THURSDAY 20 APRIL 2000

DR MICHAEL I SHAMOS

  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 said—and it is a very interesting proposal which you have put forward—as 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 on tax.

  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 fair—and 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.

  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 observation—you 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 transaction.

  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 know.

  A. They are not tax free but they are not tax discriminatory.

  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.

  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 same time.

  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.

  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 business-to-consumer here.

  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.

  717. Your story demonstrates the difference between data and information, does it not?

  A. Yes.

  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?

  A. Indeed.

  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?