Congress Continues To Debate Internet Tax Freedom Extension

Telecom Policy Report, May 29, 2007

In February, Rep. Anna G. Eshoo (D-Calif.) introduced the "Permanent Internet Tax Freedom Act of 2007," seeking to extend the moratorium on Internet access taxes and duplicative taxes on e-commerce permanently. The moratorium applies to a variety of Internet services, including digital subscriber line (DSL), cable modem and other wireless transmission services.

The bill, H. 156, would forever prohibit three types of Internet taxes: taxes on Internet access, double taxation (for example, by two or more states) of a product or service bought over the Internet, and discriminatory taxes that treat Internet purchases differently from other types of sales. Co-sponsored by Rep. Bob Goodlatte (R-VA.), the bill has the additional endorsement of 19 Republicans and 14 Democrats.

The U.S. Congress first instituted the temporary moratorium in 1998 to encourage the growth of online commerce. In 2004, Congress extended the moratorium for an additional three years, and it now is scheduled to expire Nov. 1.

"Passage of this legislation will ensure, once and for all, that the growth of Internet access and e-commerce will not be hampered by unwarranted taxation," Rep. Eshoo said at the time her bill was introduced.

Dueling Senate Bills

On Jan. 4, Sens. Ron Wyden (D-Ore.), John McCain (R-Ariz.) and John Sununu (R-N.H.) introduced a similar bill in the Senate, but it, like its House counterpart, has had little success. Instead, a new Senate bill, one that offers another extension, apparently is more palatable to Capitol Hill. Several senators now say they would support a temporary ban on Internet access taxes, but only if language in the moratorium is changed to make clear that states are allowed to tax services packaged with access, including music and movies and television over Internet Protocol, called IPTV.

The bi-partisan Internet Tax Freedom Extension Act of 2007 narrows the definition of access to a consumer's Internet connection and also exempts e-mail and instant messaging from taxation by local and state authorities. Introduced by Sens. Tom Carper (D-Del.), Lamar Alexander (R-Tenn.), Diane Feinstein (D- Calif.), George Voinovich (R-Ohio) and Mike Enzi (R-Wyo.), the bill renews the grandfather clause that allows the nine states taxing Internet access prior to 1998 to continue to levy fees on connections.

"Our bill would ensure that consumers continue to enjoy tax-free access to the Internet," said Carper. "In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments."

States and local governments fear that under the current definition of access they will lose up to $20 billion in tax revenues if VoIP and IPTV are bundled as part of a consumer's Internet access. There were similar fears three years ago during the debate to extend the moratorium yet again. This bill reportedly alters the definition of tax-free Internet access to ensure a consumer's e-mail and instant messaging remain free; it closes a loophole that puts state revenues at risk; it extends the moratorium for four years; and it continues the original grandfather clause to protect existing revenues.

The tax ban needs to stay limited to protect state and local governments' ability to offer essential services and pay firefighters, police officers, and teachers, said Enzi, adding, "You can't drink water from the Internet. You can't flush your toilet on the Internet. You can't drive your car on the Internet."

Added co-sponsor Alexander, "This is a common sense compromise that would extend the moratorium for another four years without blowing a hole in the budgets of state and local governments."

Apparently, the states agree. "This bill represents a reasonable extension of ITFA that closes tax loopholes, promotes Internet usage and protects states," says Raymond C. Scheppach, executive director of the National Governors Association. "Governors must maintain the authority to manage their state's revenue streams. This legislation protects that authority and clarifies the definition of Internet access so states are not at risk of losing significant revenues."

Senate Testimony

In light of the new bill and in the face of a looming deadline, last week, the Senate Commerce, Science, and Transportation Committee hosted a hearing on the extension of the moratorium.

In his opening statement, Sen. Daniel Inouye (D-Hawaii), who chairs the committee, said, "Absent congressional action, this law will sunset on Nov. 1. However, as we consider legislation to extend this moratorium - either on a permanent or a temporary basis - it is essential that we carefully examine the ambiguities existing in current law, in the hope of avoiding unintended consequences. Indeed, following our most recent extension in 2004, a report conducted by Governmental Accountability Office (GAO) reveals that fundamental differences of opinion remain as to the interpretation of key terms in the current moratorium. Failing to address these ambiguities will only fuel, rather than resolve, ongoing confusion between industry and state and local governments as to the proper scope of services protected by the Internet access moratorium."