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House Approves Internet Access Tax Ban

The U.S. House of Representatives approved today the Senate version of a new Internet access tax moratorium, which bans state and federal tariffs on most Internet connections for the next four years.

The Internet Tax Nondiscrimination Act (S. 150) extends the original Internet Tax Freedom Act of 1998 and expands the definitions of access to include dial-up, DSL, cable modems and wireless Internet connections. The first ban primarily covered dial-up access.

The legislation also grandfathers states taxing access before the passage of the 1998 act and exempts for two more years two states that began taxing non-dialup access after the original moratorium passed.

Rep. Christopher Cox (R-Calif.), who sponsored the bill in the House and is the co-author with Sen. Ron Wyden (D-Ore.) of the original moratorium, said the "case has never been stronger" for eliminating taxes on the Internet.

"With 200 million Americans using the Internet, [a tax on access] would be a tax on working families," Cox said.

The ban now is limited to three types of taxes: Internet access, double taxation of a product or service bought over the Internet and discriminatory taxes that treat Internet purchases differently from other types of sales.

President Bush, who has publicly endorsed the legislation as part of his initiative to provide affordable broadband to all Americans by 2007, is expected to sign the bill.

Two years ago when the 108th Congress first convened, extending the ban appeared to be the largely bi-partisan desire of both the House and the Senate. It didn't work out that way, as cash-strapped states successfully lobbied Congress to blunt the original intent of the legislation.

In September of last year, with the original ban set to expire on Nov. 1, the House passed legislation to make the access ban permanent and strip away the grandfather clause allowing 10 states to tax Internet connections. The Senate Commerce Committee approved similar legislation in July of 2003.

But any notions of a permanent ban on connection taxes quickly disappeared within several weeks of the House vote. The Multistate Tax Commission (MTC), a joint agency of state tax organizations, said sponsors of the legislation inserted last minute language expanding the scope of the tax exemption to give telecommunications firms "unprecedented church-like status."

The National Governors Association (NGA) followed up the MTC protest in October 2003 with a letter to the Senate leadership.

In April, the Senate finally passed its version of the access tax moratorium, limiting the ban to four years, keeping the grandfather clause and narrowing the access definitions. Another five months of negotiations between the House and the Senate followed before an agreement was reached.

The new Internet tax moratorium does not apply to sales taxes on Web transactions. Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies. A 1992 U.S. Supreme Court decision said states could only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes.

The court ruled that the current patchwork of roughly 7,500 taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. In order to collect the taxes, the court ruled, states would need to first simplify the existing system.

In November of 2002, representatives from 32 states approved model legislation designed to create a system to tax Web sales. Spearheaded by the NGA, the Streamlined Sales Tax Project would require participating states to have only one tax rate for personal property or services effective by the end of 2005. Included in those services would be online sales.

The coalition of states voted to require participating state and local governments to have only one statewide tax rate by 2006 for each type of product taxed.



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