regions already have goods and services taxes already? It's just taxing service. I mean, I think when I hire, let's say you hire a cleaning service. You pay the service tax on that.

P: But the first point that we're getting at, from Melanie's comment, is that, at least with respect to businesses that are using internet access as an input to the product that they make, maybe it is a little different. Because, I don't know, you can tell me, in Minnesota, are those ball bearings, do you pay tax on ball bearings --

AJ: We have exemptions for inputs, so that would be -- they would be exempted if they're use to produce a product that is taxed. So that's the way we deal with it in Minnesota.

__: But that's probably an exaggeration of what that exemption really says. If you look at Minnesota law, which I have not done, what you're probably going to find is that there's an exemption for industrial equipment and machinery that is bought and used for production, and you don't pay tax on that. But when you buy electricity, sweeping compound, you probably pay for cleaning services if you tax services at all. You're going to buy fuel for your machines and all kinds -- you're going to buy pens and pencils that you used on the desks, you're going to buy all the -- Most of those things are the most ...(inaudible) sales taxes are taxed ...(inaudible), and they're, in effect, taxed again on the output of business.

So Minnesota might be way ahead of other states and be like the Europeans, which don't tax any of the business (influx) under their value-added tax. But most Americans tax some, and the question is how much?

P: The reason there might be a differentiation is because the 'net, it's difficult to make the 'net properly ...(inaudible). So you don't worry about pens and pencils, it's only six percent anyway, it will all come out in the wash.

AJ: There are over 22 states who have established already a tax on the internet access service, so I think it has -- now, I haven't checked in to find out whether they are states that have any other use taxes, or whatever their laws say about it, but the fact of the matter is, it's very common, and I think it's quite arguable that it would stand up in court, and our Department of Revenue --

P: So now, if we're keeping track, just for a moment, if we're keeping track of arguments pro and con on this, argument #1 that we're noting is, everybody else is doing it, and so far it seems to be constitutional because it hasn't been struck down. We should keep track of this.

AJ: That is broad. I mean, not everybody else is doing that, but you're using that as kind of an example.

P: I might have to just keep this in my head. We can all write it down collectively. It's going to end up underneath the lectern and just --

__: Well, when you say everybody's doing it, what they're doing is the two things that were talked about here. One is they're taxing the consumers on their internet access, but they're also taxing the business ...(inaudible). And the states that tax business inputs to a limited degree may or may not all tax business purchases ...(inaudible). So you now have to look at 22 states and see how many of them don't tax the business purchase, as distinguished from consumer purchases.

Michelle: Well, then there's the underlying controversial policy thing on the thing, which, if you read the Cox-Widen information ...(inaudible), is, without addressing whether an ISP tax is just like a regular service tax within the state, or whatever, it ...(inaudible) here that one of the reasons why states are taxing internet access is because they can. Right now they don't know who else to tax, or how to -- like, with the next ...(inaudible), they don't know how to get the vendor so that they can get their sales and lease tax, so they're taxing whatever they actually can for now, to get some money. It's part of that everybody's doing it because they're rushing to get some kind of revenue from this.

P: But just as a matter of fairness, why isn't it -- why isn't the provision of internet access just a service like any other? Why is this a big deal? Why shouldn't they be allowed to tax it?

Michelle: That's why I prefaced it with without touching whether this is just -- this is ...(inaudible), this is good, I haven't delved deeply into the ISP issue because what we're researching at ...(inaudible) right now is sales and consumption ...(inaudible), but it does -- because I know how murky the area is surrounding the consumption tax issue, sometimes you see the other things, like the big tax proposal, other things like that, a way to get a tax they know they can get, for now. So it's kind of viewed as suspect because of that.

__: I don't entirely understand. When businesses pay tax, they don't get to ...(inaudible) that tax, just in a statistic sense?

__: If we're only talking about sales taxes --

__: That's what I'm talking about.

__: -- businesses do not deduct the sales tax they pay against the sales tax they collect on their customers.

__: Well, against their corporate income.

__: But that's an income tax deduction.

__: That's a Federal tax.

__: There's a whole separate question about getting at the income tax aspect of the internet that we haven't come to. But, to sharpen your point, if you are aware of the European value-added tax systems, what they do is when business pays the tax internet access, the VAT ...(inaudible), they get a credit for the tax they pay on that input, to offset that they have to pay on their output when they sell it. So they only pay ...(inaudible) on the vendor they have.

American sales taxes don't get worked that way, although I'm working on that.

Molly: Why are the exclusions so limited, limited to industrial machinery and equipment? Is there some logistical problem with making that broader, there would have be a long list of things, or?

__: That one ought to be thrown to the class, who's going to answer that one? Why do states offer the special sales tax exemption for industrial machinery and equipment?

__: Well, because it's long-term investment.

__: So what?

__: It'll encourage long-term investment.

__: There's another magic word.

__: Depreciation?

__: Competition. If one state -- if the state taxes the big capital expenditures, the company will say, Oh well, we're going to build that ...(inaudible) across the line.

__: And this is the race to the ...(inaudible) The Economist article is bemoaning that's happening.

__: And that ...(inaudible) to the bottom when it comes to business purchases of capital goods has reached the bottom, by and large, in all of the sales tax states, clearly for machinery and equipment. But there's a lot of difference among the states when it comes to what are called industrial consumables, not the big equipment but the small supplies you buy and use up. Which ones are going to be used up in this state, which ones in that state? There's a whole specialized (lure) out there with respect to that.

And that's where the internet fits in: it's one more business expense in conjunction of getting your work done. And if it's covered in the tax base, the way more and more states are doing the services generally, then why would you make an exception for ...(inaudible)?

P: Now with respect to the business personal consumption distinction, you may say this might even fall in the category of pens, paper and office chairs that we don't really care so much if they're taxed or not, even though they're inputs, because internet access is pretty cheap.

Now it may differ if the kind of internet access you're getting is a T-1 line running right into your office and it's thousands of dollars a month or something, and starts to sound like it's a car or a truck.

But probably what we most commonly have in mind with this tax, and perhaps Alice, you can say what you had in mind writing this tax ...(inaudible), this is a $9.95 a month that you fork over to some local ISP for the ability to use your modem, place a local phone call and get access to the 'net.

AJ: I can get it through my cable TV hook-up, where -- and then sort of we pay tax on that.

P: Yeah. Now, this is small potatoes, this is fifty cents or something, on the 995. And in fact, it may be at least one thing where you get around the race to the bottom, because if you live in Minnesota and you want internet access in Minnesota, you want to be able to dial a local number for it, you don't want to have to pay long distance to call New Hampshire to get onto the 'net.

So there's a natural way in which other states that choose not to impose the tax still can't eat all of the base from Minnesota from ISPs who operate in Minnesota.

__: 800 numbers.

P: What about that, explain that more?

__: You can dial up to an 800 number.

AJ: You pay a tax on it in Minnesota ...(inaudible) that 800 number.

__: If you had a 1.800 number that wasn't in Minnesota?

__: Oh, not if you didn't -- if you had one that wasn't, that didn't originate in Minnesota.

P: Are 800 numbers somewhere? They are, right?

AJ: Mm-hm.

P: I mean, you call 800 it doesn't just go up to Heaven, it has to land somewhere on the planet.

__: I mean, Delaware ...(inaudible)

P: Delaware: corporate haven. You're in Minnesota, you dial 800.delaware, and you hear the tone, you hold it away from your ear, and now you say, OK, that's going to cost me so much a month, flat rate. Do you think it will?

__: Unfortunately.

P: Well, at some point, whoever has to pay for the call is going pass that back along, otherwise it won't be in business for very long.

__: It's not ...(inaudible), but, I mean, let's say it's AOL, or AOor AOQ in Delaware, they have a marginal -- I mean, it depends what the marginal cost is on that. They needed so many people there. As opposed to that, I think that could still get your --

P: So you're saying even though the inputs to the ISP through the use of the 800 are by the minute, fairly unavoidably by the minute, the ISP could still turn around and charge so much per month unlimited use and not worry about losing their shirts.

__: ISP does charge a lot of money. The ISP would be expensive, wouldn't it?

P: I know, it's a good question. You can imagine, though, at least the way it works together, and this is of course part of the code, this could change anytime, somebody like CompuServe or AOL, they don't want you using their 800 number very much, they'll even busy it out for a while. Instead of making you wait on hold while they pay for the call, if it's for customer service, they want you to use their local numbers. In fact, that's why they've designed this bizarre systems you have to call. So when you're in Boston you have find out from AOL, OK, what's the number I call? Wouldn't it be great if it were just 1.800.Delaware, and then you were onto AOL wherever you were?

So there are some -- I think you're right, the 800 numbers might be a foot in the door, but that, at least at this moment, AOLs and CompuServe still maintain basically their own proprietary network of lease lines for which there is a number you call locally, with an area code that still works, that says this is where I'm getting onto the 'net.

__: What about when you get the AT&Ts and the MCIs involved?

P: Good question. In fact, this is the kind of vertical integration we were talking about before, where AT&T's inputs are its own lease lines.

AJ: And that's one of the basic principles of taxation, is, you know, a uniform or a level playing field, or a uniform treating everyone alike.

P: So the level playing field says -- Alice says, All right we'll tax them, too.

__: I have a question. Were you suggesting that a company might just set up an 800 number and just locate everything in one state that happened to have favorable tax policies, and conduct their business from there to avoid this tax problem?

__: In the end, yes, that's what I would be suggesting, but it just depends on what the margins are. At this point, it doesn't seem worthwhile.

__: Alice was just -- we were at a meeting with Microsoft and I.B.M. and some other lobbying interests from big companies like that a couple of weeks ago, and we brought up, asked them whether this was a myth they wanted to debunk or not, the myth that eighty large companies are just going to move everything off-shore or reset the tax statements or things like that, because that's like when the ...(inaudible). Well, that really seems to be something that people are afraid is going to happen.

Now, I really take what was said with a serious grain of salt, because he wants us to draft a statute that was favorable to their interest, but this guy from Microsoft, his response to that was, you know, it would be -- because he worked in the tax department -- he said, it would be great if we could get our tax analysis to drive the company, he said, but in reality that's not the case. We give the company -- what we're doing ...(inaudible), he said, but we're not going anywhere, it's just not feasible for us to do that, it's not productive.

Now, I don't think people are worrying about nothing, but I think we might be thinking that a little too much is going somewhere a little too quickly.

__: I think the ISPs are a special case, because that who pop system, the point of preference ...(inaudible), I think you have to do that for bandwidth, that if you were dial up the ...(inaudible) to one of their ISPs in Florida from here, you'd have a very different user experience, because that whole last leg of it would be copper wire.

So the reason you'd call locally, I think, I could be wrong on this but I'm almost sure this is right, the reason you call up the local numbers is because the much quicker you're on the broadband width transition.

P: That doesn't actually make sense to me. Does it make sese to others?

__: My experience is, dialing from Weston to Boston, I'm getting 62 bytes per second.

P: You should be dialing Florida.

__: I'm willing to try Florida.

P: A lot of the way a lot of the new modem protocols work, when you see X2 52K, what they do is they'll take Digex on one end, or somebody, and they'll jack them into the phone network, all digitally. There's no copper wire on their end; the only thing is the copper wire on your end as you place the call. And once the copper wire gets to the central hub, or even the not so central hub just in Cambridge, from there you're in fiber, and this is the speed of light, I mean, this is stuff that goes to Florida just as easily.

__: But it's just a telco ...(inaudible)

P: Exactly. Now, you may notice, as a policy matter, that the way Alice's bill is drafted, and the key provision is on the top of page six, underlined, if you actually try and follow with the digits, it looks like the number 1, in which case you think somehow it's built into the ...(inaudible) association or other organization memberships division. In fact, it's the ...(inaudible).

And this says it's the furnishing for consideration of internet access on-line services...which originate or terminate in this state and are charged to a resident of this state.

Now, in that case, the 800 number use would actually fall under this law, and if you dial an 800 number you don't know where your call is going, but the person who is on the other end, the ISP, gets a list every month of what phone numbers call it.

In fact, if we were talking about privacy today, we would talk about what happens when you dial the 800 and their caller ID tells them where you are, because they're paying for the call, it's thought, they have some right to know where the call is coming from.

So, in this case you can imagine not an insurmountable burden to some kind of national ISP with an 800 to apportion taxes accordingly if they used an 800 number to locate themselves out of the state. You still have the call originating from this state.

__: And you have a question of what their particular jurisdictions, after taxes, if they want the sales taxes on that.

AJ: ...(inaudible) really, there was no question whether this was something that could be done. There was not a legal debate, it was purely political. And that was, the pressure and the efforts that were put forward by the interested parties, the private interests. And that's what drove that whole discussion. It wasn't based on whether we could do it or not. Even the taxing of similar services that are provided over the internet, for instance, books and videos, there isn't really a debate, a legal debate, whether that could be taxed in the state of Minnesota.

However, I believe it would have been political suicide for me to push that, and so I pulled way, way back, because one of the motives for the introduction of this legislation was to try to get a sensible debate started about something that I think is very, very important for the future of our state and our country and our world.

But you know, it's really little, and you feel very insignificant when you're just a single person like myself, that doesn't even have a lot of technical expertise, putting forward with something, and then Ira Magaziner gets a call to come in an testify against my little stinking ...(inaudible).

I mean, can you believe it?

P: So it's not ...(inaudible)

AJ: Oh, I wouldn't have been afraid, actually. The other thing was that we didn't really need money this year; we have more money than we knew what to do with in our state. As most states do. But it was not a grab for money, as some people, especially private interests were trying to put forward that picture, that legislators are just out to grab money.

P: They're not just out to grab money.

AJ: No. As I said, and I have my written comments hen I presented this bill. I said, if this were oil passing through those lines, it would be taxed; and why should one portion, one segment of our economy go without being taxed without bearing some of the burden of paying for our schools? While, at the same time, our farmers are suffering dreadfully in Minnesota and trying to get out of paying taxes on their farm machinery.

P: Now, before we get too much into policy debate, this is interesting, let's pursue it for a moment, let's just hear the political story of how this bill came about.

You were sitting ion your office one day when the head of the sales tax committee said, OK, we need some sales taxes, this is my job, right? I'm the head of the committee.

AJ: No, that's not the way it started. Before I was Chair of the sales tax committee I was chair of the education finance division, and I would have been very active in that area for a far longer time than on taxes. And the state of Minnesota, about five years ago, was looking for money, we were short of money. I went to a conference in Arizona, a national conference, and the states were all asking, how are we going to raise enough money to pay for our education, because we need money so badly?

One of our speakers said, Well, how about ...(inaudible) communications? And from that time on I've carried the idea in my head.

P: Memo to myself, tax the ...(inaudible)

AJ: No. A source of funds that we might need to provide schools for the people of the state of Minnesota.

__: But I thought more money than you needed, and more money than you knew what to do with.

AJ: Right, but that's why I said I pulled back. But the way I introduced the bill, then, this year was to say, We need to have a discussion of this, we need to start levelling the playing field. Why should AT&T pay more money than somebody else that provides a similar service? Also what I said is, the future looks as if we're going to see more and more of our commerce on the internet through telecommunications, and we will see a major ...(inaudible) in our sales tax base. Minnesota and, I think, I don't know what other states -- Minnesota basically collects one-third income, one-third sales, and one-third property taxes. That's where we get our money.

P: So this is a big part of where your bread is buttered.

AJ: Right.

P: So, how you came back from the conference and said, You know, some day, we really ought to get into this. And then, viola, you're the Chairman of the tax committee, the sales tax.

AJ: The Department of Revenue came ot me, and we have a Republican Governor and I am a Democrat -- our legislature is controlled by the Democrats. They came and said, we need some clarification of this sales tax law, and to really work on Nexus to clarify about the fact that we could collect sales tax on certain products that are transmittable.

P: Now, this Nexus issue, which of course floats through a lot of the readings in this packet, how is the state legislature empowered to weigh in to clarify what's a Nexus and what isn't under this ...(inaudible) case?

AJ: Well, we have our attorneys that are watching this.

__: Alice, what was your response to the nexus issue?

AJ: What I said was, we can pass anything we want, and then we'll go to court.

__: Explain, what do we mean by the nexus issue?

P: Who here wants to tell us what we mean by the nexus issue?

AJ: Oh, I see. That's where I started out.

P: What do we mean by the nexus issue? Yes, JJ?

J.J.: In South Dakota ...(inaudible), I think they said something about it there.

P: That's a great start. It's almost as bad as, I thought you logged onto Nexus. I drive one. So, what is the Nexus issue? If you'd read the packet you would have thoughts on it.

__: It's going to regulate an activity. Usually there has to be some relation between the state and the entity being regulated in some fashion, or else the would be exercising power outside of their constitutionally prescribed limits.

P: Yes, this is some kind of limitation on state power, or state jurisdiction, that says that the dormant commerce clause of the constitution wakes up from its slumbers, says, Uh-uh, you can't demand, you can't ask a company that is not properly associated with you as a state to do something for you, namely, collect money from residents of your state when they buy things from your company. Mr. Roman, does that seem a --

__: Well, it's, the commerce clause of the Federal Constitution restricts state on their power to tax, in order to keep a free open market -- that's the starting point.

But, the Supreme Court, having spoken and respoken and continually speaking about where this limit really is, and if one knows what today's rules are on that, there's still the question of how much of the power that the constitution allows a state to exercise, in terms of reaching companies doing something in the state, how much of that power is exercised at all?

States don't have to tax everything that has a connection or an access to the state, they tax up to the limit if they want to, but they tax much less than the limit, which is typically the case. And the constitution only comes in the ...(inaudible) issues.

P: And it's almost kind of odd, because this seems perhaps a form of constitutional commonlaw or something, where this is one of the few cases, perhaps, of the Supreme Court's pronouncements about the scope of the ...(inaudible) commerce clause that's subject to the revision and correction by the U.S. Congress. Is that right? That's sort of unusual.

__: It's not unusual because the commerce clause gives congress the power to regulate commerce.

P: But most of the time, if you say Roe v. Wade, you have the right to -- it means the Federal congress can't override it, they got to pass an amendment if they want to change the formality.

Here, because the awake commerce clause gives Congress the power to regulate, they can move that line themselves.

__: I'd like to hear, Professor Ullman, how is the interplay with the due process clause requirements --

__: Well, there's a crucial point under process that comes out here is, if the Supreme Court says, this is a matter of due process, then Congress can override it. So Congress can't use its interstate commerce clause power or regulate to do away with a due process limit that the Court has announced.

So the court's pretty careful, in these Nexus cases, to say whether this is a big process limitation on connection with the state, or it's a cover ...(inaudible). So vertically, that puts on the free trading, basically, amongst the states, of a kind that means that the court will say, Well, if you put that much burden on the trade, then you can't do it.

P: Yes. And now, typically when these Nexus cases are done, at least some of the ones in the packet mentioned, these are limits to the ...(inaudible) commerce clause, it's not as due process limits.

__: The due process limits, you don't hear about very much.

P: And that's why, in Read My E-mail, No New Taxes, we have this guy, after quoting former president Reagan, says, Congress should include specific language establishing that internet activity and contracts for service are insufficient to establish Nexus. Which is to say, Yeah, Congress could weigh in, they could pass a law, and take the rug out from under Alice's attempts to tax this thing, through this weird back door of Nexus and interstate commerce.

AJ: Can't the states challenge the Congress if they pass a law? Is there any way that they could challenge the Congress?

__: Yeah. But then the Supreme Court's going to say to the states, you're right.

P: Anybody can find --

__: But it still comes up, it's different than what it was before. The first thing that happens is someone brings up a constitutional thing, it's unconstitutional, first thing that happens. The second thing that happens, you find out fast, well, this is nothing uncommon, and it is constitutional.

So that, they can challenge, it's not the issue. Except for the work, what's been happening ...(inaudible) what does the court do. So people who don't want to pay taxes that they didn't have to pay before, the first thing they do is challenge the constitutionality. When they lose that, then they go to the politicians and say, This may be constitutional ...(inaudible) it's bad politics. But if you can get the court to do that for you, you could have saved a lot of political money.

P: So Alice, is there anything else you want to add as to the process by which you came up with this idea? You got at the conference, and then you saw the need while you were on the education committee, you saw the chance to fill the need while you were on the sales tax committee, and then basically you tasked some staff to tell you write up some language, write up something that seems reasonable, and we can pass anything we want, let the courts sort it out later. They don't like it, fine. We'll pass it again --

AJ: This law, there would have been no challenges in the courts to this particular law that we put forward. It was done very cautiously for that reason. Because we felt -- I mean, that was even too big of a step to even take. We really should have taken a smaller step.

__: Alice, is that analysis based on this nexus being something that was satisfactory in another context, the billing ...(inaudible)? I wonder if the nexus analysis might be different in the internet context than it has been in other contexts. Because I assume it's kind of part of the general balancing act that the court does in all dormant commerce clause cases, things like what's the state's interest, what's the interest in having uniform standards instead?

And it seems like if there is more potential for confusing overlap of different state taxation schemes, and also more potential for double taxation on the internet than there is in trucking or other interstate commerce activities that are taxed, that maybe that wasn't sufficient nexus in traditional interstate commerce might not be a sufficient nexus on the internet, because the interest in national uniformity is a lot greater.

AJ: You people are much more knowledgeable about the constitutional law, probably, than I am, but common sense tells me that the Supreme Court, every time you get someone new on the Supreme Court, you could get a different decision. And many people pass laws with that in mind.

__: I might have misheard ...(inaudible), but I think actually the nexus problem that tax administration is facing right now is that it's exactly the opposite, that if you have something that would constitute a sufficient nexus pre-internet, it would overwhelmingly support nexus if you have the same kind of context in the internet transaction; but what you find is that you don't have what would be considered a sufficient nexus.

P: Well, that actually gets to electronic commerce taxation, which we'll turn to sort of in Part 2 of our exploration. Perhaps walking quickly through it, on page 604 of the article that was in the memo, basically, to Alice: there's a cover letter to the memo from the legislative analyst, and then there's this sort of memo, by Martin Eisenstein.

You see at the top, he represents providers of internet access and online services, and companies selling products and services on the internet.

He's written up this special report/viewpoint about the constitutional limits of sales taxation in cyberspace, and he's very troubled. In 604, he raises the constitutional dilemma of the states. OK, what's the dilemma that he's raising? Because so far, what Alice is saying, Hey, this is a slam dunk, no big deal. What's the problem? Is there anything in this constitutional dilemma that holds any water? Are people still looking for it, or are people just reading it now for the first time?

Well, one thing they say is, Boy, the difficulty in establishing the location of the service address, billing address. Unlike telephone service, no service address for internet or online service. The equipment is the software package; it's inherently moveable. That was as comparable to a telephone number used to cite the service address, and Goldberg is the password of the log-on code. These, of course, are not limited to one state -- this is the case for a telephone number.

So, jeez, you don't know where these people are who are asking for internet service, even though they do seem to have a billing address, ...(inaudible).

The next paragraph says, Well, the billing address does not necessarily solve the problem. In a credit card transaction, the billing address for the service provider arguably is the banker credit card payment processor that pays the service provider. This organization and the service provider looks for payment.

Now, this guy is raising as a serious dilemma the idea that you pay MasterCard of Delaware and MasterCard of Delaware pays CompuServe --well, is it the billing address in Delaware? No, this does not seem like a tough constitutional dilemma. Are we missing something?

AJ: It does ...(inaudible) the cover.

P: That's true, but is there something I'm missing --

__: It goes back to the basic simple problems of a corporate shield and corporate form, shielding you from everything, and when do you pierce the veil and when don't you?

P: And I guess you pierce it when you suggest the dilemma and people snort and say, OK, it's time to pierce the veil. Yes, J.J.?

J.J: Perhaps the just give us money is not so much of a complex issue as to raise some of the nexus or ...(inaudible) burden issues, but what if, say, there were a state that was seeking to have its home manufacturer be the standard provider for the fiber optic cable used in on line services, and it was ...(inaudible) state, and that state said that any internet connection that does not use cable meeting the standards that happen to be the standards of our home state fiber optic cable producer, this will have to meet the regulatory structure that we decide as to the state legislature, should be the proper way for internet connections to go, because we think that would be a safer and more stable connection, and therefore we think that would be better.

This seems to get close to the kinds of things that were raised in the mud guards (?)

P: Right, this is a whole series of milk cases, too: filled milk and skim milk, all these milk constitutional cases, right?

JJ: Once you get away from, give us money, it seems to be a lot of potential for beggar thy neighbor tactics on the parts of states --

P: Yes, but Alice's provision says, she says, Hey, level the playing field, I'll take everybody, no big deal.

(end of side A)

P: -- to me, and I'll bill them. She's not saying there's some Minnesota industry that can be benefitted if we come up with some strange tax that only burdens the stuff that other states are interested in, right? She just says there's a service that's provided in the state people get billed here, so we tax it 6 percent.

__: How do you collect?

P: How do you collect? She says we're going to find out on Friday. Stay tuned next week.

AJ: And not trying to be light about it, that's up to the Department of Revenue.

P: So you pay them --

AJ: The Department of Revenue told me that this was doable and this was constitutional and this was recommended. Their people who deal with tax administration -- and they're not gung-ho tax people. They're under a Republican administration, generally they're less interested in taxing than Democrats. That's a generality, but basically true. Especially in Minnesota.

But I think -- you mentioned something at the beginning of the class about the business practice that might be affected when states impose a tax and take away business from the state, or people might not choose to use the internet. I think that's the strongest argument that's keeping something from happening.

They have said if there's a tax imposed, that --

P: Well, then this just gets to, there's no particular baseline. It just says, Hey, we'll lower taxes here, we'll raise them here, we'd really like to help the culvert industry out, so we ...(inaudible). That's just a question of what do you want to subsidize, as far as the race to the bottom goes, is that right?

AJ: That's my point.

P: Now, as a quick sidenote, Professor Altman actually provided me with, basically hot off the wire, Alabama has jumped on the bandwagon, and, against the protestations of Governor ...(inaudible) Jennings, the Department of Revenue has said they're going to start taxing ISPs, and Bob James says he's going to start proposing legislation to bring them into line. Now, it's unclear why their particular state constitutional system is such that he can't do a Saturday Night Massacre and just keep firing the Commissioner of Revenue, it's a Commissioner, it's somebody appointed in some way that he can't directly control. But there definitely is the kind of everybody's doing it steam gathering.

Gene, you had a question --

Gene: Doesn't this whole kind of they're moving around and you can't tax them because they're like pager systems, or whatever, objection become kind of spurious when you -- I don't know the ...(inaudible) develop, but isn't there a kind of movement towards making the internet connection more like a cable connection when it comes directly to your home, rather than using dialogue lines? And as that becomes more like a fixed physical place, doesn't it really seem kind of silly to say that because you can move around across the state line of dialogue?

P: Well, in fact, they converge at the point of, say, a cable modem, right? Media One rolls cable into your house. At the same time it's giving you "The Flintstones" and a hundred other channels, you can type a few things upstream and you've now got an internet connection.

Gene: I don't see people staying with dialogue lines to make slower because they're going to save five cents a month on ...(inaudible) tax.

P: Now, Professor Dupont had some lingering question about how you collect the thing.

Prof. Dupont: Yeah, two things. It sticks in my mind, not being a student of this esteemed institution and having studied the sales tax ad nauseam, but I thought there was kind of a nexus issue that you couldn't collect sales tax in another state unless there was something there that belonged to the person you're getting it from.

If I dial from Massachusetts to amazon.com, Massachusetts can't get them to collect Massachusetts sales tax unless they have a warehouse here, or something like that.

P: Now, in a way, that segues into the electronic commerce issue.

Prof. Dupont: Yes. There's the ISP, and to say that somebody, anybody in Minnesota who calls up on these things is going to be taxed, I find it difficult to say how you know whether or not anybody called these people, and how are going to get Delaware.ISP to tell you that somebody in Minnesota called them?

P: Well, in the case of flat rate, they bill these people every month, right? They have to know --

Prof. Dupont: Well, how does Minnesota know what the bill is?

P: Doesn't the Commissioner of Revenue just send a nasty letter to the company and say --

Prof. Dupont: So the company says stuff it, and puts it in the wastebasket. What's Minnesota going to do?

__: Are you talking about goods being sold?

Prof. Dupont: Well, I'm talking about, in this case, back to calling 800.Delaware, connecting up to your ISP.

__: So, it's the access.

(simultaneous voices)

Prof. Dupont: -- Minnesota to go with that 800 for Minnesota to grab. They'd have to know you're getting a bill from Delaware ISP, to tax it.

__: It's probably different -- ...(inaudible) wonders a technical question that people who understand all the electronics can answer. Generally what I hear from those guys when I put a specific question like that is, we can do whatever you want us to do.

Prof. Dupont: We, the tax people.

__: We, the technical people, can arrange it so that that can be done. The problem then goes back to the lawyers and the policy designers. What is it that you really want to do, and whether you want to do it. The technical problem of whether you can get the information and process all of this is quite different from the problem of, do you want to do it? Is there a legal structure that permits it?

P: But if you have a jurisdiction that satisfies this nexus requirement we were talking about, you also inherently have jurisdiction to enforce some kind of administrative subpoena or other request for information for which penalties have been laid down by the state if people throw it away. And then you can say, Fine, we're going to fine this company in Delaware x amount because they haven't been responsive, and then get that enforced in Delaware.

__: The starting point was assuming that there was some nexus connection with that company, and under existing law many of those would not have the connection.

So one possibility is Congress - and this is an area where they quite clearly can act under the Congress clause, and they can require all of these people to do these things.

So they say if the state to which you're selling the service wants you to collect the tax for it, we can establish some federal rules to provide that information.

They do that. Most people don't realize cigarette traffic is all regulated by Congress, so that the stuff, what used to be an enormous amount of evasion of state tobacco taxes, Congress did act, finally, in that area. But they never acted in the case of out-of-state use tax mail order collection, which they also have the power to do.

And in this internet area, same thing could happen, like Congressional regulation. That's one of the reasons why there's action in Congress to make sure that doesn't happen yet.

Prof. Dupont: So the law, as written, would work, except that there's a piece missing, that you can't -- just because I live in Minnesota and hire this ISP doesn't mean you can actually reach me to collect the tax, unless Congress allowed you the subpoena power to --

AJ: Unless they had presence.

Prof Dupont: Yeah. If they didn't have presence -- I mean, this was the 800 number idea, that there's no presence except something you can dial --

__: The meaning of presence keeps changing.

Prof. Dupont: Well, somebody's got to change the definition of presence to make this fully effective.

P: But it does seem like your ability to enforce rises or falls with your ability to impose to begin with. You don't end up in a situation where you're empowered to impose it but you're not empowered to collect.

Molly: Is Delaware trying to tax Delaware ISP on their sales, or does sales tax --

__: They don't have sales tax.

__: Why do we pick --

Molly: Are sales tax every required at the point where the seller lives?

P: Where the seller lives? That's pretty much the only place they're required. All right. I think what Molly's asking is, do we run some other risk of double taxation? Is it possible that if the ISP happens to be operating in New York and when you dial that 800 number you go to New York and New York says, Hey, we want to tax that transaction, too.

Molly: Do any states do it that way, or is that --

AJ: I couldn't answer that.

P: Well, does your provision -- if you have somebody who's not a Minnesota resident but they're calling a Minnesota ISP, do you tax them?

AJ: No. I mean, we only tax Minnesota residents, and we only --

P: Well, if I'm not a Minnesota resident, I'm just visiting, and I buy a Holstein cow or something, whatever your biggest industry is, I buy a car --

(simultaneous voices)

AJ: They're failing. We need to prop them up a little bit.

__: I might have ...(inaudible) but a good concrete example that ties some of this together. During the summer I live in New Hampshire, small town, summer house there. And the question of internet access finally got solved two years ago, when a Wisconsin Company, TDS Net, went around buying some small local companies, and they happened to buy the one in this town. They're just collecting local phone companies. But they also have this internet provider. So they decided that anybody who's in the local area can, for $20 about, get unlimited internet access.

So I get billed from Wisconsin $20 a month, and I pay $20 a month.

If New Hampshire decided they want to go after this $20 a month as part of one of its tax systems which they don't have now but which they may be getting, can they do it?

It turns out, in this case, to be short, easy answer: They own the local telephone company, so they're there. And the fact that all the billing and all the real service comes from an ISP out in Wisconsin wouldn't make any difference. Physically, the location connection is there because they didn't limit themselves to the ...(inaudible).

P: Now, to tie it back to Molly's question, could Wisconsin tax it, too?

__: Wisconsin -- the question would be, would Wisconsin want to tax it, first of all, when the service is going outside of the state, when the user is outside of the state? Are they going to worry that TDS is going to move outside of the state if Wisconsin starts taxing this service out.

And, by and large, states generally cannot tax their exports, their exported services and so on don't get taxed, and most state laws even have provisions to rebate any tax, as long as you can prove that it was ...(inaudible).

P: So the answer to Molly's question, it's a matter of policy.

__: As a matter of policy, they wouldn't, but they probably have the power to do it, although there are some Supreme Court cases that make it a little bit tough to apply a sales tax on the export, and that's one of the reason why states have both sales and use taxes, but that's a side issue of another stream of Supreme Court cases.

P: OK. Now back, for a moment, to the policy of all this. You can imagine two ways of looking at taxes having to with the internet. One way says, the internet is brand-new, it is an unsullied gem, it has not yet been ground down into a fine and dirty sand of taxes. So let's just leave it as it is. This is a new realm, and if we can undo all the taxes that happen in the real world, we'd do that too, but that's too ...(inaudible) no charge. So let's just draw the line here and say no new taxes. That's one way of looking at it.

Another way of looking at it is, let's have no, really, internet targeted taxes, let's not just especially tax the internet. What we really seek is levelling the playing field, or fairness, the quality, equivalence. Maybe, depending on how you read this treasury document, however far you might have gotten through it without snoozing, it means neutrality, tax neutrality. And we saw that the articles covering that document said, Wow, the Treasury Department says there's not going to be any internet taxes. Oh boy. What they're really calling for is neutrality in taxes.

Now, the question would be, is this kind of tax that Alice has proposed, is this neutral? Isn't this just bringing ISP-dom into the realm of everything else that gets taxed up and down in Minnesota? And maybe you're against it, but if you're against it you're going to have to be against it for the first. Just because you're anti-tax, you just don't want to see it happen. And you even realize it's unfair, but it's too late to save the farms. Let's, at least, save the internet from this oppressive burden.

So you have to kind of really blow a subversive horn, or a quite radical horn, to make that argument. And maybe, in fact, that's really the argument captured in the articles that covered Alice's proposal. The enterprise just said, Don't tax us, that would eat into our business, stuff would be more expensive, then. Why would you want to do that? This is a general argument saying tax is bad.

Now, I don't know how the second argument, just saying somehow this is disproportionate, comes out. I mean, is there anybody that's against this proposal on grounds other than the purest radical ground that just says, Hey, don't ruin the internet like everything else got ruined? Is there anybody willing to attack this proposal on any other basis?

__: You mean, this one here?

P: Yes, the legal sized stuff.

__: Well, if you get a sales tax, you can be against the proposal.

P: This is my point.

__: If you think they're not progressive because they don't take into account differences between high income and low income people, you can just be against the principle and, especially, impose them here.

__: Although if Minnesota has sales taxes, they should have them on ISPs, because rich people get internet service.

__: Well, assuming ...(inaudible). I mean, if you just don't like sales tax at all.

P: Right. If you don't like sales tax, you can be against this and not lose a night of sleep.

__: And especially services.

__: I have a question. When the bill says charges for transmission services ...(inaudible) etc., I ...(inaudible) question, you weren't just charging a monthly fee for access, that you were somehow going to charge everything across those --

P: There's going to be a ...(inaudible) tax.

__: Well, this isn't a ...(inaudible) tax, is it?

P: ...(inaudible) political suicide. We'll get to that.

__: Am I reading too much into this?

AJ: No. This was the original bill as drafted, but then, in the process, I was starting to get beat up by everybody. I backed down, and then started talking about just the internet charge, and then ended up, finally, with a study committee.

__: Which is saying you should propose a (bid) tax.

AJ: No, no.

P: Now, she did propose -- in fact, at some point you were given a menu by your staff, basically, that said you could pick this option, and this option basically turned out to be this provision, taxing ISPs. And/or you could pick this option, and that one was the more comprehensive language, and actually, we should have that language handy. If I remember it, we can introduce that.

But now also, while you're just going over the actual language of the bill here, we do have what you called etc., we have this language here, and other enhanced and content-related services. What does that mean?

AJ: That was a very thoughtful language that was recommended and put forward by our legal staff, and if you do reading about this topic, there's a lot of people who would agree, because the industry is changing so quickly. If you try to name what you're going to tax, you'll end up having that be obsolete and there'll be all sorts of other new things.

This would allow there to be discretion on the part of the Department of Revenue, which they have all the time.

P: So this is just really a to be assigned loophole the size of Minnesota, so that if the Department of Revenue wants to adjust to changing circumstances, people go from modems to cable modems or they go from modem to something else, they can still get it.

Of course, it's so broad, you could imagine the Department of Revenue, if it really decided to froth at the mouth, they could interpret this to mean, Hey, any kind of content-related services, that's anything.

AJ: Well, if a piece of legislation like this would get passed in the department, we would expect that the Department of Revenue would put out memorandums describing what the language means, and that can be modified and changed through the legislative process or administratively. They have a lot of right to do that. They have the discretion to do that.

If they make a wrong choice, however, you know they're going to get beat up, and then people will call their legislators and the legislators will say, OK, we clarify that, it no longer includes --

P: So this is a legislative blank check, subject to your stop payment.

AJ: It is a sensible way to go forward in an industry that's as complex and quick-changing as this one is. It would be like saying if you had a tax on food -- but we have exemptions. We don't tax food in Minnesota.

P: I see you tax gum.

AJ: We tax soda pop and gum and junk food.

P: Section 1, subdivision 3, item A-3 little six.

AJ: Now, this is not an attack on Minnesota taxes.

__: Well, at least you're not making up letters.

P: OK. So any other thoughts? Kathryn, you've got something?

Kathryn: What I was getting at is, I don't think I can argue against taxing a monthly service, just like you would tax a phone service. But once you start getting into more of the electronic commerce aspects, I think you have significant -- because there are arguments against it. And part of it stems from the difficulty in how you would tax is, which is what we were talking about be fore.

P: OK. We're about to move onto that, but you have a --

__: I would just add that the same argument applies on that, because, given the is, what the is is now with the ISPs, this tax isn't ...(inaudible) what Professor Altman says. It's not really objectionable, because they're going to get taxed on one place, in Minnesota, in Wisconsin, the ISP provider in Wisconsin isn't going to pay a double tax on it, although they may. But if this tax gets set into place and it changes immediately, and it may very well become objectionable, based on the same grounds.

P: So, are you saying that you have just come out against the internet tax freedom act proposed in Congress?

__: The one that read from the Clinton thing?

P: Well, it was inspired by the molasses that was in that framework; it was actually from that they baked the cookie that was the bill. And the bill was actually not included in the packet, we can provide the cite later. Right here, this is the bill, and this is basically -- it's called Cox-Widen, Michelle, you know about this bill.

Michelle: Well, basically, I mean -- there's a lot. It's hard. I kind of agree with some of the things about the Cox-Widen Bill, but emotionally I'm torn to disagree with it because I don't like heavy regulation involvement.

But basically, Senators Cox and Widen have proposed that you declare a moratorium on sales taxation, basically, on taxation of anything to do with the internet for two years, while somebody figures out what to do with it.

That's really basically what it is that they're proposing. It's been interpreted differently, depending on which camp you're in; if you agree with them, basically if you agree -- businesses love it, so they're saying this is a great thing, and they're being level-headed and they're just saying slow down and let's take a look at this and let's all work together. And if you're in the other camp, they're saying, No, Cox-Widen, they're trying to prevent us from being able to get our revenue, they want us to not tax.

P: But now, Cox-Widen, just specifically, it does apply to her proposal, right? Her proposal loses all its steam if Cox-Widen passes, no?

Michelle: No. If they are taxing an internet service in the same way that they could tax a Main Street merchant transaction, then it can forward under Cox-Widen.

P: Is that right?

Michelle: Supposedly.

__: Then they just change the way the transaction's set up.

P: You're saying the --

__: I mean, what I'm saying is that these taxes that are imposed or not imposed, depending on the margins, the revenue on it, would just change the way that people do the business in the state. I mean, if it's one state, or another state, then I think that the problem of the race to the bottom isn't -- the ISP may not be a factor now, but it could play, depending on what happens.

P: See, I actually -- I read this text, and it's unfortunate we don't have the text in front of everybody here, and it's not so clear to me, upon reading this text, that Alice's Bill survives.

__: I think that if she can frame it well enough, to say, this is not a new tax, this is not an internet tax, per se --

P: So, in fact, she could add some bindings, or something, to her bill --

__: -- this is a telecommunications tax, very similar to excise taxes and things that are already imposed on telecommunications in the state, and then it can go forward under this.

P: Melanie?

Melanie: Just have a question. What's the base line that they use? They're saying essentially that you can't -- you can tax things that have already been taxed traditionally, so ...(inaudible) But what's the baseline? Is it, if there's a tax right now in the state, then they can tax that same type of thing on the internet? Or is it two years from now? Suppose a state has a bad law right now and they decide they want to change it?

P: No. The moratorium, actually, it's a word, so far as I can tell, that just means a ban. It's not a moratorium. It doesn't mean, hurry up states, pass your laws now before the moratorium on new ones. It actually kills all the old ones, too.

If the states pass a law now, and then the moratorium comes into effect, it applies backwards to laws that have already been passed, is what I'm saying.

__: I think what she's asking is something a little bit different. What she's asking is, are they talking about-- the laws that you can get away with, the laws that -- I don't think I know quite the answer to this, but the laws that you can get away with, what is the baseline for that? Is it the existing franchise fees, taxes on telecommunications structures in your state? If it's already there and in place in your state, is that the only one you can use? If you have a law that you don't like that is in the process of being changed anyway, are you going run into a problem with the new tax?

P: And in that case, I think it's so long as you change all the taxes at the same time, you're fine.

__: The big thing is, anything that looks like you're doing something new and different just because of the internet, there'll be a strong argument that it's going to be banned, if this passes.

__: So you could essentially still pass an across-the-board tax that applies -- so long as you applied the tax to not only ...(inaudible) activities, you'd then be able to extend the tax to internet activities.

AJ: I believe not. But if you have it in place already, like, say, if you were a state that didn't have a tax on any services, you suddenly pass a law that put all services under the improvised reporting on sales tax on services, I think that would be banned. But, as in Minnesota where we have the sales tax in place already, it's OK. I truly believe that this Bill would stand up under, even if Cox-Widen passed.

P: That seems to be a strange interpretation, to me, that --

__: But then if Delaware decides, as a choice of public policy, that their policy is bad, or if some other state decides that their ...(inaudible) taxing policy for the poor, then that means essentially that they're still banned from taxing the internet.

P: That's what Alice is saying; I'm not sure. What we should do, actually, is --

__: It's important to specify, or to search for, how a given state is dealing with services. Where does that word services come in? In European systems of applied sales taxes, they apply to goods and services generally. You've heard the expression GSC, goods and services taxes, they apply to the whole ball of wax of consumption, bottom line.

Typically, American sales taxes started off applying only to technical personal property. That's goods ...(inaudible). Gradually some of the states starting adding services. There is no state, so far as I know, now that taxes services in general.

If you look at this Minnesota statute that you have before you, which is basically their sales tax statute, with some underlying language added on page 6, which is now in the law. But if you look down there, under G, you find cable television services. If you look under H, ...(inaudible). Then I is services listed in this paragraph.

What most interstates have done, when the pressure got on to put services under the sales tax, is they did it by enumeration, not by having a general tax law.

P: And then ...(inaudible)

__: Right. Therefore, in Minnesota, you have to add your paragraph, unless you can fit it into this paragraph here that deals with cable television services, pretty specific. I didn't notice telecommunication. Here, telephone is up here, so it might fit in.

Or, you can do what ...(inaudible), this piece that a few of us have, where the Governor didn't like it but the head of The Department of Revenue says, Our law covers -- and this is not a general sales tax law, it's a utility tax law -- covers telecommunication services in general. So I'm just going to apply it to the internet as part of the meeting of taxing communication services.

__: Something like that is in the ...(inaudible) piece, too, where he talks about --

__: And many states --

__: -- a utility tax on tele-typewriters, for example ...(inaudible)

__: You can have separate taxes on those things, or it can be part of the sales tax. But if your sales taxes reaches telecommunications broadly, then you may not need to do anything. All you have to do is get out there and start taxing.

So that problem of where services fit into a picture, under income taxes, there's no question at all. Income from any source, services, goods or anything, would be part of income. So if you were an internet access provider, your income from that part of your business, no problem about that being income.

The problem is whether this internet provision is a service that's under a tax base that gets its services. And Alice has to add that, because the way the Minnesota sales tax law is written, it's a little hard to figure out where you stretch it.

AJ: Actually, really not. Actually, people from the Department of Revenue came and said --

P: -- why don't you do this, but if you don't we'll do it anyway.

AJ: No, we won't do it unless you do it. Because they were afraid of the politics, they wanted me to take the hit for it, not them. They really felt -- and we have highly capable legal staff that work for us, and they told me that -- they said, we believe the Department of Revenue has the ability, they have the legal right to collect the taxes, but they want it clarified, because it's very political.

P: This is preserving their option for future comments.

AJ: And the Governor would go after them like he went after me, if you saw in the newspaper articles.

__: Alice brings up, though, really, what she said earlier when we were talking just about her proposal and everything like that, and she started talking about how this proposal evolved and the actual non-consideration that actually goes into whether it's going to really hold up or not. It's more like, put it out there and let somebody challenge it and see if it gets struck down.

That, in a way, is why Senators Cox and Widen put forth the Bill that they have, to try and get it passed, because that is not an isolated case just in Minnesota. That's now, as Alice was informing us every step of the way here, really that's how legislators work.

I mean, when we first talked about this, I remember actually being a little surprised because I'm sitting here as a naive law school student, going, Gosh, doesn't everybody figure out all the ramifications and everything they do before they do it? Because that's what we do.

And Alice is like, What are you guys, crazy? We just write up legislation and figure something we need to do, we do it. And it's like, Oh, that's right. That's what's going on in most of the states right now, which is why they're saying, All right, hold it. We've got fifty states that are doing this. Stop. Let's everybody get together and try to get a consensus.

P: Of course, what still remains unclear is whether the stock is applying to this idea. Two seconds ago I was hearing, no, no, that Bill ...(inaudible) doesn't mean she can't tax ISPs. Now we're hearing, well, yes, we need to stop, gather our breaths. Also note that the moratorium in this bill, the two years is just, the president within two years should give a report to the Congress. It doesn't actually say that the Bill runs out of steam in two years. This is a permanent moratorium for which a report will be issued in two years, and then Congress is free to revisit the issue at its convenience.

So, why don't we get -- we're going to now shift into -- this is kind of just like the appetizer. Taxing this $9.95 a month, this is like small potatoes. I am curious, before we move on, how many people came in thinking that this tax alone, this small potatoes tax, was a bad idea? Ted, you seem offended.

Ted: I guess, you mean, adding it if you don't already have a service tax. ...(inaudible) a place where we have --

P: You're just giving argument. Did you think it was a bad idea or not?

Ted: Well, I mean, given the fact that they don't already have a service tax?

AJ: We do have service taxes.

Ted: I mean, they don't have across-the-board service taxes. See, you ...(inaudible) service taxes.

(simultaneous voices)

P: Who actually thought this was a bad idea? OK. How many now think it's a bad idea? All right, this is a good opportunity. Mike, you had your hand up, why don't you have the last word before we shift into the higher gear.

Mike: ...(inaudible) whether it's the last word. I wanted to go back to the brief discourse on the history of goods and services taxes generally, and ask a question. The question is whether, as a theoretical matter, the basis for sales tax or consumption tax is that providing those services or selling those goods is imposing some social cost on the community that the state is entitled to recoup, in part, by the tax. I'm asking a question. I don't know whether that's actually the rationale, from a theoretical standpoint, or not.

__: Well, if you're going back to what I said earlier about consumption taxes, about consumptions being taxed, because of the services that government provides to make consumptions possible, so that but for the services provided by the states, the markets, the courts, the peace and quiet, so to speak, you wouldn't be able to consume as freely as you did. That's the rationale. And it doesn't interfere with your incentives to work and do various other things, so that neutrality point that keeps coming up has a feature to it that doesn't prevent you from doing a lot of things that you might otherwise do, or at least bring in incentives that might reduce your information ...(inaudible).

So consumption taxation has, more and more, turned out to used type of revenue raising around the world, more so in other countries than in this country. And the systems and techniques for doing it have been more ...(inaudible)

If you pursue a little bit more the question of services we were talking about, and why the American states by and large have gone through enumeration of service rather than services in general, the way other countries have, probably the principal reason is that when you look at these lists, almost everything that you see is an item that you would classify as principal consumption: the laundry, a lot of the telephone --

P: The massage, the pet grooming, I mean, this is gluttony.

__: The ...(inaudible) and so on. This is all personal consumption. If you talk about services generally, a lot of services are provided to business. You then would have the technical problem, under American sales taxes, of how do you prevent the double taxation ...(inaudible) that gets prevented with respect to machinery and equipment? How would you do that? How would you describe the services for which you want to make some special business allowance?

So the ...(inaudible) system has been the enumeration approach. As soon as the state of Florida, about eight or nine years ago, tried to put in a broad services provision, there was almost a revolution that took place, and they adopted it, they had to repeal it before it went into effect.

P: If you didn't take ...(inaudible)

__: I always explain why it got repealed is they went too far when they decided to include legal services. And the lawyers from Boston said, Gee, a lot of our legal work is for these Florida people, and you're going to tax us?

So, in any event, the Florida people did not get away with that approach. The Europeans do get away with it, because the system of collecting, administering the sales tax allows all the business inputs, all the tax paid on business inputs, to be credited against the tax the business would have to pay for what it collects on the ...(inaudible).

So there is no double taxation. Therefore, you can broadly tax all goods and services, and business would pay out everything, but it doesn't bear any net ...(inaudible)

P: So let me ask something. Let's say that you've got some tax consulting business, got a lot of money, want to invest it properly, you order up a subscription to Kiplinger's Back Bay newsletter. And this comes out every month, it's very expensive, you pay maybe $200 a month for it, and it arrives and your door, and it gives you all sorts of advice about investment.

Now, is that a good or a service?

__: It probably doesn't make too much difference technically what it is. The question is, which states -- are you in a state which includes that under the sales tax? And all of these different kinds of information services are covered to a greater or lesser degree by the sales taxes.

P: In this case, it's kind of like a magazine or something.

__: And if it's a sports magazine, it's going to be covered. The question is, Is a Kiplinger newsletter type thing meant to be for business, or for personal? Does it make ...(inaudible)

P: Let's say it's called the Kiplinger's, for personal use, Back Bay Newsletter.

__: Right. And if, when you open up the cover, you find that's what it is.

P: For personal use only. It gets taxed.

__: Right.

P: Now, let's say you order it up and it comes as an e-mail newsletter. Taxable?

__: There's no reason in principle, of course, why it shouldn't be.

P: No constitutional ...(inaudible)

__: No. But even in terms of designing the state tax law, as long as you define the nature of the newsletter that you're downloading, and not to get newsletters in general, because you may not want to tax newsletters in general, and particularly not want to tax trade publications that business uses as a part of its normal business activity.

P: Of course, now, I'm not meaning so much to explore the line between business and personal, as to say, when you go into the store and you buy a book, it's a tangible good, right?, tangible personal property. You pay tax on it. If you were to click and download that book, is that tangible personal properly.

__: When you say download, you mean print it out?

P: Well, I'll tell you what, my answer depends on your answer.

__: For tax purposes, if you want to treat all of that the same, a ...(inaudible) idea, you would have no difficulty doing that, to make sure that you cover, either way.

P: But now, when we get to the Department of Revenue, coming to Alice and saying, You know, we think we can treat it equally but we wouldn't mind if you'd slip a little provision into your tax bill. So long as you've already taken six arrows in the heart over this, why don't you add a provision -- say you put it in -- I don't know, you can put it in under Item J, about the transfer of computer software, and say, this provision shall also cover the transfer of information when such information is functionally equivalent to that which might otherwise be bought in real form.

Is that suggestion ever made, something like that?

AJ: Well, basically, that's what this is.

P: What --

AJ: The original proposal there. Well, it isn't -- it was a suggestion that could do that. But again, as I said, the legal staff from our legislature assured me that they already had the ability to do it, they didn't need it. But making laws is a political game. Anybody knows -- I think anybody that's been involved closely knows that there are a lot of good laws that should get passed that don't get passed, and there are bad laws that get passed that shouldn't be passed, and that's because of political pressures that are applied, and whoever applies the strongest pressures wins. Sometimes wins.

P: So, if Minnesota goes ahead and passes a law that clarifies that stuff you get over the internet, so long as it's basically a stand-in for something you could have bought in a bookstore, or a newsstand, let's presume they already tax that stuff. So they say, as a matter of fairness, we're now going to tax it when you buy it over the internet. What do we think about that? Are we happy with that proposal? Melanie?

Melanie: Well, I guess the question that comes to mind is, why are you doing it? Are you taxing it as a matter of fairness? Are you taxing it because you're concerned that your tax base is going to disappear when everything is electronic? It matters to me why you're doing it. ...(inaudible) happy with it, and I guess my feeling is, do you want a lot of people to stop selling books in the book store and to start to distribute more electronically? It's a better way to distribute, there are no marginal costs. There are lots of efficiencies. So part of is that you want to encourage this.

P: But of course, as you just point out, it's already naturally better anyway.

__: Right. You're naturally getting advantages. On the other hand, going back to the first hand, it's the beginning stages, so right now you're looking at people who, partly because the security on the internet isn't great, you're not getting large numbers of small transactions of business yet, and so there's still a need to encourage people to get on the internet, even, and especially, I would say, small businesses.

P: So this is the incubator theory. This says, when an industry is new it should be given special breaks or subsidies, or something, so that it can grow.

__: I just disagree, just because I think the market is most efficient when it's ...(inaudible). Like, I realize it's a more nascent technology, it's a more nascent industry, but the ...(inaudible) it should only grow to the size that it ought to be and will only do that if the market is left alone to do that.

P: And to leave it alone, you say tax it, like you would tax everything else.

__: You shouldn't tax neutral. If you're leaving it alone, you're giving it special treatment. I mean, you can't let the semantics of it determine whether or not tax it.

__: And you take away the tax on the books.

__: Well, fine.

P: We have another purist. And then the kids don't go to school.

__: No. Or you can argue that distribution of books on the internet shouldn't be taxed, but maybe downloading should be. And then you're getting it -- for example, this distinction you were just drawing between downloading the information and printing the information, there you have a difference between a service and a good. You're talking about, are you providing a service on which people can look at something or ...(inaudible)

P: This is interesting now. This is like an Einsteinian equation, where service can equal good times printer, or good equals service times printer.

__: Well, in some sense, if you can think of -- there are proposals to limit access, in which the idea is that to protect intellectual property you'd have a certain period of time during which you can look at something, then it essentially goes away.

P: This is great. Can you imagine the Jeopardy song playing while you're staring at the screen? You've got to hurry to the end before it -- sorry, please deposit another quarter.

__: That's actually what industries like Disney want. I mean, they're biggest concern is that they won't be able to do that, that once you see it, you have it.

P: Do we understand the true dimensions of this technological proposal that Melanie's positing? This is under the general rubric of something called trusted systems, and we're actually going to get the fellow who has coined that phrase, I think, into class, to defend this idea.

__: Mark ...(inaudible)

P: Yes. But basically this is saying that, hey, today's internet is not tomorrow's internet. It's quite possible that tomorrow's internet, you won't be able to get the service and only later decide you want it to be a good by cueing up the printer. Instead, you decide, the moment you click OK, to buy it, and it only costs you ten cents, if you don't mind just reading it quickly as it scrolls up like the credits on a TV program. But if you really want to kind of savor it and take it to bed, or on vacation or something, you pay a little more, and then the network authorizes your printer to actually print out the thing.

And Stepnik, this guy who is big into trusted systems, his point is, it does not take a whole lot to tweak an operating system, so that when you go for the screen snapshot nothing happens. And when you go to do edit copy, it's conveniently greyed out because you didn't put in the money. When you ask to print it says, please deposit five cents for an additional three pages.

Gene: I just think, you know, it's all well and good to say that these things should be taxed, or books should be taxed, or whatever, but I'm not really sure why we should be going into -- the internet all of a sudden should be taxed b because it's new, it's different. I mean, I don't feel a lot of people who are really -- there are a lot of critics now, people who said like the negligence rule back in the 1800s was bad, and it helped subsidized railroads and get railroads across the country -- it killed a lot of people too, without giving compensation.

So, I mean, why is it that the internet now should be not taxed, or books should not be taxed, or whatever shouldn't be taxed? I mean, tax is just necessary for the government to provide --

(end of tape)