House Approves Permanent Internet Access Tax Ban

WASHINGTON — The U.S. House of Representatives voted Wednesday to permanently extend the current temporary moratorium on Internet taxes that expires on Nov. 1. The legislation, passed on a voice vote, amends the Internet Tax Freedom Act (IFTA), which imposes a federal ban on state and local taxes on Internet access services and certain Internet-based sales transactions.

Similar legislation was approved by the Senate Commerce Committee in late July but has not been scheduled for a floor vote. President Bush has said he will sign the legislation.

The bill also requires nine states that were grandfathered in the original 1998 legislation to repeal existing Internet access taxes. The Congressional Budget Office (CBO) estimates that repealing the grandfather clause will result in revenue losses for the states and for several local governments totaling between $80 million and $120 million annually beginning in 2004.

“Today, Republicans and Democrats have come together to say that no matter how we might choose to fund government services, we all agree that it would be counterproductive to create new taxes that target the Internet, which are harmful to consumers, destructive to technological innovation, and bad for our economy,” said Rep. Christopher Cox (R.-Calif.), sponsor of the legislation.

The legislation applies to both dial-up and broadband Internet access.

“This legislation will help keep Internet access affordable,” Cox said. “In many areas, the difference between dial-up and broadband is ten dollars a month. If ten dollars a month is already a barrier for people to embrace broadband, adding an increment on top of that is only going to keep the digital divide wide open.”

Software & Information Industry Association (SIIA) President Ken Wasch hailed the legislation and urged the Senate to take quick action.

“Now, we look to the Senate to pick-up on this strong, bipartisan show of support and pass a permanent extension of the moratorium. After all, there will never be a good time for states to start taxing Internet access, or to begin implementing discriminatory taxation,” Wasch said.

The 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 can 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 last year, representatives from 32 states approved model legislation designed to create a system to tax Web sales. Spearheaded by the National Governors Association (NGA), the Streamlined Sales Tax Project (SSTP) 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.

“The case for taxing Internet access has never been weaker,” Cox said. “New taxes would make Internet access even less affordable, and discourage the adoption of broadband connections. Punishing Internet users with a new monthly tax on Internet access, whether dial-up or broadband, shouldn’t be anybody’s idea of pro-consumer policy.”

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