Examination of Witness (Questions 700
THURSDAY 20 APRIL 2000
700. I want to add a follow-up before we leave
the subject of tax, my Lord Chairman. I am fascinated by the issue
of tax as you have outlined it. However, I was not clear from
what you saidand it is a very interesting proposal which
you have put forwardas to what would be the forum in which
the conversation could take place to decide the right solution
to the taxation issues.
A. Let's distinguish between taxation within
a particular country contrasted with the issue
701. I am thinking of it worldwide.
A.Where two different governments are
involved. I think internationally it will initially be handled
by tax treaties between pairs of countries. Ultimately there may
be a treaty of the nature of the intellectual property treaties
in which nations one-by-one subscribe to the provisions of the
treaty and thus get added to a club and are delivered the technology
which implements all of this. The proper form is certainly to
get one's own internal taxation house in order, find another country
that has its in order and make a deal between the two countries
for the share of tax revenue relating to Internet taxation. If
that proposal is workable and effective one can expect other nations
to want to join in.
702. That is very similar to the existing arrangements
A. Yes, in a sense. The problem is that, in
general, goods for personal use are exported free of charge. There
may be an import duty levied but certainly the sourcing nation
does not share in the import duty and so the tax treaties that
I am familiar with generally deal more with income tax than with
sales and use taxes.
Chairman: That is right.
703. Just a final one on tax. You say you are
a radical person, radical thinking. How about this? This is a
completely new way of doing business, it is a new economy, we
hear this all the time. We ought to try and scrap all our pre-conceived
ideas of how we raise taxation, decide what taxes are for, and
do away with all sales taxes throughout the world and only have
income tax and property tax. How about that?
A. As I said before, I have always viewed taxation
as a pure revenue raising measure. Each state has a certain amount
it needs to raise and must figure out a way to do that. If that
mechanism could be made workable and fairand us property
owners sometimes think we are subsidising people we should not
be subsidising. Aside from that I think it would be a great boon
to e-commerce because it would result in the elimination of all
taxation of all e-commerce and permit it to grow as fast as it
wants to grow.
704. A radical person talking about tax treaties
and so on, immediately you have this looming bureaucracy with
only the lawyers getting rich. Would it not have been much simpler,
and actually it could be justified socially as well I am sure?
A. As to the issue of simplification, I am certainly
in favour of simplification of tax codes. The simpler the tax
code the less is lost to heat in employing lawyers to argue about
the tax code. I am not sure that the issue there is particularly
simple if we rely on income and property taxes because there are
so many loopholes and exceptions to income tax that it does not
really solve the problem. My vision is that once we have these
Internet tax treaties in place there is virtually no more administration
associated with it other than audit. The mechanisms that are installed
to not only measure the tax but collect it at the source will
be essentially automated. Once in a while a tax rate will change
which involves modification of one number in one table in one
database somewhere. I do not see a large bureaucracy associated
with it. Of course one needs to have investigators and enforcement
against those who do not pay but the same is true of all taxes.
Baroness O'Cathain: Thank you.
Lord Woolmer of Leeds
705. One thing on tax before I go on to something
else. The position in Europe on the whole is they are not sales
taxes but VAT and in principle that should be easier to adapt
to the e-commerce world than the complicated variety of sales
taxes we have in the States. I make an observationyou may
or may not disagree with that.
A. I completely agree with it.
706. The impression we got in the States was
that the desire not to have new taxes on e-commerce is absolutely
de facto resulting in no taxes on transactions undertaken
through e-commerce, which is actually a discriminatory position.
Clearly that can be lived with for some considerable time and
all the signs are that it is going to be lived with for some considerable
time but one's impression is that it is a discriminatory situation.
In a sense that is a problem for the States although not a problem
for Europe. In Europe with VAT in principle that appears to be
less of a potential problem except where services are in a sense
virtual or can be transmitted virtually, like music or what have
you, where you can actually jump over different tax regimes. What
do you feel about that way of looking at things?
A. I do not think it is absolutely right to
say that the situation is no taxes on e-commerce. It is not that
there are no taxes on e-commerce per se; it is that it
does not result in an additional tax. But when I purchase books
from Barnes & Noble dot-com and they are delivered to me in
Pennsylvania, Barnes & Noble does assess sales tax on that
707. Do they? I did not know that.
A. They have stores in Pennsylvania.
708. Right, we did not know that. This is interesting.
Each time we ask these questions we hear something we did not
A. They are not tax free but they are not tax
Baroness O'Cathain: They reason is that Barnes
& Noble has a store in Pennsylvania so they have to do business
there so they have to levy the tax.
Lord Woolmer of Leeds
709. So for example the tax would be levied
at the rate of the home person, the person purchasing as opposed
to the host that was actually hosting the site and whoever is
providing the goods? So if you are providing it from New York
and you sell it to someone in Pennsylvania, the rate of sales
tax will be that of Pennsylvania?
A. The way it works is that if I am in a state
in which the vendor selling me goods happens to have a store I
will pay the same tax as if I have purchased the goods in the
store in that state.
Lord Woolmer of Leeds: Providers, wherever it
happens to be, have to recognise that and charge at the rate of
your home state?
710. Why does everybody not move to Texas and
put their book stores there?
A. There is no question that enterprises have
moved to a particular jurisdiction so they will be able to offer
goods tax free. Not everyone has moved to Texas but many have.
Lord Chadlington: For very good reason!
711. Could I move us on a little bit. When we
were in Washington, right at the end of our visit we had a very
helpful and interesting exchange with Donald Upson, the State
Secretary for Technology of the State of Virginia. I do not know
if you know of him?
A. I do not know him but I am aware of Virginia's
aspirations in the e-commerce world.
712. He talked about the changes wrought in
their government services and the application of e-government
to the process of government. Is it a reality? Are they ahead
of what is happening elsewhere?
A. The state of Virginia? I would not say exactly
so. Politicians all over the United States made the discovery
much earlier than I believed they would that the Internet is an
incredibly useful tool for keeping their names and faces in front
of the electorate. Whilst it was previously expensive for the
state to tout its own achievements it is now trivial to do so
on the Internet. The exemplary but horrible demonstration of this
was when the Special Prosecutor in Bill Clinton's "difficulties"
wanted to issue his report and instead of using the traditional
means of government printing off, the report appeared on the Internet
which was much cheaper and faster as a way of publicising it.
On the good side there are numerous governments that believe that
it is part of their civic responsibility to inform the voters
of exactly what goods and services and regulations and general
information the government has that is of use to them and so there
is a proliferation of very useful government web sites all over
the United States. One of the most useful in a sense is that of
Florida which has the most liberal attitude to public access to
information collected by the government of Florida. Different
to other jurisdictions like Pennsylvania, which have taken that
to mean that all they have to do is provide some building somewhere
in the state with dusty rooms full of paper records that they
must allow you to access, that is their idea of public, in Florida
their idea of public is if it is not a publicly available database
on the Internet it is unrealistic for people to access information,
so all digitised information is available through the government
of Florida which is totally unavailable in other states.
713. He did speak about the availability of
information but in particular the provision of services. They
had gone on line and taken a different approach to most other
states in that there had been very strong leadership by the governor.
He had been appointed solely to deal with technology issues. He
had been given the freedom to recruit specialists to assist him,
he was allowed to run across departmental budgets and create a
new budget solely to advance e-commerce within Virginia, which
is quite different to the normal practice you find in most areas
of governmental or local government operation where there are
silos operating and great difficulties in cross-cutting. He claimed
they were breaking through that and in turn the services that
they were providing from cross-cutting too were of a nature that
were not normally found in other states. Maybe we are asking unfair
questions; you may not know all the detail.
A. I have nothing negative to say about what
Virginia is doing. They are not alone. The state of Texas, for
example, has funded a project at Carnegie Mellon University to
make court records and court information available to the general
public through the Internet including feeing for services, kinds
of services. So, for example, Texas wants to allow lawyers and
members of the public to file documents in court cases electronically.
There will be a fee charge for that, a very low fee, but the fee
money and fee collections will be used to support the huge infrastructure
including in the 254 counties that make up the State of Texas.
Various kinds of information will be free to the general public
but volume users will have to purchase it. Another example, an
astonishing example to me, I have been a trademark attorney for
20 years and there are very complex procedures for dealing with
the United States Patent and Trademarks Office. They require signatures
to be in a certain colour of ink so that it can be determined
that the signatures are original rather than xeroxed. I was as
shocked as anybody on the planet when the Office announced that
it would accept completed trademark applications directly over
the Internet. So you sit down, type the details of the transaction,
give a credit card number (and you could never used a credit card
with the United States Patents and Trademarks Office) and you
can even supply a graphic image of the trademark as an acceptable
specimen of use of the trademark. What happens then is you are
asked to print out a piece of paper and sign the piece of paper
but you need not send it in. You may retain it so that it can
be examined at some future time if there is a dispute as to the
genuineness of the transaction. So even the federal government
is willing to allow instantaneous access for fee charging services
to the general public. So it is possible Virginia may be one of
the most advanced states in that regard.
714. What do you think of the US Federal Government's
ability to co-ordinate policy on e-commerce? There is a national
co-ordinating committee, I understand. Does it work? Does it really
make a difference?
A. It is difficult to tell what the genesis
of the good changes that have occurred recently really is. I am
not familiar in depth with the political process. But I am happy
with the statutes that have come out of the United States on protection
of e-commerce and protection of the consumers. I do not see bad
statutes. There are still problem areas the United States has
been unable to deal with. I am not sure why that is so. It may
be that the necessary solutions have not been pointed out at the
715. What do you see as a major residual issues
they have to tackle which they have not solved yet?
A. The major area is they have done nothing
whatsoever with respect to the field of electronic payments and
right now the range of payments that can be made over the Internet
are basically consumer value transactions. Something between $1,000
and $10,000 you can pay on the Internet. If it is less than $2
you cannot pay over the Internet and if it is $1 million it is
impossible to make a payment for that sum on the Internet. The
United States' Government has taken a completely hands-off attitude
to this problem and so you have got the ludicrous situation where
I have signed up to be a member of the Chemical Exchange, not
because I deal in chemicals but because I use this as a demonstration
for my classes, and I have the ability to purchase $1 million
worth of chemicals on the exchange and no ability to make a payment.
Payment has to be made out of band, as we say. We get instructions
to mail a certified cheque or generate a wire transfer. I would
just like to use the word "insane" to refer to this
situation. It should be the easiest thing in the whole deal to
make a payment because that involves exchanging a few hundred
bytes of information yet everything else is completely automated
and digitised online but when you come to pay you cannot do it.
That is the problem. Also the domain situation is completely unliveable
with now. What has happened is people have usurped all the nouns
in the English language. Whatever the noun is it is noun dot-com.
Should you want to go into a business where that would be a useful
domain name you are forced to pay essentially a ransom to the
holder of the name. But there is an anti-cybersquatting statute
dealing with some of that. However, it is not illegal for me to
find a noun that is not in use and if I am in good faith and I
have no knowledge that someone else intends to use that name I
am perfectly free to register it and hold on to it. The real problem
is that in the real world it is possible to use the same trademark
for many different goods and services provided that no confusion
results. So we can have a Cadillac car and Cadillac catfood. No
one believes that General Motors makes cat food and no one believes
that the cat food manufacturer makes cars but on the Internet
only one of them can have the Cadillac domain. So there is this
massive many-to-one problem that makes it impossible for people
to do business under their previous name to continue doing business
under their previous name on the Internet and this problem is
now worldwide. It has led to the comical situation in Tuvalu which
you may have read of recently. That is apparently a state in the
Pacific which was assigned by the Internet Corporation, who assigns
names and numbers, fortuitously the high level domain "TV".
All of the TV stations would love to have a domain like that.
So some venture capitalists got together and signed a contract
with Tuvalu and they are essentially giving up their right to
use the .TV domain for $150 million. That is many times the gross
domestic product of Tuvalu. It will economically change the entire
economy if the companies pay off on their obligations. If you
want to get something .TV you have to go to Tuvalu. It is possible
for many TV companies in many different countries to have the
same call letters and they are administered on a country-by-country
basis and so it is a race to the land office to see who gets ABC.TV
first. It has not solved the problem, it has only exacerbated
the problem. No-one has come up with the same structure for domain
names so businesses can fairly inform their consumers of who they
are and where they are.
Lord Woolmer of Leeds
716. Could I turn to business-to-business activity.
Talk us through a bit about the business-to-business area. Give
us one or two examples of companies or industries in the States
where this really has taken off and is transforming the business
process. Insofar as you have had an opportunity of comparing this
with what is going on in Europe can you give us some comparisons
in Europe and tell us what kind of issues arise there are in that
area since we have principally but not entirely been talking about
A. Certainly. Let me try to draw a distinction
between business-to-business and business-to-consumer. There is
really very little difference in the technological processes.
All buying and selling is the acquisition of information, followed
by a decision-making process, followed by a payment, followed
by some kind of delivery. That is no different in B2B than B2C.
To see the real difference let us look at why consumers use the
Internet in the exchange of electronic commerce. It is mainly
for convenience and possibly because they are able to do some
price shopping because of the free availability of information,
but it is not an economic necessity for a consumer to buy things
over the Internet. If you spend 20 minutes hunting around for
which vendor is selling a hard cover book for the lowest price,
that is irrational because the time you have spent doing it does
not justify the cost reduction. So it is the convenience factor.
For businesses it is a completely different matter. Businesses
are achieving huge reductions in procurement costs by using B2B
commerce and every dollar they save in procurement goes directly
to the bottom line and increases profit. Hence the massive move
not only by companies in B2B but also by start-up companies and
venture capitalists in B2B. Right now the world of B2B transactions
exceeds B2C by a factor of six. That is expected to go up to a
factor of 14 before it eventually tails down to its natural level.
Its natural level in the United States appears to be about five.
That is the total value of goods exchanged to provide a dollar's
worth of consumer product is about five dollars. So the issue
there is why is it going to go up to 14? The reason is there is
an obvious economic benefit to a corporation to do B2B procurement
because of the savings and acquiring profit. There is not nearly
such an incentive to the consumers because they go to stores all
the time anyway and in effect buy lots of products in physical
stores, but businesses do not shop that way; they use the Internet.
Of the $13 billion transacted electronically in the US in 1999,
$2 billion of that alone was created by IBM purchasing products
from its vendors and selling products to its distributors. So
that is almost ten per cent of the entire total. Intel accounted
for another $1 billion selling chips on line. The reason these
companies are doing it is because it enables them to increase
market share and at the same time they are reducing costs. The
situation in Europe I do not have heavy familiarity as to which
companies are actually engaging in which solutions. I heard a
presentation by the Swiss country manager for Ariba in December.
It was a one-hour presentation after which I called home and suggested
to my wife she went to buy Ariba. Two months later Ariba had doubled,
within three months it had trebled. When I asked my wife, "How
much Ariba did you buy?" she said, "I did not buy any.
I thought you were kidding." The difference now is that when
I give her a stock recommendation she knows I am not kidding.
What was it that I heard from Ariba that suggested to me that
this was a sure win on the stock market? It had to do with their
explanation of how their system integrates perfectly with real
procurement systems in real businesses. It is not some whiz bang
piece of software automation. The entire procurement process is
a very cumbersome and costly one, so costly you can achieve all
the savings you need just to assist your employees in using authorised
procurement procedures. In many companies it is too cumbersome
to use authorised procurement channels so they go across the street
and buy the equipment at full market price and submit a chit for
petty cash reimbursement thus circumventing all the negotiated
discounts which the company would be entitled to. It automates
everything and charges transaction fees at the same time. If I
can save 20 per cent on my procurement costs I would not mind
paying five per cent of it to Ariba, for example.
Lord Woolmer of Leeds
717. Your story demonstrates the difference
between data and information, does it not?
718. So one last question on that. A number
of companies in a number of industries, again particularly in
the States but increasingly in Europe, are getting together on
a club basis, as a purchasing consortium almost. Can you tell
us a bit about one or two examples there and what issues do you
see arising on that beyond e-commerce?
719. Perhaps if I may, and this will be my final
question because I did tell the Committee we would be closing
down around noon, would you also perhaps, if you have any, give
us observations on how governments might deal with the monster
companies that e-business now appears to be creating such as the
Time Warner AOW merger.
A. Which should I answer first?