[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]



                 VoIP: WHO HAS JURISDICTION TO TAX IT?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 31, 2009

                               __________

                           Serial No. 111-23

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida               STEVE KING, Iowa
STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
  Georgia                            JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
LUIS V. GUTIERREZ, Illinois          JASON CHAFFETZ, Utah
BRAD SHERMAN, California             TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

            Perry Apelbaum, Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
BRAD SHERMAN, California             DARRELL E. ISSA, California
DANIEL MAFFEI, New York              J. RANDY FORBES, Virginia
ZOE LOFGREN, California              HOWARD COBLE, North Carolina
HENRY C. ``HANK'' JOHNSON, Jr.,      STEVE KING, Iowa
  Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel



















                            C O N T E N T S

                              ----------                              

                             MARCH 31, 2009

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     2

                               WITNESSES

The Honorable Phil Montgomery, Wisconsin State Assembly
  Oral Testimony.................................................     4
  Prepared Statement.............................................     6
Mr. John L. Barnes, Director, Product Management and Development, 
  Verizon Business
  Oral Testimony.................................................    10
  Prepared Statement.............................................    12
Mr. Robert W. Cole, Manager, Tax Accounting, Sprint Nextel 
  Corporation
  Oral Testimony.................................................    15
  Prepared Statement.............................................    17
Mr. James R. Eads, Jr., Executive Director, Federation of Tax 
  Administrators
  Oral Testimony.................................................    19
  Prepared Statement.............................................    20

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................     3

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from the Honorable Phil 
  Montgomery, Wisconsin State Assembly...........................    32
Response to Post-Hearing Questions from John L. Barnes, Director, 
  Product Management and Development, Verizon Business...........    35
Response to Post-Hearing Questions from Robert W. Cole, Manager, 
  Tax Accounting, Sprint Nextel Corporation......................    38
Response to Post-Hearing Questions from James R. Eads, Jr., 
  Executive Director, Federation of Tax Administrators...........    41

 
                 VoIP: WHO HAS JURISDICTION TO TAX IT?

                              ----------                              


                        TUESDAY, MARCH 31, 2009

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2:16 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Sherman, Johnson, Scott, 
Franks, Jordan, Issa, and King.
    Staff Present: Norberto Salinas, Majority Counsel; Adam 
Russell, Majority Professional Staff Member; and Stewart 
Jeffries, Minority Counsel.
    Mr. Cohen. This hearing of the Committee on the Judiciary, 
Subcommittee on Commercial and Administrative Law will now come 
to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing, which we will have to do when we go 
into votes, which is not going to be too far from now.
    I will now recognize myself for a short statement.
    Telecommunications have moved from a fixed phone line 
between two individuals, or in some places two coke cans and a 
long line, to the point where anyone can place a call on a 
wireless device from and to almost anywhere in the world. Today 
someone using an iPhone can even video-chat with another 
person.
    But as technology evolves, many of our tax laws have not 
kept pace--cultural lag. For example, just 10 years ago States 
maintained a telecommunications tax structure based on a call's 
origin. This structure worked well because telephone calls at 
the time were placed from a fixed location. But mobile 
telecommunications do not fit neatly into that tax structure 
because mobile users rarely place calls from the same location.
    State and local governments had to refine their tax systems 
to address the broad use of mobile telecommunications devices. 
This resulted in the passing of the Mobile Telecommunications 
Sourcing Act of 2000, hereafter known as MTSA, which created 
sourcing requirements for State and local taxation of 
telecommunications services. In essence, MTS would be taxed 
based on the customer's place of primary use.
    State and local governments, providers, and consumers now 
face a similar situation with the newest form of 
telecommunications: Voice over Internet Protocol. With Voice 
over IP, users are able to place calls over the Internet as 
long as they have access to broadband Internet access. Some 
providers and State legislatures have grown concerned that 
current tax policies are difficult to apply to VoIP and urge 
that Congress help resolve the taxation issue as it did with 
mobile telecommunications.
    Today's hearing will provide Members of the Subcommittee 
the opportunity to hear testimony about Voice over IP and the 
impact of its expected growth in usage. Members will also hear 
testimony about State and local taxation of VoIP to determine 
whether a taxation issue does exist and whether Congress should 
intercede to resolve it. Accordingly, I look forward to 
receiving today's testimony.
    And, at this point, I recognize my colleague, the gentleman 
from Arizona, Mr. Franks, the distinguished Ranking Member of 
the Subcommittee, for his opening remarks.
    Mr. Franks. Well, thank you, Mr. Chairman.
    I want to welcome all the Committee here. I met Mr. 
Montgomery earlier. He seems tall enough that he can reach out 
and touch someone without a telephone. But it is a pleasure to 
meet you, sir.
    Today we are considering whether and how the Mobile 
Telecommunications Sourcing Act should be modified to address 
changes in telecommunications technology. The law was designed 
to resolve questions as to which States and localities could 
tax cellular calls. Existing Supreme Court precedent held that 
a State had a jurisdiction to tax telecommunications if two of 
three factors were in alignment: the source of the call, the 
destination of the call, and the billing or service address of 
the telephone.
    Traditional wireline communications has presented very few 
difficulties. A call placed from Arizona to Tennessee was 
likely made on a phone whose billing address was in Arizona. 
However, with cell phones, a call placed from Arizona to 
Tennessee could be made with a phone whose billing address is 
in the District of Columbia. Under such a scenario, the three 
factors established by the Supreme Court could theoretically 
never be in alignment.
    To address this problem, Congress enacted the Mobile 
Telecommunications Sourcing Act, which defined the place of 
primary use of service and mandated that only the State of the 
place of primary use could tax mobile telecommunications. This 
helped consumers by ensuring that they could not be double-
taxed for their cell phone calls. It helped States by ensuring 
that at least one, and only one, State would be eligible to tax 
those calls. And it made it easier for mobile telephone 
companies to properly assess taxes on customers' bills.
    So now we are back to consider whether the rules that apply 
to mobile telephones should also be used for Voice over 
Internet Protocol, or VoIP. VoIP allows a consumer to use their 
broadband connection like a telephone line. VoIP is often 
cheaper than traditional land lines, particularly for long 
distance and international calls.
    Recently, the telephone companies have rolled out a new 
technology known as nomadic VoIP--boy, they just keep coming up 
with this stuff, don't they--which enables a consumer to use 
their VoIP phone number and account number wherever they may 
be. The implications for taxation are clear: Like mobile 
phones, calls made from a nomadic VoIP no longer must be made 
from the same location as the billing or service address.
    Accordingly, this Subcommittee has the opportunity to 
examine whether changes to the Mobile Telecommunications 
Sourcing Act are appropriate. To that end, we have 
representatives from both industry and the States here today. 
It is my hope that we can work together to quickly resolve the 
issues identified today so that States, industry, and, most 
importantly, consumers can have the clarity and certainty that 
they need to conduct their affairs.
    And, Mr. Chairman, with that, I welcome the panel members 
and yield back.
    Mr. Cohen. I thank the gentleman for his statement.
    Without objection, other statements of Members will be 
permitted in writing and included in the record.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    Voice over Internet Protocol is a new telecommunications technology 
that is expected to overtake traditional land-line telecommunications 
in the near future.
    It allows users to communicate with one another by transmitting 
voice signals over the Internet. It is less expensive than using analog 
land-line telecommunications, and offers mobility to users.
    Some are concerned that the mobility of Voice over Internet 
Protocol does not lend itself to falling clearly under current State 
and local tax systems.
    For instance, a State may tax an individual if a nexus exists 
between it and the individual at the time of the transaction.
    As a result of Voice over Internet Protocol's mobility, however, 
several States may claim nexus to tax the user. This could make it 
difficult for providers to determine which taxes to collect, cause some 
States and local governments to lose tax revenues, and result in 
double, or even multiple, taxation for some users.
    Additionally, the taxing may impede interstate commerce, and 
therefore be unconstitutional.
    Therefore, State legislatures and some providers have asked 
Congress to consider legislation that would provide for the home State 
of the user to be the sole authority to tax Voice over Internet 
Protocol services.
    Today's hearing will, I hope, help us consider three critical 
questions.
    First, we should determine whether there does exist an issue 
concerning State and local taxation of Voice over Internet Protocol.
    Second, if there does exist a taxation issue, we should consider 
whether Congress can and should address it.
    Third, if we determine that Congress can constitutionally address 
this issue, and is better suited to doing so rather than leaving it to 
the States to resolve, then we should determine the best course of 
action.
    For example, is there an existing framework to simplify State and 
local taxation of Voice over Internet Protocol?
    Or should Congress impose a new structure to determine which taxing 
authority can tax Voice over Internet Protocol?
    Today's testimony should help us answer these questions. I look 
forward to hearing from the witnesses.
                               __________

    Mr. Cohen. We have 15 minutes for votes. And I think, while 
we could start and maybe get through one gentleman's testimony, 
if you don't mind, I think we probably ought to vote and come 
back and do all the testimony at the same time.
    So, without objection, and in spite of the fact that we 
have our largest attendance yet in this early spring training, 
I would ask, without objection, that we take a recess and 
return after votes are finished and promptly return.
    Without objection, we are in recess.
    [Recess.]
    Mr. Cohen. Thank you, gentlemen. We are back in session.
    I am now pleased to introduce the witnesses and hear their 
testimony today.
    I understand, Mr. Montgomery, you have a 4 o'clock flight?
    Mr. Montgomery. Five.
    Mr. Cohen. Five o'clock?
    I am going to go ahead and take him out of order, if that 
is all right with the other witnesses. Why don't we do that and 
have Mr. Montgomery go first. And if he can stay for a while, 
maybe we can get to ask questions, but if you have to leave, 
you have to leave.
    All right, I have to tell you the rules.
    The first rule: Don't leave the University of Memphis for 
Kentucky. That has already been violated. Bad day, bad day.
    Your written statements will be placed in the record. We 
ask that you limit your oral remarks to 5 minutes. You will 
note that we have a lighting system. When it is green, that 
means you have 5 minutes; yellow means 1 minute; red, over.
    After each witness presents his or her testimony, the 
Subcommittee Members have an opportunity to ask you questions 
subject to a 5-minute rule.
    Those are the rules.
    Our first witness is Mr. Phil Montgomery. He was elected to 
the Wisconsin State Assembly in 1998 and has chaired a variety 
of committees, including the Assembly Insurance Committee, 
Financial Institutions Committee, and the Telecommunications 
Task Force. Most recently, he served as chairman of the 
Assembly Energy and Utilities Committee for 4 years, where he 
played a vital role in several key energy and telecommunication 
reforms, including the Cable and Video Competition Act.
    During the upcoming 2009-2010 legislative session, 
Representative Montgomery will represent northeast Wisconsin on 
the legislature's powerful Joint Committee on Finance, where he 
will take a leading role in crafting the State's budget.
    Thank you, Representative Montgomery. As a former State 
legislator, I appreciate your service and welcome you here. 
Would you proceed with your testimony?

  TESTIMONY OF THE HONORABLE PHIL MONTGOMERY, WISCONSIN STATE 
                            ASSEMBLY

    Mr. Montgomery. Thank you, Mr. Chairman. I greatly 
appreciate the indulgence.
    Chairman Cohen, Ranking Member Franks, and Members of the 
Subcommittee on Commercial and Administrative Law, I appreciate 
the invitation to testify before you today on behalf of the 
National Conference of State Legislators.
    I am Phil Montgomery, a member of the Wisconsin Assembly. 
And I serve as the chairman of NCSL's Standing Committee on 
Communications, Financial Services, and Interstate Commerce.
    Mr. Chairman, I am pleased to acknowledge your long history 
as an active member of NCSL. Speaking on behalf of your 
colleagues in the State legislatures, we are proud of your past 
service as a State Senator and now your leadership in Congress. 
We hope that during your tenure as a Member of Congress and 
your chairmanship of this Subcommittee, we will have numerous 
opportunities to work together to foster a strong Federal-State 
partnership on interests of mutual concern.
    Mr. Chairman, you may recall that, while you were a member 
of the Tennessee Senate, you voted to implement Public Law 106-
252, the Federal Mobile Telecommunications Sourcing Act. The 
legislation established a national framework that, when 
implemented by the States between 2001 and 2002, provided a 
mechanism on how mobile telecommunications calls involving 
multiple jurisdictions should be assigned for purposes of tax. 
The MTSA created the concept that the customer has a place of 
primary use, which is the jurisdiction with the right to tax 
wireless calls even if the call neither originates nor 
terminates in that jurisdiction.
    The MTSA was a win-win for both the industry and 
government. State and local governments supported the MTSA to 
prevent ``nowhere'' taxation and to bring administrative 
simplicity and cost savings to the tax administration. 
Furthermore, government organizations supported the legislation 
to avoid potential congressional preemption of State taxing 
authority based on burdens of interstate commerce.
    The wireless industry supported the legislation to prevent 
multiple taxation to achieve administrative simplicity and cost 
savings in the billing process, to avoid expensive audit and 
litigation exposure when multiple States claim jurisdiction to 
tax the same call, and to avoid class-action lawsuits from 
customers who claim that companies are improperly collecting 
taxes even when they are merely complying with State laws.
    NCSL is once again pleased to support and urge passage of 
legislation to extend the MTSA provisions to VoIP. This 
legislation will merely clarify how VoIP calls involving 
multiple jurisdictions should be sourced for State and local 
tax purposes. It will not change the tax status of any VoIP 
provider.
    As is the case with wireless calls, it is just as important 
for VoIP communications that there be a clear, national rule 
for determining what jurisdiction is permitted to tax a call 
and, thus, avoid situations where multiple jurisdictions may 
try to tax the same call or that a call might escape taxation 
all together.
    While the thought of tax-free communications may be 
appealing, we must acknowledge that, if a government taxes 
communication services, as policymakers, we have the obligation 
to ensure that all providers, regardless of the medium used, 
should be treated similarly for tax purposes. Taxes on 
communication services must be applied in a competitively 
neutral manner without being used to benefit one provider over 
another in the marketplace.
    In conclusion, last year the National Conference of State 
Legislators' membership unanimously approved a request to 
Congress for legislation that would extend the MTSA sourcing 
provisions to Voice over Internet Protocol. The legislation to 
extend MTSA provisions to VoIP should be considered 
noncontroversial and should move without any opposition. For 
this reason, we should request that the VoIP sourcing 
legislation not become a vehicle for nongermane or slightly 
related amendments that would only slow and probably keep the 
legislation from enactment.
    Mr. Chairman, thank you for inviting me to express the 
concerns of NCSL with regards to the assessment of taxation on 
VoIP services and our support for legislation on national 
sourcing rules.
    [The prepared statement of Mr. Montgomery follows:]
          Prepared Statement of the Honorable Phil Montgomery
    Chairman Cohen, Ranking Member Franks and members of the 
Subcommittee on Commercial and Administrative Law, I appreciate the 
invitation to testify before you today on behalf of the National 
Conference of State Legislatures (NCSL). I am Phil Montgomery, a member 
of the Wisconsin Assembly and I serve as Chairman of NCSL's Standing 
Committee on Communications, Financial Services & Interstate Commerce. 
As you know Mr. Chairman, the National Conference of State Legislatures 
is the bi-partisan national organization representing every state 
legislator from all fifty states and our nation's commonwealths, 
territories, possessions and the District of Columbia.
    Mr. Chairman, I also am pleased to acknowledge your long history as 
an active member of NCSL, especially during your service on NCSL's 
Executive Committee. Speaking on behalf of your colleagues in state 
legislatures, we are proud of your past service as a state Senator and 
now your leadership in Congress. We hope that during your tenure as a 
member of Congress and your chairmanship of this Subcommittee, we will 
have numerous opportunities to work together to foster a strong 
federal-state partnership on issues of mutual concern.
    I am pleased to have the opportunity to appear before you today to 
discuss Voice over Internet Protocol and the problems related to the 
assessment and collection of taxes on VoIP related services. I also am 
here to express NCSL's support for draft legislation--the ``Voice over 
Internet Protocol Sourcing Act of 2009''--and I want to commend you Mr. 
Chairman for your willingness to sponsor this important legislation 
that goes directly to strengthening the federal-state partnership.
             mobile telecommunications sourcing act (mtsa)
    Mr. Chairman, you may recall that while you were a member of the 
Tennessee Senate, you voted to implement Public Law 106-252, the 
Federal Mobile Telecommunications Sourcing Act (MTSA). This legislation 
established a national framework that when implemented by the states 
between 2001-2002 provided a mechanism on how mobile telecommunications 
calls involving multiple jurisdictions should be assigned or sourced 
for tax purposes.
    Prior to the enactment of the MTSA, the Supreme Court decision in 
Goldberg vs. Sweet governed the question of which jurisdiction has 
authority to tax all interstate calls, both wireline and wireless. 
Under the Goldberg rule, a jurisdiction could impose a tax on a call if 
the call either originated or terminated in the jurisdiction and the 
call was charged to a ``service address'' in that jurisdiction.
    Because of the mobile nature of wireless telecommunications, it had 
become more difficult to determine whether wireless calls met the two-
out-of-three ``Goldberg'' rule of origination or termination plus 
service address, calling into question states' ability to tax such 
calls. Furthermore, as customers increasingly selected single rate, 
fixed-usage plans, the wireless industry's determination of which 
jurisdiction has authority to tax the calls become more complicated. 
With the growing popularity of the single rate plans, there was a 
decreasing need to track individual calls for billing purposes. 
Tracking individual calls solely for tax purposes unnecessarily wastes 
company resources.
    The MTSA solved both of these problems. It created the concept that 
the customer has a ``place of primary use,'' which is the jurisdiction 
with the right to tax wireless calls, even if the call neither 
originates nor terminates in that jurisdiction. Thus, the federal law 
allows states and localities to tax calls that they could not have 
taxed under the ``Goldberg'' rule and precludes their ability to tax 
other calls that they may have historically taxed.
    The MTSA also provided a means to avoid another very contentious 
fight between state and local governments, Congress and industry as was 
the case just two short years before its enactment. You may recall, 
that in 1998 in response to an effort by some states to tax access to 
the Internet, Congress passed and President Clinton signed into the law 
the first Internet Tax Freedom Act. The new law prohibited taxation of 
access to the Internet by any government, federal, state or local. The 
legislation did grandfather approximately 13 states, but the number is 
now down to 9 to 10 states. With the rapid growth of the Internet in 
the late 1990's, some state tax departments merely extended the 
taxation schemes that existed in their states' telecommunications 
statutes without any recognition of the impact on a new interstate 
communications service. Applying the old tax scheme to an emerging 
technology led to protests and complaints from communications providers 
and Internet service providers. While Congress intended the original 
moratorium to be a temporary measure, it has now been extended until 
2014 and will likely be made permanent. The MTSA is a model in avoiding 
another Internet Tax Freedom Act type battle between Congress, state 
and local governments and industry. It is for this reason that we seek 
quick congressional action to pass legislation that would extend the 
sourcing provisions of the MTSA to Voice over Internet Protocol and get 
it to the President's desk for his signature.
    The MTSA was a ``win-win'' for both industry and government. State 
and local governments supported the MTSA to prevent ``nowhere 
taxation'' and to bring administrative simplicity and cost savings to 
tax administration. Furthermore, government organizations supported the 
legislation to avoid potential Congressional preemption of state taxing 
authority based on the above mentioned burdens on Interstate Commerce.
    The wireless industry supported the legislation to prevent multiple 
taxation; to achieve administrative simplicity and cost savings in the 
billing process; to avoid expensive audit and litigation exposure when 
multiple states claim jurisdiction to tax the same call; and to avoid 
class action lawsuits from customers who claim that companies are 
improperly collecting taxes even when the are merely complying with 
state laws.
    The MTSA was enacted in July 2000 and in two years, all fifty state 
legislatures and the Council of the District of Columbia passed 
legislation to bring their states into compliance with the federal 
legislation. The MTSA has served state and local governments well as it 
ensured a vital revenue stream and provided clarity and uniformity for 
providers in collecting our taxes and fees on wireless services. The 
MTSA has served as a model of federal, state and private sector 
cooperation.
    NCSL is once again pleased support and urge passage of legislation 
to extend the MTSA provisions to VoIP. We will work with the other 
state and local organizations to obtain their support for a VoIP 
sourcing rule. This legislation will merely clarify how VoIP calls 
involving multiple jurisdictions should be sourced for state and local 
tax purposes; it will not change the tax status of any VoIP provider.
    As is the case with wireless calls, it is just as important for 
VoIP communications that there be clear, national rules for determining 
what jurisdiction is permitted to tax the call, and thus avoid 
situations where multiple jurisdictions may try to tax the same call or 
that a call might escape taxation all together. While the thought of 
tax free communications may be appealing, we must acknowledge that if a 
government taxes communications services, as policymakers we have an 
obligation to ensure that all providers, regardless of the medium used, 
should be treated similarly for tax purposes. Taxes on communications 
services must be applied in a competitively neutral manner, without 
being used to benefit one provider over another in the marketplace. 
This legislation endeavors to ensure competitive neutrality.
                      voice over internet protocol
    Ten years ago when negotiations were taking place between state and 
local governments and providers on the sourcing of wireless calls, few 
had any notion that soon another developing technology would provide 
another medium for voice communications that would once again challenge 
the way government taxes communications services.
    Voice over Internet Protocol or VoIP enables packet transmission 
over data networks which in essence converts voice to data and allows 
for voice transmission over the Internet. I will leave the basics and 
types of VoIP transmissions to the experts on this panel. However, as a 
legislator and an advocate for enhanced communications services, I am 
concerned about how my colleagues in state governments may attempt to 
collect taxes on VoIP communications service. Under what ``tax rule'' 
will state tax departments attempt to assess VoIP services for 
taxation? It certainly does not meet the standard of the Goldberg rule 
I mentioned above and while in some respects the mobile 
telecommunications sourcing rules could apply, VoIP technology also has 
differences from wireless technology that will need to be addressed.
    The legislation to source VoIP services provides the clarity that 
state and local governments need to assess and collect taxes on VoIP 
services. It ensures that well meaning tax officials do not try to 
impose existing tax regimes on VoIP that will only lead to confusion, 
litigation, lost revenue and possibly federal preemption.
    This legislation will expand the sourcing rule adopted in the 
Mobile Telecommunications Sourcing Act to VoIP services. This will 
ensure consistent tax treatment of VoIP across all states. It will 
provide consumers, vendors and state and local governments with 
certainty, thus avoiding needless litigation. It ends the likelihood of 
multiple taxation of the same call and eliminates the possibility of 
``nowhere'' taxation.
    As with the Mobile Telecommunications Sourcing Act, this 
legislation allows the jurisdiction the customer identifies as their 
place of primary use (PPU) to tax VoIP services and conforms with the 
sourcing provisions of the Streamlined Sales and Use Tax Agreement.
    VoIP providers may offer VoIP services that provide multiple 
telephone numbers only a limited amount of capacity or lines for making 
calls outside of the internal network. With VoIP it is important to 
understand that telephone numbers do not necessarily equal a 
traditional wireline access line. Therefore the VoIP sourcing rule will 
only count those lines that a customer can make simultaneous calls as a 
line for tax purposes.
    As I mentioned previously, what this legislation does not do is 
change the taxability of VoIP services. If VoIP is already taxable in a 
jurisdiction, this legislation only provides certainty in how services 
will be sourced for tax purposes, it does not force a state or local 
government to impose any new taxes. As VoIP service is an Internet 
protocol, it is possible that a VoIP service provider may not have 
nexus in a state where it has customers. If a VoIP service provider 
does not have nexus in a state, this legislation does not provide any 
new authority to the state or local governments in that state to tax 
the service provided by the non-nexus VoIP service provider.
                               conclusion
    Last year, the National Conference of State Legislatures held a 
total of three hearings on the question of assessing taxation on VoIP 
services in which we invited all stakeholders to express their 
concerns. At our annual meeting last summer, NCSL's membership 
unanimously approved a request to Congress for legislation which would 
extend the MTSA sourcing provisions to Voice over Internet Protocol. A 
copy of the NCSL resolution is attached to my testimony.
    The legislation to extend the MTSA provisions to VoIP should be 
considered non-controversial and should move without any opposition. 
For this reason, we also would request that the Voice over Internet 
Protocol sourcing legislation not become a vehicle for non-germane or 
slightly related amendments that would only slow and probably keep the 
legislation from enactment.
    Mr. Chairman, thank you for inviting me to express the concerns of 
the National Conference of State Legislatures with regard to the 
assessment of taxation on VoIP services and our support for legislation 
on a national sourcing rule. We stand ready to work with you and the 
other members of this Subcommittee to ensure quick congressional 
passage of a sourcing rule for VoIP
    Thank you.

                               ATTACHMENT


                               __________

    Mr. Cohen. Thank you for your testimony, Representative 
Montgomery. You must not realize this is the United States 
Congress; we don't have nongermane and irrelevant and 
extraneous types of amendments, something you must be used to 
in Wisconsin.
    Mr. Montgomery. Sir, in addition to my understanding of 
legislative time, we have some of the same things back home, as 
well.
    Mr. Cohen. Thank you, sir.
    Our second witness is John Barnes. Mr. Barnes is director 
of Global Advanced Voice Product Development. He is primarily 
responsible for the development, maintenance, and enhancement 
of Verizon's VoIP suite of services and Contact Center suite of 
services targeted at business customers.
    In this capacity, he is responsible for managing the 
software development and network deployment initiatives 
associated with VoIP and Contact Center services. Additionally, 
he is responsible for the development and maintenance of 
implementation and post-implementation support procedures and 
corresponding systems.
    Before joining Verizon in 2005, Mr. Barnes served as 
director of Voice over IP service product development for MCI, 
where he was primarily responsible for the development and 
enhancement of MCI's VoIP services targeted at business 
customers. He held management positions focusing on the 
development of MCI's VoIP services from 2001 onward.
    Thank you for coming, Mr. Barnes. We will proceed with your 
testimony.

 TESTIMONY OF JOHN L. BARNES, DIRECTOR, PRODUCT MANAGEMENT AND 
                 DEVELOPMENT, VERIZON BUSINESS

    Mr. Barnes. Chairman Cohen, Representative Franks, and the 
Members of the Subcommittee, thank you for this opportunity to 
testify on an issue that will benefit both individual consumers 
and businesses, drive technological innovation, and boost the 
U.S. economy.
    My name is John Barnes. I am the director of product 
development for global advanced voice services, including Voice 
over IP services, at Verizon. My testimony should provide a 
better understanding of Voice over IP services, how they work, 
why the technology is inherently mobile, and why the taxation 
of Voice over IP services requires modernization.
    VoIP stands for ``Voice over Internet Protocol.'' VoIP is 
the conversion of traditional analog and digital voice into 
data packets that are transmitted over an IP-enabled data 
network.
    Historically, voice transmissions originated from analog 
and digital telephones required a dedicated connection to the 
public switched telephone network, or PSTN. This connection was 
fixed to a certain location and dedicated to the customer all 
the way to the PSTN. With VoIP, these voice transmissions are 
converted to IP signaling and media data packets using either 
an IP phone or other conversion device. They are routed over an 
IP-enabled data network, including the public Internet. Unlike 
traditional telephony, when one customer is not using the 
capacity, it can be used by other customers, resulting in 
greater network efficiency.
    Many equipment providers produce a wide variety of IP 
phones and devices. Telecommunications carriers have developed 
services using these devices. Carriers' network architecture 
provide intelligent call routing, instructions on how and where 
to route these calls. And they also provide basic features such 
as caller ID and call waiting. Enhanced features include 
features like simultaneous ring or routing incoming calls to 
multiple devices simultaneously and selective call screening, 
to name a few. Voice over IP technology is highly customizable, 
and many of the features are controlled by the customer without 
any direct intervention from the service provider.
    Most Voice over IP devices have a traditional 10-digit 
telephone number; however, they also have an IP address. This 
is similar to the electronic serial number assigned to wireless 
devices.
    IP addresses are a global phenomena. They have no 
correlation to a physical address or geography. As a result, a 
VoIP device can be moved to any location where it can be 
connected to an IP-enabled data network, including the public 
Internet, and continue to send and receive calls. The network 
recognizes and validates the IP address, but it cannot 
determine the physical location of the device.
    Software and equipment manufacturers continue to enhance 
Voice over IP devices. For example, software can be installed 
on a laptop computer and send and receive VoIP calls. As a 
result, customers can place calls virtually anywhere they can 
carry their laptop and connect it to a wired or WiFi Internet 
connection. I brought an example of one such software device 
that can be used in conjunction with a laptop computer.
    Like wireless services, Voice over IP services are 
typically packaged as a collection of basic and enhanced 
features and local and long-distance calling for 1 monthly 
price. These bundled pricing packages benefit consumers and 
businesses with predictable monthly pricing and the opportunity 
to reduce their monthly cost. However, they complicate the 
ability to correlate specific charges to the physical location 
of a Voice over IP device that may have been mobile sometime 
during the billing period.
    For businesses, Voice over IP services provide several 
benefits. First, they achieve cost savings through converging 
both voice and data services over a common network. They can 
realize operating efficiencies by offering businesses with 
multiple locations the ability to share physical access 
capacity across multiple locations, substantially reducing the 
overall capacity requirement and corresponding costs. This is 
just simply not technically feasible with traditional PSTN 
services.
    In conclusion, the technology has simply outpaced the rules 
that apply to taxation for telephone services. Consumers are 
demanding, and the technology will continue to provide new 
Voice over IP services that are inherently mobile.
    A new system is needed to determine State and local 
taxation for VoIP services, and the good news is such a system 
already exists for wireless devices. Congress enacted the 
Federal Mobile Telecommunications Sourcing Act in 2000. The 
industry and government are in general agreement that Congress 
needs to expand the Federal sourcing rules to include Voice 
over IP services.
    Thank you for the opportunity to testify today, and I would 
be glad to answer any questions you might have.
    [The prepared statement of Mr. Barnes follows:]
                  Prepared Statement of John L. Barnes
    Chairman Cohen, Representative Franks, and members of the 
subcommittee, thank you for this opportunity to testify on an issue 
that will benefit individual consumers, small and large businesses, 
continuing technology innovation, and the economy of the United States.
    My name is John Barnes and I am the Director of Global Advanced 
Voice Product Development for Verizon. My primary responsibility and 
area of focus is the development, maintenance and enhancement of Voice 
over Internet Protocol (VoIP) services that Verizon markets to business 
customers.
    The testimony that follows is intended to cover:

          a definition of VoIP services

          a brief description of how these services technically 
        work

          why the services are inherently mobile

          description of how the services are typically 
        packaged and sold to customers

          why the services are beneficial to businesses and 
        consumers

    This testimony should provide a better understanding of VOiP 
services, the technology and how VOIP is inherently mobile, 
necessitating modernization of the taxation methodology that applies to 
such services.
                           definition of voip
    VoIP stands for Voice over Internet Protocol. Simply put, VoIP is 
the conversion of traditional analog or digital voice into data packets 
that are then transmitted over an IP enabled data network.
    Historically, in the large business context, voice transmissions 
originated from analog telephones or digital telephones connected to a 
PBX or key system. In a PBX or key system, there are multiple internal 
or intercom lines and a much smaller number of trunk lines that allow 
those internal lines to dial out to the public switched telephone 
network (PSTN). This is best demonstrated by the need to dial ``9'' 
from an inside line to reach an outside line. The voice calls are then 
routed to sending and receiving switches on the PSTN in order to be 
delivered to a receiving analog or digital telephone. In the consumer 
context, voice transmissions originate on a telephone at the customer's 
premises and travel over a line that is dedicated to that customer all 
the way to the PSTN. This requires every household to have a dedicated 
line that sits idle much of the time and cannot be used by other 
households.
    With VoIP, these voice transmissions are converted to IP signaling 
and voice media packets using either a VoIP phone or other conversion 
equipment at the customer location and are routed over an IP enabled 
data network. The IP enabled network may be either a private network or 
the public Internet. However, when one customer is not using the 
capacity, the capacity can be utilized by other customers resulting in 
greater efficiency and better utilization of telecommunication lines 
and maximization of resources. If VoIP calls are destined for another 
VoIP device, they may route directly to the receiving device over the 
IP enabled data network where they are converted back to a voice 
transmission using a VoIP phone or another conversion device at the 
terminating customer's location. If the calls are destined for a 
traditional telephone connected to the PSTN, the calls are first routed 
to a device, commonly referred to as a media gateway, where the signal 
is converted back into a digital voice transmission and then routed to 
the PSTN where the call can be terminated on a traditional telephone at 
the terminating customer's location. A media gateway is a device that 
is connected on one side to the PSTN switches and on the other side to 
an IP enabled data network. The function of the media gateway is to 
translate and route voice transmissions between other VoIP devices 
connected to an IP network and traditional telephones connected to the 
PSTN
                  how carrier based voip services work
    Today, many VoIP telephony equipment manufacturers produce a wide 
variety of IP phones, IP enabled PBXs and key systems as well as analog 
or digital VoIP adaptors/gateways all designed to send and receive VoIP 
calls.
    Over the past several years, telecommunications carriers have 
developed and marketed services to customers using these VoIP devices 
available in the marketplace.
    Creation of these services has resulted in the development and 
deployment of carrier network architectures designed to provide 
intelligent call routing instructions and features. Specifically, VoIP 
devices interact with call routing intelligence (also referred to as a 
call control server, an application server or a proxy) to receive 
instructions regarding how and where to route a particular call. In 
addition to providing call routing instructions to VoIP devices, these 
call control servers provide basic and enhanced features to the VoIP 
devices through association to the customers. Basic features would 
include typical capabilities, such as Caller ID or Call Waiting. More 
enhanced features would include capabilities such as simultaneous ring 
(the ability to route an incoming call to multiple devices 
simultaneously) or selective call screening (the ability to screen an 
incoming call and route to the VoIP device or voicemail or other 
routing option based upon criteria). These call control servers are 
highly capable and highly customizable and serve as the foundation to 
support future advanced service options. These features are all part of 
the VoIP service package many of which can be controlled by the 
customer without any interaction needed on the part of the VoIP 
provider. As you know, traditional telephone service requires a 
customer to separately subscribe to each desired feature which must 
then be enabled by the telephone company to work for that particular 
telephone number.
                     why voip is inherently mobile
    For most VoIP services, the customer operated VoIP devices 
described above have a traditional 10 digit North American Numbering 
Plan telephone number assigned to them. However, the uniquely 
identifiable characteristic for a customer operated VoIP device is the 
IP address assigned to that device. This is very similar to the 
electronic serial number (ESN) assigned and used to identify and 
validate wireless devices. This IP address is used by the carrier in 
conjunction with authentication information (user names and passcodes) 
transmitted by the VoIP devices to recognize and authenticate the 
customer operated VoIP devices and to provide services and features to 
those devices. IP addresses are a global phenomenon and have no 
correlation to physical addresses or geography.
    As a result, while a VoIP device may have a traditional telephone 
number assigned to it, the VoIP device can be physically moved to any 
location where it can connect to an IP enabled data network and 
continue to send and receive calls. The call control server does 
recognize the IP address and validates the authentication credentials 
of the VoIP device but cannot determine the physical location of the 
device based upon its IP address.
    This IP address associated with a customer operated VoIP device 
provides a unique type of mobility in that the devices can be connected 
and used to send and receive calls virtually anywhere they can be 
connected to an IP enabled data network including the public Internet. 
As carriers and software and equipment manufacturers continue to 
develop and enhance VoIP devices to become more portable, VoIP services 
will become even more mobile. For example, some equipment and software 
manufacturers and carriers have developed application software that can 
be installed on a laptop personal computer that can be used to send and 
receive VoIP calls just like any physical VoIP device. As a result, 
customers are enabled to place calls virtually anywhere they can carry 
their laptop computer and have wired or WiFi access to an IP network.
    In an effort to accommodate emergency services call routing in the 
presence of this inherent mobility, most service providers have 
developed methods for permitting individual VoIP device end users to 
define a temporary location address for emergency services call routing 
purposes. Based upon temporary address information provided by the end 
user, service providers can validate the temporary address to determine 
whether it is within a service area in which the service provider can 
route calls to an appropriate emergency service provider. If the 
address is not within a served area the VoIP device can be disabled 
from placing calls over the service providers VoIP service until it 
returns to an address for which the service provider can route calls to 
the appropriate emergency service provider.
    The portability and IP address association that characterize these 
devices facilitates the VoIP service mobility that has been described 
above. While these technological changes provide substantial benefits 
to consumers, they also necessitate a reconsideration of the rules 
applicable to voice services that have traditionally been associated 
with the physical service address of the originating telephone device, 
such as taxation.
                how services are packaged for customers
    For both business and individual consumers, VoIP services are 
typically packaged as a collection of basic and enhanced features as 
well as unlimited or defined local and long distance calling services 
for a monthly fixed price.
    For business customers, the monthly pricing model is often extended 
one step further to be applied to simultaneous call capacity instead of 
individual VoIP devices. Specifically business VoIP services are often 
priced using structures similar to the purchase of traditional PSTN 
access capacity like the PBX system mentioned above. As a result, 
customers purchase sufficient simultaneous call capacity to support the 
maximum number of VoIP devices that may be communicating with the PSTN 
at the customer's busiest hour of the day/month and pay a monthly fee 
based on simultaneous call capacity. In an effort to optimize costs, 
the amount of simultaneous call capacity to the PSTN that a customer 
purchases is most often far less than the total number of VoIP devices 
that the customer may have in service, anticipating that not all VoIP 
devices will communicate with the PSTN at the same time. Again, this is 
similar to the intercom lines and the PBX trunk lines that require 
dialing ``9'' but it is much more flexible allowing the capacity to be 
shared by multiple locations and can take advantage of different time 
zones to reduce the total capacity needed.
    While these bundled pricing structures do provide individual 
consumers and businesses with predictable monthly pricing and the 
opportunity to reduce their monthly costs, they do further complicate 
the ability to correlate specific charges for services to the physical 
location of an individual VoIP device that may have been mobile for 
some portion of time during the month.
               voip benefits to businesses and consumers
    Most frequently, the primary benefit to businesses and consumers 
attributed to VoIP services is cost savings associated with combining 
their voice services with their IP network services, reducing the 
overall expense of having to purchase these two services separately.
    While this is certainly a benefit, it only scratches the surface of 
the advantages afforded to businesses and consumers as a result of the 
operating efficiencies and enhanced applications made possible by VoIP 
services.
    For businesses, VoIP services not only provide cost savings through 
converging their voice and data networks into one, because of the 
architectural flexibility of VoIP, but they also enable service 
providers to extend additional operating efficiency and business 
continuity benefits. As referred to above, in the area of operating 
efficiencies, some service providers can now offer the ability for 
business with multiple geographically distributed locations to share 
physical access capacity across the locations within their enterprise, 
substantially reducing their overall capacity costs. This is not 
technically feasible with traditional PSTN based services. 
Additionally, VoIP affords the architectural flexibility to reroute 
traffic real time. So, for example, in the event of a power outage or 
natural disaster a customer can reroute traffic real time from an 
affected area to an unaffected area to maintain business operations. 
And with the mobile nature of VoIP services the business continuity 
benefits are extended even further.
    In addition to cost savings benefits, both businesses and consumers 
benefit from the continually expanding array of hosted basic and 
enhanced features enabled by VoIP services, some of which were 
discussed earlier such as simultaneous ring and selective call 
screening.
    Carrying the concept further, many service providers have expanded 
the scope of their VoIP offerings far beyond traditional voice calling, 
to include a host of unified communication options such as instant 
messaging, short text messaging, and audio conferencing.
    Through industry collaboration between service providers, software 
manufacturers and equipment manufacturers, through leveraging VoIP 
technology, voice calling becomes much more tightly integrated into the 
electronic tools that businesses and consumers use to communicate, 
making the communication options far more flexible and the 
communication itself far richer.
    VoIP services significantly improve and enrich businesses' and 
consumers' voice calling experiences through enhanced features and 
capabilities, architectural flexibility, cost savings and operating 
efficiencies. As a result, demand for these services has grown 
exponentially and is expected to continue to grow to ultimately 
displace traditional PSTN voice services. With this growth, so grows 
the potential and propensity for these services to be increasingly 
mobile. Because of this inherent mobility of VoIP services combined 
with their exponential growth, it necessitates a near term 
reconsideration and modernization of the rules applicable to voice 
services that have traditionally been associated with the physical 
location of the telephone device, such as taxation.
                               conclusion
    Technology has outpaced the old rules that apply to the taxation of 
telephone services. Consumers are going to demand, and technology will 
provide, new VoIP services that are inherently mobile and cannot be 
taxed according to the rules that have applied to landline telephone 
services for many years. The rules need to be modernized so that a fair 
tax system will apply at the state and local levels to these new 
services. The good news is that such a system already exists for 
wireless services--Congress enacted the Federal Mobile 
Telecommunication Sourcing Act (MTSA) in 2000. I believe industry and 
government are in general agreement that Congress needs to expand the 
federal sourcing rules for wireless services to cover taxes applicable 
to VoIP services so that all parties can have certainty in the taxation 
of these services. My colleague from Sprint will explain further how 
this can be achieved by Congress to benefit consumers, businesses, 
technological innovation and state and local governments all at the 
same time.
    Thank you for this opportunity to testify regarding Voice over IP 
services, the relevant technology and the inherently mobile nature 
these services. I would be happy to answer any questions the committee 
may have regarding my testimony.
                               __________

    Mr. Cohen. Thank you for your testimony.
    Our next witness is Mr. Rob Cole, tax research manager for 
Sprint Nextel, a position he has held since 2003.
    He has worked with industry coalitions and elected 
officials on a variety of tax policy issues. Mr. Cole was 
heavily involved with the coalition that worked to seek passage 
of the Internet Tax Nondiscrimination Act in 2003-2004 and the 
extension of the act in 2007. Mr. Cole has also worked with 
several other coalitions involved with telecommunications 
taxation legislation on State and local levels.
    He worked as a tax analyst for Sprint from 2001 to 2003 
before becoming the tax research manager. Prior to coming to 
Sprint, he worked as an attorney and law clerk with BillSoft, 
Inc., a telecommunications taxation software company in Kansas.
    Thank you, Mr. Cole. You are no longer in Kansas. Will you 
begin your testimony?

 TESTIMONY OF ROBERT W. COLE, MANAGER, TAX ACCOUNTING, SPRINT 
                       NEXTEL CORPORATION

    Mr. Cole. Chairman Cohen, Representative Franks, and 
Members of this Subcommittee, thank you for the opportunity to 
testify on an issue of significance to millions of customers, 
businesses, and State and local governments across the United 
States.
    The emergence of new technologies in the telecommunications 
industry has accelerated over the past two decades. Our 
industry is in the opening phases of another technological 
shift in how we provide telecommunications service to our 
customers. This shift involves the transition from fixed-
location, circuit-switched landline services to Voice over IP, 
or VoIP, and nomadic broadband service.
    With opportunity and advancement, however, we are 
confronted with fitting this new and dynamic service into 
existing tax laws. The laws were written for services that had 
a fixed location and phone numbers that identified a specific 
geographic location.
    However, there is a precedent for resolving this issue. The 
wireless providers had similar issues with fitting mobile 
services into existing tax laws prior to the enactment of the 
Federal Mobile Telecommunications Sourcing Act in the year 
2000.
    The Mobile Sourcing Act is one of the great success stories 
in both clarity and cooperation between our industry and State 
and local government. It provides clear and simple guidance for 
the sourcing of wireless telecommunications services for the 
purpose of collecting and remitting sales, telecommunications, 
911, and other taxes and fees. The Mobile Telecommunications 
Sourcing Act mandates that wireless carriers collect taxes and 
source these taxes to the customer's place of primary use. The 
industry is here to advocate the same sourcing rules for VoIP 
services.
    Traditionally, the answer as to which State and local 
jurisdiction has the authority to tax interstate fixed landline 
services is well-settled. The U.S. Supreme Court in 1989 
decided Goldberg v. Sweet and in that decision held that the 
location of a call would determine the taxability of that call. 
And that rule is basically the two-out-of-three rule. If two 
out of three of the following points of a call--origination, 
termination, and the service address--are in a single 
jurisdiction, then that jurisdiction has the sole legal 
authority to tax.
    However, you can see where this would be a problem with 
VoIP services. Goldberg is simply inapplicable for VoIP. First, 
it is not possible for VoIP providers to comply with Goldberg 
because VoIP providers may not have geographic information as 
to the location of the call's origination or termination.
    Additionally, VoIP customers have the option to choose an 
out-of-area telephone number. This could be done, for example, 
if you live in Washington, D.C., but your family is in 
Tennessee. You could get a Tennessee telephone number, and your 
family could call you without incurring long-distance charges.
    Additionally, as we have heard from Mr. Barnes, many VoIP 
services are nomadic or mobile in nature; they can be moved 
around. And they can be originated anywhere there is a 
broadband or high-speed Internet connection.
    Additionally, VoIP services are commonly sold as a flat 
monthly charge for the service rather than as a call-by-call 
basis. And, finally, there is no call detail record generated. 
Again, we have no identifying information other than an IP 
address for many VoIP calls.
    These are very similar to the issues that wireless faced 
before the enactment of the Mobile Sourcing Act. Under the 
Mobile Sourcing Act, a jurisdiction designated by the 
customer's place of primary use would have the sole authority 
to levy taxes and fees. And we would advocate this be extended 
to VoIP services. Thus, if a VoIP user has a Washington, D.C., 
place of primary use, only D.C. Has the authority to tax that 
call. If a tax jurisdiction determines that place of primary 
use as applied by the customer is not correct, the act outlines 
a procedure for notifying the VoIP provider and for the VoIP 
provider to make those changes on an ongoing basis.
    The existing Mobile Sourcing Act has been successful in 
providing clarity to the wireless service providers, to 
customers, and to taxing jurisdictions. Expanding that act to 
include VoIP is sure to be just as successful.
    By allowing only the jurisdiction identified by the 
customer as his or her place of primary use to tax VoIP 
services, multiple or ``nowhere'' taxation scenarios would be 
avoided. This protects State and local governments and reduces 
disputes regarding tax situs. Furthermore, the act protects 
consumers by ensuring that taxes based on lines of service, 
such as flat-rate 911 fees, are only imposed on the number of 
lines that provide simultaneous outward access to the public 
switched telephone network.
    Our industry is facing an important deadline in this issue, 
as billing systems need to be created or modified in order to 
correctly bill and tax on VoIP services. VoIP technology will 
become exponentially more prevalent in the coming years. In 
order to have clarity for State and local governments and VoIP 
service providers and fairness and simplicity for consumers and 
businesses, VoIP services should be sourced according to the 
user's place of primary use. The simplest and most efficient 
way to accomplish this is to expand the scope of the existing 
Mobile Sourcing Act to include VoIP service.
    Again, Mr. Chairman, thanks for the opportunity to testify. 
And I am happy to answer any questions that you or Members of 
the Subcommittee might have.
    [The prepared statement of Mr. Cole follows:]
                  Prepared Statement of Robert W. Cole
    Chairman Cohen, Representative Franks, and members of this 
subcommittee, thank you for this opportunity to testify on an issue of 
significance to millions of consumers, businesses, and state and local 
governments across the United States. The emergence of new technologies 
in the telecommunications industry has accelerated over the past two 
decades. Our industry is in the opening phases of another technological 
shift in how we provide telecommunications service to our customers. 
The technological shift involves the transition from traditional fixed 
location, circuit-switched landline service to voice over internet 
protocol or VoIP that is mobile.
    VoIP technology allows providers to use the Internet and private 
Internet Protocol networks to provide voice telephone services to our 
customers. This technology is more efficient for providers because 
telecommunications capacity no longer requires a dedicated line from a 
household to the public switched telephone networks, while allowing 
customers greater flexibility and convenience. With opportunities and 
advancement, however, we are confronted with fitting this new and 
dynamic service into existing tax laws. The tax laws were written for 
services that had a fixed service location and phone numbers that 
identified a designated geographic location. The wireless providers had 
similar issues with fitting mobile services into existing tax laws 
prior to enactment of the Federal Mobile Telecommunication Sourcing Act 
or MTSA in 2000. The MTSA is one of the great success stories in both 
clarity and cooperation between our industry and state and local 
governments. The MTSA (4 USC Sections 116-126) provides clear and 
simple guidance for the sourcing of wireless telecommunications 
services for purposes of taxation. The MTSA ``sources'' wireless 
telecommunications services to the customer's place of primary use. The 
industry is here to advocate the same sourcing rule for VoIP services
    Traditionally, the answer to the question of which state and local 
jurisdiction has the authority to tax interstate telephone service is 
well settled. The U.S. Supreme Court decided in Goldberg v. Sweet, 488 
US 252 (1989), that the taxing location of a call should follow what 
the industry refers to as the ``two out of three rule''. If two out of 
three of the following points for a call, origination or termination 
and service address, are in a single state, then that state has the 
sole legal authority to impose tax on the call. For local telephone 
service that is static, the service address is always the taxable 
location because the service always originates from the service 
address. Goldberg and service address provide a clear rule for 
telecommunications companies charged with the collection of various 
state and local sales, telecommunications, emergency 911, and other 
taxes as to which state and local taxing jurisdictions have the 
authority to tax. Furthermore, it provides these state and local 
governments with assurances regarding collection and remittance of this 
important revenue stream.
    Goldberg and service address, do not, however, work for VoIP 
service. First, it is not possible for VoIP providers to comply with 
Goldberg and service address for a service that is not always provided 
at a fixed location and for which the telephone number may or may not 
have a geographic connection to the actual location where the VoIP 
service originates. VoIP customers generally have the option to choose 
an out of area telephone number. This may done, for example, if you 
live in DC but your family members live in TN. If you purchase VoIP in 
DC with a TN telephone number, your family members can call you without 
incurring long-distance charges. Many VoIP services are ``nomadic'' or 
mobile in nature, in other words, they are services that that can be 
originated anywhere that there is a broadband or high speed Internet 
connection. There is no fixed origination, termination, or service 
address. Additionally, VoIP is most commonly sold as a flat monthly 
charge for the service rather than on a call-by-call basis. Finally, 
most VoIP calls do not generate a ``call detail record'' that has any 
relation to the geographic location of the customer making the call. 
Many times the only information available to the telephone provider is 
an IP address or if a telephone number is provided, it may or may not 
relate to the geography of the caller. When no geographic location 
information is contained in the call detail record, the providers are 
unable to apply the Goldberg rule. Again, the VoIP sourcing issues are 
very similar to the wireless sourcing issues prior to the MTSA; 
however, VoIP providers have even less geographic location information 
than the wireless providers.
    The issue of VoIP sourcing is further complicated by E911 routing 
database requirements. Currently, federal law requires VoIP providers 
to obtain from customers their location for purposes of identification 
of the correct E911 emergency communications centers. For example, a 
VoIP customer here in Washington, D.C. would provide his or her 
physical location to his or her VoIP provider, who in turn provides 
that location to the local public safety answering point for purposes 
of dispatching first responders in the event of an emergency. However, 
if that individual takes his or her nomadic VoIP device on a trip to 
Memphis, Tennessee, the individual is required to notify his or her 
provider of the new location so that it can be provided to the local 
public safety answering point for dispatch of responders in the event 
of an emergency. This makes perfect sense; however, it raises an 
interesting issue for tax purposes. Who has the authority to levy tax 
on the calls? Washington, D.C.? Memphis, Tennessee? Furthermore, the 
E911 location systems don't normally have a connection to the billing 
system that actually calculates the taxes. Although a provider may have 
a physical location for E911 purposes during the month, that 
information is not normally available in the billing systems without 
substantial programming. Finally, when the locations change throughout 
the month, it is not practical or feasible to prorate taxes or fixed 
line charges for 5 days in TN and 20 days in DC and 5 days in NY. 
Certainty is needed with respect to what location to use for purposes 
of calculating taxes, fees and charges.
    Under the Streamlined Sales Tax Agreement that has been adopted by 
approximately 22 states, the place of primary use would apply to VoIP 
services but not all states have adopted the SSTP and the SSTP does 
apply to other taxes, fees and charges that are not sales taxes.
    Under the VoIP Sourcing Act, the jurisdiction designated by the 
customer as their PPU, and applied by the VoIP provider in good faith, 
has the sole authority to levy taxes, fees or charges on amounts billed 
for VoIP services. Thus, if a user has a Washington, D.C. place of 
primary use, Washington, D.C. has the authority to levy tax on VoIP 
service charges to that user. This applies whether the user is making a 
call across the street in Washington, D.C. or is making a call while 
traveling in Tennessee, Arizona, or Kansas. As long as the service 
providers use an electronic database developed by a state or a 
designated database provider, enhanced zip code and applying due 
diligence or an alternate jurisdiction designated method to an accuracy 
level of 95%, the service providers are held harmless from retroactive 
taxes, fees or charges. If a tax jurisdiction determines a place of 
primary use is not correct, the Act outlines a procedure for notifying 
the VoIP provider and for the VoIP provider to make appropriate changes 
prospectively. The existing MTSA has been successful at providing 
clarity to the wireless service providers, the customers and the taxing 
jurisdictions. Expanding to MTSA to VoIP is sure to be just as 
successful.
    By allowing only the jurisdiction identified by the customer as his 
or her place of primary use (PPU) to tax VoIP services, multiple 
taxation or ``nowhere'' taxation scenarios would be avoided. This 
protects state and local governments and reduces disputes regarding the 
proper tax sourcing location. This Act does not determine the 
taxability of VoIP services; it only identifies which tax jurisdiction 
can tax VoIP services if their law subjects VoIP services to tax. 
Furthermore, the Act protects consumers by ensuring that taxes based 
upon ``lines'' of service, such as flat rate taxes to fund E911 
service, are only imposed upon the number of lines that provide 
simultaneous inbound or outbound access to the public switched 
telephone network.
    The VoIP industry is facing an important deadline on this issue as 
billing systems have to be modified and developed and certainty is 
needed in order to program the proper tax sourcing functionality. VoIP 
technology will become exponentially more prevalent in the coming 
years. In order to have clarity for state and local governments and 
VoIP service providers, and fairness and simplicity for consumers and 
businesses, VoIP services should be sourced according to the user's 
place of primary use in every state. The simplest and most efficient 
way to accomplish this is to expand the scope of the existing MTSA to 
include VoIP services as has been done with the VoIP Sourcing Act.
    Mister Chairman and members of the subcommittee, thank you again 
for the opportunity to testify on this important subject, and I 
respectfully urge you to pass legislation that would extend the mobile 
telecommunications sourcing act to include VoIP services.
                               __________

    Mr. Cohen. Thank you, Mr. Cole.
    The final witness is Mr. Jim Eads, executive director of 
the Federation of Tax Administrators starting in September 
2008, capping a career of over 30 years in State tax work. He 
leads the Federation of Tax Administrators staff in D.C. and 
around the country as they seek both to serve and represent the 
tax agencies of the 50 United States, the District of Columbia, 
and New York City.
    Prior to accepting this position, he was director of public 
affairs for Ryan, a major tax consulting company where he 
represented Ryan and its clients regarding State tax policy and 
legislation across the country. He has also served as a partner 
in the National Tax Department of Ernst & Young; a senior 
attorney and government relations counsel with AT&T; senior tax 
attorney with Sears, Roebuck; and chief counsel of the Revenue 
Division of the Arkansas Department of Finance and 
Administration. He is a past president of the National Tax 
Association and former chairman of the Electronic Commerce Task 
Force of the Council on State Taxation.
    Thank you, Mr. Eads. Will you please proceed?

TESTIMONY OF JAMES R. EADS, JR., EXECUTIVE DIRECTOR, FEDERATION 
                     OF TAX ADMINISTRATORS

    Mr. Eads. Thank you, Mr. Chairman and Members of the 
Committee. I am pleased to be here today and to speak to you 
about this issue.
    I find myself in a unique position, that I am able to 
associate myself with some of the remarks of all the preceding 
witnesses. I think all the preceding witnesses said that the 
Mobile Telecommunications Sourcing Act was the product of a lot 
of negotiation and discussion between government and industry 
some 9 years ago and has resulted in beneficial effects, we 
think, both for industry and government as it has been 
implemented over the course of the years.
    I am not here to obstruct in any way the discussion of 
these issues. The Federation of Tax Administrators does 
believe, however, that, because of the way that the Mobile 
Telecommunications Sourcing Act came into being and because it 
has worked so well, that applying its principles to Voice over 
Internet Protocol, while it may indeed be meritorious, needs to 
be done without making any substantive changes to the existing 
Mobile Telecommunications Sourcing Act.
    Again, because of the way it was negotiated, because of the 
cooperation that existed then and, I think, continues to exist 
between the industry and government, what we would urge is that 
there be some continuing dialogue, working with your staff, Mr. 
Chairman, to try to make sure that nothing is changed in the 
Mobile Telecommunications Sourcing Act that isn't absolutely 
necessary to be changed to supply its principles to Voice over 
Internet Protocol.
    I have submitted written testimony, and I would be glad to 
answer your questions if you have any.
    [The prepared statement of Mr. Eads follows:]
                Prepared Statement of James R. Eads, Jr.
    Chairman Cohen, Ranking Member Franks and Members of the 
Subcommittee:
    The Federation of Tax Administrators (FTA) is an association of the 
principal tax and revenue collecting agencies in each of the fifty 
states, the District of Columbia and New York City. Its purpose is to 
improve the techniques and standards of tax administration through a 
program of research, information exchange, training, and representing 
the interests of state tax administrators before the Congress and the 
Executive Branch.
    The Federation of Tax Administrators appreciates this opportunity 
to appear before you to discuss possible changes to Title 4 of the 
United States Code that would apply sourcing requirements for State and 
Local Taxation to Voice over Internet Protocol Services. The Federation 
is receptive to some of the concerns the industry has raised regarding 
this issue and hopes to be able to find a way to alleviate those 
concerns before any legislation is considered for action. However, we 
are not supportive of some of the suggestions being advocated.
    Our concerns about possible legislation in this area are two-fold. 
First, those advocating the application of the principles of the Mobile 
Telecommunications Sourcing Act to Voice over Internet Protocol 
services are proposing unnecessary changes to that Act, a law that was 
enacted a relatively short time ago and that represented a 
collaboration of parties with multiple interests. The Federation of Tax 
Administrators cannot support changing settled law when the changes do 
not appear to relate to Voice over Internet Protocol Services, which 
was our understanding to be the issue to be addressed. Even if a 
provision relates to VoIP, it should also relate to sourcing only. 
Second, FTA opposes restrictions on the ability of states to enact and 
administer their own taxes in ways that suit their unique needs without 
a demonstrated necessity for doing so, as is being proposed by 
industry.
    If Congress legislates in this area, the public's interests as well 
as those of the states and industry must be balanced. A primary 
consideration is to maintain the administrability of the current 
sourcing rules. Settled principles of law upon which individuals, 
businesses and the states have come to rely should not be changed 
unless circumstances strongly require such change. Many of the 
proposals being advocated would unsettle the law without reason and 
lead to wholly unnecessary interpretive conflicts that can be 
exploited. This is the kind of intrusion into state authority and the 
disruption of state revenue systems, particularly during this time of 
severe economic stress that Congress should reject.
                 concerns with the proposed legislation
    In 2000 Congress approved and President Clinton signed into law the 
Mobile Telecommunications Sourcing Act (P.L. 106-252). The Act was 
intended to address, for transactional tax purposes only, the problem 
of determining the situs of a wireless telephone call, which had proven 
to be difficult under normal standards of sourcing transactions. The 
Act addresses this problem by sourcing all wireless calls and mobile 
telecommunications services to the ``place of primary use'' (PPU), 
which will essentially be the customer's residence or business address. 
Only the state and/or sub-state taxing jurisdictions encompassing the 
PPU could tax the calls or service.
    The Act provides a mechanism for assigning PPUs to taxing 
jurisdictions. It further provides, in Sections 119(c) and 120(a), that 
a wireless carrier will be held harmless against errors that might 
occur in such assignments if one of the two designated methods of 
assigning the PPU is used.
    The FTA, the industry and other interested parties worked to 
establish a compromise law that, if it did not give everyone what they 
wanted, at least achieved a solution that is workable and generally 
acceptable. Some of the ideas for change being advocated do not relate 
to Voice over Internet Protocol (VoIP) Services or even appear to 
address sourcing. The rationale for these changes is not apparent and 
represents a departure from the much discussed and ultimate 
accommodation among competing interests that resulted in that 
legislation being passed in 2000. These changes represent an effort to 
rewrite what the states view as relatively useful and settled 
principles.
    Some examples of proposed modifications to settled law that do not 
relate to issues of VoIP or sourcing as enacted in the MTSA are:

        1.  An expansion of the charges from which the providers would 
        be held harmless from the current law's ``any tax, charge, or 
        fee liability in such State,'' to now include ``any 
        disallowance, claim, liability, including but not limited to 
        taxes, charges, fees, penalties or interest that otherwise 
        would be due or could be asserted'' (with ``in such State'' 
        deleted). The rationale for this change is not apparent. If it 
        is necessary it would appear that the change enlarges the scope 
        of matters from which service providers would be held harmless, 
        yet there is no evidence of which FTA is aware to justify this 
        change. It would open the door to interpretative questions as 
        to what is covered and lead to originally unintended tax 
        avoidance at worst and customer, industry and governmental 
        confusion at best. For example, 911 fees and other charges 
        might be ``deemed'' to be charges that are to be sourced to the 
        principal place of use, when that is not the current law under 
        MTSA

        2.  A provision apparently unrelated to sourcing that would 
        impose a limit on taxation of multiple VoIP service lines, in 
        that it provides that there is a limitation on certain fixed 
        charges. It provides that to the extent a tax, charge or fee 
        levied by a taxing jurisdiction is a fixed charge per VoIP 
        service line, it shall be levied on no more than the number of 
        VoIP service lines on an account that are capable of 
        simultaneous unrestricted outward dialing. The necessity of 
        such a restriction on taxing jurisdictions is not clear, 
        especially in view of the fact that the existing MTSA law 
        provides that it does not modify, impair, supersede, or 
        authorize the modification, impairment, or supersession of the 
        law of any taxing jurisdiction pertaining to taxation except as 
        expressly provided in sections 116 through 126 of this title.

        3.  A change to the existing MTSA to apply to state Universal 
        Service Fund payments is also proposed. This changes bears no 
        relationship to VoIP and it is unclear why it is a sourcing 
        issue. Even if there is some relationship, it is a change to 
        existing law that was the product of compromise and agreement 
        in 2000. The application of MTSA to revenues other than those 
        which were agreed upon, without some credible reason that can 
        be considered by the parties who negotiated in good faith to 
        enact MTSA, will lead to misunderstanding and could lead to 
        litigation. If the entire MTSA is to be opened up, state tax 
        administrators could have some changes they might propose.

    Absent justification for changing P.L. 106-252 in ways unrelated to 
Voice over Internet Protocol or addressing issues to taxation unrelated 
to sourcing, the Federation of Tax Administrators believes that these 
changes are unjustifiable policy options and should not be considered 
for enactment. Unsettling current law without a compelling reason that 
can be understood by the courts will lead to litigation which could 
consume years.
                         state tax sovereignty
    Many of the changes sought by industry are an intrusion into state 
tax sovereignty. If enacted, that would arbitrarily circumscribe the 
ability of the states to structure their taxes in the most efficient 
and appropriate ways based on the considerations and action of their 
elected representatives and chief executives. While some might consider 
the concept of state tax sovereignty to be esoteric, it is fundamental 
to our system of federalism and to the operation of states. 
Determination of their fiscal destiny is a core concept of the 
existence of the states. Within their sphere of responsibility, states 
are able to define the level of government services they desire. 
Further, they are, within the bounds of the United States Constitution, 
free to tax the activities occurring within the state to finance those 
services. The two responsibilities go hand in hand.
    The importance of state tax authority to state sovereignty and our 
federal system virtually requires that Congress tread lightly in 
limiting the authority of the states and do so only on a showing of 
compelling need and only after balancing an array of significant and 
appropriate interests.
           federation of tax administrators policy statement
    The FTA has addressed this specific issue of telecommunications tax 
policy as long ago as 2006, when a resolution was adopted by the 
membership at its annual meeting that says in pertinent part:
    ``WHEREAS, many states have specifically included VOIP, and have 
included other electronic products and services in their tax bases, and
    WHEREAS, taxation of telecommunications and related products and 
services provides a critical pillar in the foundation in the state 
fiscal systems, therefore let it be
    Resolved, that as Congress considers updating federal 
telecommunications laws, it refrain from adopting provisions that limit 
or abrogate states' rights to apply their taxes to Voice Over Internet 
Protocol and other electronic products and services in a rational and 
evenhanded manner, and be it further
    Resolved, that given the dramatic changes in the nature of the 
communications services available to U.S. consumers and in the entities 
and manner by which such services are provided, states should examine 
their taxes on communications services and electronic products and 
services to ensure that they are applied in a rational and evenhanded 
manner.'' (Resolution 24, adopted June 7, 2006).
                               conclusion
    The issues addressed by this proposal are complex and in need of 
thoughtful consideration by all of the parties with an interest in 
making tax administration more straightforward and compliance simpler. 
That being said, those complex issues deserve careful consideration so 
that the solution does not become more complex than the problems and 
result in tax economic and administration turmoil.
                               __________

    Mr. Cohen. Thank you, sir. I appreciate that, and I 
appreciate your testimony.
    At this time, we have questions.
    And I would like to ask first, Mr. Barnes, is that the kind 
of device that Osama bin Laden has?
    Mr. Barnes. To be honest with you, I can't tell you what 
type of device----
    Mr. Cohen. But he could use that. That is the kind of thing 
you could kind of go and--you said nomadic-type thing. I mean, 
he could take that and you couldn't find him, could you?
    Mr. Barnes. It is true that nomadic devices do provide 
extensive mobility advantages. But all of those services have 
to be connected to a Voice over IP service provider's service 
that comes along with order entry information and customer 
authentication credentials that help define who the customer is 
and what use they will put the services to.
    Mr. Cohen. So when you get that type of equipment, you can 
hide it from everybody but the taxman, is that right?
    Mr. Barnes. Or the service provider.
    Mr. Cohen. Or the service provider. Okay.
    Mr. Cole, you indicated in your written statement that the 
industry is facing an important deadline on this issue, as 
billing statements have to be modified and developments. When 
is that deadline and what is the deadline?
    Mr. Cole. Well, sir, it is coming very close.
    Because this is the future of landline telephone service, 
in my opinion--and I think Mr. Barnes would concur with that--I 
think we, as an industry, are moving many of our large 
enterprise customers toward this type of service. And as you 
have necessary allocation of dollars for system development, it 
is important that we make a decision on this now--and when I 
say ``now,'' I think immediately--in order to make sure that, 
one, there is no revenue loss to State and local governments; 
two, that we stay out of the courts, States fighting over who 
has the right to tax; and three, in fairness to our customers.
    You know, I deal with questions from customers, and very 
rarely do I get questions about tax situs, and when I do, it is 
very easy for me just to point to the Mobile Sourcing Act, and 
the customers are satisfied. It is a great piece of 
legislation. It is clear, it is concise. It says exactly, you 
know, how the provider is to bill and remit taxes and determine 
the situs for those taxes.
    So, in order to have that same level of clarity and 
certainty for what is really an exponentially growing industry, 
the answer would have to be sooner rather than later.
    Mr. Cohen. Thank you.
    Representative Montgomery, you have suggested that the 
Mobile Telecommunications Sourcing Act would be a model for 
legislation to provide the clarity that State and local 
governments need to assess and collect taxes on this type of 
Voice over Internet Protocol.
    Before basing any legislation on a past act, we need to 
know whether and how well that act has held up in court 
challenges. Do you know if there have been court challenges to 
the MTSA? And, if so, what was the basis of the action?
    Mr. Montgomery. I am going to defer to my lawyer, but, as 
far as I know, there has not been--again, in fact, it has 
brought better clarity and order to what could be a very 
confusing situation. And so using, again, that model of clarity 
to both the provider, the consumer, and to governments I think 
is the major benefit from it. And so if there have not been 
challenges, I would, again, for the sake that it has brought 
that clarity, would use it as a model.
    Mr. Cohen. I got you. What is the Senator's name there from 
the capital, that has been there forever? Fred, is it Reichert?
    Mr. Montgomery. Risser.
    Mr. Cohen. Is he still there?
    Mr. Montgomery. He is. He kind of got crossways of his 
leader and got removed as the longest-serving member in history 
on the Building Commission, but they reinstated him after there 
was a bit of an uproar. But he is a great colleague, and he and 
I share ties.
    Mr. Cohen. Well, he is a gentleman. Thank you. Remember me 
to him, if you would.
    Mr. Eads, in your written testimony, you expressed concerns 
about three proposed modifications to the MTSA, which you say 
go beyond the scope of merely applying sourcing principles to 
VoIP. Would you elaborate on those three particular proposed 
modifications? And who is proposing them, and what are your 
concerns?
    Mr. Eads. Yes, sir, Mr. Chairman, I would be glad to. I 
have used those in my written testimony as examples. Obviously, 
we haven't seen any final version of a bill. We have simply 
seen versions of the bill as it has evolved and may be 
introduced.
    Changing the language of the MTSA relating to the hold-
harmless provisions for the industry seems to us to be of some 
concern, inasmuch as we are not sure why that change would have 
any applicability to making those MTSA principles applicable to 
Voice over Internet Protocol services. The provision relating 
to multiple VoIP lines may, in fact, be benign. It is just 
simply an issue that we believe needs some further discussion. 
And, finally, with regard to the Universal Service Fund, there 
is some disparity of treatment of that issue by the States, 
although I think the vast majority of the States do it in a way 
that this bill contemplates.
    All we are suggesting is that these are not fall-on-
    your-sword, undermining-the-foundation-of-the-republic 
issues. We believe that they are simply changes to MTSA that 
don't appear to be directly related to VoIP, and therefore we 
would like to have some further explanation of them, working 
with your staff and with the proponents.
    Mr. Cohen. Staff has been so instructed and will do that. 
Thank you, sir.
    Mr. Scott, the gentleman from Virginia who has a new 
basketball coach, one of his choosing I think, you are 
recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    Let me just get all the witnesses just to give us an idea 
of what is going on now, what the present law is and where you 
are taxed. If you buy a phone in Maryland, you use your phone 
in Washington, DC, you live in Virginia and your best friend 
lives in New York, so you have a 212 area code. Now, on cell 
phones, where do you get taxed today with a cell phone? Where 
would you get taxed today with VoIP? And if a bill passes, what 
would change?
    Mr. Cole. Okay, you may have to run by those locations.
    Mr. Scott. Okay, you buy your phone in Maryland. You use 
your phone in D.C. You live in Virginia. Your best friend lives 
in New York City, so that is where you are calling back and 
forth.
    Mr. Cole. What we would do as a provider, under the Federal 
Mobile Sourcing Act, with mobile telecommunication services, 
not VoIP services, would be to rely on the place of primary use 
that you provide me. What the language of that Mobile Sourcing 
Act says is that we can default to your home address. So, if I 
kept track of this correctly, that would be in Virginia. You 
live in Virginia, correct?
    Mr. Scott. Right.
    Mr. Cole. Okay. So, under the Mobile Sourcing Act, and if 
that was the primary place of use that you provided----
    Mr. Scott. Well, if I am using the phone and if all 
outgoing calls are coming out of D.C., since that is where I 
work and that is where I am during the day----
    Mr. Cole. Again, that would have to be--if you provided us 
with a D.C. Business address----
    Mr. Scott. No, I gave you my home address as my address, 
but I use the phone in D.C.
    Mr. Cole. If you provided your home address, then it would 
be Virginia. Under the Mobile Sourcing Act, your home street 
address is--that jurisdiction that encompasses that has the 
sole authority to tax those calls.
    Now, moving along in your question, for VoIP right now, I 
think you have illustrated the nature of the question: Which 
State does get to tax that? We don't know. Right now we simply 
do not know. If the Mobile Sourcing Act were to be expanded to 
include VoIP, then we would rely on that same place of use that 
you provide, your home address, and that would be Virginia.
    Mr. Scott. Now, I provided the home address. Is there a 
little box you can check off or a little blank you can fill in 
where the primary use is?
    Mr. Cole. Actually, I can't speak for other providers, but 
that is something that we require our customer service reps 
when we set up an account, we ask them specifically, ``What is 
your place of primary use,'' because that is required by 
Federal law.
    Mr. Scott. Okay. And if I find out that North Carolina 
doesn't have a tax, can I say Raleigh?
    Mr. Cole. You can find that out, but it would be a 
violation of Federal law.
    Now, the corrective measure in the Mobile Sourcing Act is 
that, if Virginia comes in on audit and determines that is 
incorrect, that you, the customer, have been giving us false 
information, here is the beauty of the Mobile Sourcing Act: We 
are not held harmless, going backwards, because it is not our 
fault, we as the provider. And the State is able to say, going 
forward, ``Hey, this is incorrect. This place of primary use is 
really in Virginia. You need to bill and remit these taxes in 
accordance with a Virginia place of primary use.''
    And that is why I think the Mobile Sourcing Act has been 
such a great success. It is a win-win situation for all three 
of the parties. And, frankly, I am not aware of any issues, in 
my time at Sprint, where a customer has attempted to game the 
system in that fashion.
    Mr. Scott. Well, you have said primary use. If I only use 
the phone in D.C. And all of the calls that you have a list of 
start off in D.C. And none of them are in Virginia because, by 
the time I get back home, it is too late to be using the phone 
in Virginia, you still tax at my home address?
    Mr. Cole. Right. And there are two reasons for that. One, 
it is the place of primary use that you provided us. And, two, 
the default under the Mobile Sourcing Act--and this is also 
consistent with Streamlined--is your home address--the 
Streamlined Sales Tax Act.
    Mr. Scott. But with cell phones, you have a record of where 
the calls are coming from. Do you ever check?
    Mr. Cole. No, because we are not required to under Federal 
law. Under the Mobile Sourcing Act, we are not required to do 
that. And the reason why is to prevent D.C. And Virginia from 
fighting over those tax revenues. This provides Virginia with a 
clear mandate that they have the authority, and they alone, to 
tax those calls.
    Mr. Scott. And if I were to move to Maryland, move my home 
address to Maryland, then the taxing would change?
    Mr. Cole. Correct. You would have to provide----
    Mr. Scott. So the only thing that seems to matter is the 
home address.
    Mr. Cole. That is correct. That should be the place of 
primary use provided by the customer.
    Mr. Scott. Whether it is the primary use or not.
    Mr. Cole. Correct.
    Mr. Scott. Can you argue that your primary use is in a 
lower tax jurisdiction?
    Mr. Cole. You could argue that, but then, again, if we 
get----
    Mr. Scott. Well, I mean, if D.C. has a lower tax than 
Virginia and I am actually using it in D.C., can I argue that 
the primary use is D.C.?
    Mr. Cole. Not if you didn't present that as your place of 
primary use.
    Mr. Scott. When I bought the phone.
    Mr. Cole. Right.
    Mr. Scott. And if the primary use location changes, what 
happens then?
    Mr. Cole. Then it is the customer's responsibility to 
provide that information to the telecom provider.
    Mr. Scott. Okay. Thank you.
    Mr. Cole. And, again, this has been the settled law for 
almost 8 1/2 years now. And I think it has worked very well for 
both the State and local governments and for industry and, 
frankly, for consumers. I have gotten a handful of questions 
about this sort of thing from customers, and it is very easy to 
say, ``Hey, you know, this is why you are getting these taxes, 
it is because you provided this place of primary use,'' and 
then they understand that no one is trying to play games, no 
States are trying to fight over these taxes, the industry is 
doing it as required by law.
    Mr. Scott. What is the complication of expanding it to 
include the VoIP?
    Mr. Cole. I don't see a complication. I think that is the 
answer to the problem where, going back to your scenario with a 
VoIP device, a nomadic VoIP device like this here, you have 
those very same questions, you know, purchased in Maryland, 
used in D.C., home address in Virginia, there is no clear 
answer in Federal law or State law as to where to tax that 
call. And so that is why----
    Mr. Scott. The computer could be in D.C.
    Mr. Montgomery. And this is one of many issues that we are 
dealing with at the State. In Wisconsin, we just enacted the 
streamlined sales tax, where if you purchase something in 
Wisconsin or you purchase it on the Internet, we are able to 
collect the tax in another State. And part of that is getting 
the verbiage of whatever it is you are purchasing down to 
something discernable. So if you buy a bottle of water or a 
bottle of juice, it is, in essence, taxed the same way.
    So this is just another area where we are dealing with a 
new generation of telecommunications that we are trying to make 
it, again, incumbent on the customer to say, ``I live in 
Virginia, but almost all my calls are in Maryland,'' and so you 
would then declare Maryland as your primary point. But if you 
declare your home as Virginia, they can come back later and if 
they see 99.9 percent of your calls are actually in Maryland, 
then Maryland would have a case to say, ``Well, no, your 
primary point of use would be Maryland.''
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Cohen. Thank you, Mr. Scott.
    Mr. King, you are recognized. And if you have questions of 
Mr. Montgomery, I would ask that you try to ask them first, so 
he can take off to the airport. He has a plane to catch.
    Mr. King. Thank you, Mr. Chairman. I would be happy to 
accommodate that.
    Mr. Montgomery, it just raises a little a curiosity in me, 
having just passed the streamlined State sales tax that you 
mentioned, how many States have conformed with the language 
that Wisconsin has approved?
    Mr. Montgomery. I believe 28 now have. And, again, one of 
the misconceptions of streamlined sales tax is that it has to 
be a revenue enhancer. In fact, you can implement it as part of 
your overall tax policy without having to raise taxes by 
implementing it.
    Mr. King. ``Revenue enhancer.'' How would you then, 
Representative Montgomery, how would you deal with it in 
Wisconsin--having just been through this debate and having a 
real feel for trying to broaden and level these sales taxes out 
so that there are fewer exemptions and that you can conform the 
exemptions--how would you then react as a State legislature if 
we were to do the prudent thing here in this Congress and 
eliminate the IRS, the Federal income tax code, and impose a 
national consumption tax to supplement your State sales tax?
    Mr. Montgomery. Yeah, and, again, it is a very fine line 
for us to--again, when you are advocating for simplicity and 
then again having Federal preemption, as always I will stand by 
the States and ask that you allow us to work in conjunction 
with each other to determine that.
    But, again, as I go down my Main Street and I talk to my 
retailers of computers and everything else, they are 
automatically, in a very competitive market, put at a 5 percent 
disadvantage if the consumer chooses to use the Internet.
    So there are a number of different issues that come into 
this. But, overall, I would say that, again, the States have 
done a great job of working together through NCSL to address 
those issues.
    Mr. King. And have you worked with the American Legislative 
Exchange Council, as well, or what is their level of dialogue 
in this discussion?
    Mr. Montgomery. I apologize, I could not hear the group?
    Mr. King. The ALEC, the American Legislative Exchange 
Council?
    Mr. Montgomery. Yes, you know, and I have, in fact, because 
I am a member of that organization, as well. And they take a 
different approach, again, or a little bit more on wanting each 
individual State. Again, there is a balance.
    And, again, when I talk to people at ALEC, again, you can 
implement this without raising people's taxes. I won't use the 
``revenue enhancement,'' but you can implement this and, again, 
represent your people on Main Street that are having to compete 
on the Internet against providers.
    I have a provider of Sony computers in my district. He is a 
very big supporter of University of Wisconsin-Green Bay. He 
regularly loses out on bids to people that don't even live in 
our State, let alone pay any kind of property tax or support to 
the university.
    Mr. King. I agree with you, Representative Montgomery, that 
it is a disadvantage to our Main Street businesses that have a 
disproportionate sales tax that might be sold over the Internet 
as part of the motive for this.
    It is your hope, then, that the rest of the States will 
follow and conform to the legislation that you have passed in 
Wisconsin and the 27 other States?
    Mr. Montgomery. Well, again, I would hope that they each 
look at it in such a way that--I did not implement it in my 
State. In fact, I voted against it, because it was used as, 
again, as a revenue enhancer as opposed to an overall tax 
policy.
    But I would say this, that, again, the aspect of it that 
levels the playing field for my Main Street, brick-and-mortar 
businesses is something that I totally agree with.
    Mr. King. I thank you, Mr. Montgomery. And I want to make 
sure that, if you do have to run and catch that plane, I won't 
come back with a follow-up question to you. But I did have a 
couple of others that I wanted to direct across the panel.
    Just a short one to Mr. Eads before I go to the 
telecommunications companies, and that was also in response to 
one of your responses to the questions I think, Mr. Eads, or 
perhaps when I read your testimony. But are you as an 
organization working hand-in-glove with NSCL?
    Mr. Eads. Representative King, we are in same building as 
NCSL. We are in the same building with the National Governors 
Association. We are in the same building with a lot of 
associations of State officers.
    The Federation of Tax Administrators represents tax 
agencies. So I don't come from a constituency in which I can 
come up here and sign off on behalf of the States on something. 
I come as a representative of an organization that has what we 
hope is some technical knowledge about how tax administration 
works and how tax policy gets implemented.
    And so, the short answer to your question is, yes, we work 
with NCSL, we have worked with the National Governors 
Association. But we are here primarily as a resource about what 
are the technical and policy issues regarding tax 
administration, and that is what we try to provide to Congress.
    Mr. King. Mr. Eads, I understand your professionalism in 
this. And I am curious as to what level of involvement, then--
in the same building with NCSL--how involved, then, is the 
American Legislative Exchange Council? Are you able to work 
with them also?
    Mr. Eads. We work--ALEC is not in our building. I have 
worked with ALEC in my prior lives. I know ALEC members. And 
the Federation of Tax Administrators is willing it to work with 
anybody who is interested in efficient tax administration and 
good tax policy, absolutely.
    Mr. King. And That really does, I think, answer my 
question. I just wanted to bring that up to that level. And I 
see my light has turned red. However much curiosity I have, I 
am going to defer to the rules of Committee and----
    Mr. Cohen. If you would like it to ask another question, 
you have been here, and I appreciate it, and you go ahead, Mr. 
King.
    Mr. King. Well, thank you.
    And I do have--and I listened to each of you. I would go to 
Mr. Barnes, if I could.
    And I mentioned the situation and you are concerned about 
how taxation, multiple taxation that might take place, the 
possibility of multiple taxation. What is your level of 
comfort, after testifying in this hearing, that there won't be 
multiple taxation on the services that you provide?
    Mr. Barnes. Excellent question.
    I believe that, as we define clear and concise taxation 
methodology from the outset, that we can establish those rules 
in advance of tax assessment. And, as a result, we can avoid in 
advance any opportunities for double taxation.
    Mr. King. Thank you.
    And, Mr. Cole, same question?
    Mr. Cole. I think, frankly, sir, if this legislation is 
passed, I don't think you will see any multiple taxation. I 
think if this legislation is not passed, I think you could 
conceivably have a customer that receives taxes from several 
jurisdictions. One provider might choose to look at the law in 
that State one way, Sprint may look at it another way, and the 
customer may get different State taxes from different 
providers. I mean, it is really a situation where that type of 
confusion could exist if we don't establish a clearer framework 
at the outset.
    Mr. King. Okay. And I am presuming here a little bit 
because I didn't hear the early part of the question, I regret 
I was called away. But do I understand this that we would have 
and we would deploy the technology that would automatically 
direct the taxes to the jurisdiction where they should be 
applied because of predominant use?
    Mr. Cole. That is correct, yeah. We already have that on 
the wireless side, and it would be much easier to implement if 
we were to go to this on the VOIP side. And I know that it 
would probably be just as easy for the third-party software 
providers like Vertex that provide some of our tax rating 
software to the various carriers.
    Mr. King. Let me just submit that, in my experience, 
looking at efficiency and mistakes and error, that the most 
persistent errors are created by human beings and the most 
efficiency that we provide is with machines and technology. So, 
with that, I am always going to want to err on the side of let 
the technology make the decision, because human beings are 
fallible.
    I appreciate the testimony of all of you.
    Mr Chairman, I appreciate this, and I would be happy to 
yield back the balance of my time.
    Mr. Cohen. Thank you, sir. I appreciate your attendance, 
and that of Mr. Scott and Mr. Johnson here earlier.
    I thank all the witnesses for their testimony.
    Without objection, Members have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask you to answer promptly. They will be 
made part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials.
    Again, I thank everyone for their time and patience, 
particularly Mr. Eads. You have had previous lives, you and 
Shirley MacLaine. It is nice to have had you here.
    This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 4:04 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from the Honorable Phil Montgomery, 
                        Wisconsin State Assembly





   Response to Post-Hearing Questions from John L. Barnes, Director, 
          Product Management and Development, Verizon Business




        Response to Post-Hearing Questions from Robert W. Cole, 
           Manager, Tax Accounting, Sprint Nextel Corporation



      Response to Post-Hearing Questions from James R. Eads, Jr., 
          Executive Director, Federation of Tax Administrators