Bush Signs ‘Net Access Tax Moratorium

WASHINGTON — President Bush signed into law a new four-year ban on
state and federal taxation of Internet connections, legislation the industry said was needed to promote universal broadband.

The latest version of the Internet Tax Nondiscrimination Act expands the original dial-up definition of access to include DSL, cable modems and wireless Internet connections. The bill blocks states from differentiating for tax purposes between dial-up and broadband hookups.

“Under the previous moratorium, there were about 18 states that started
taxing high-speed connections over DSL lines,” U.S. Sen. George Allen
(R-Va.) said after the White House signing ceremony. “If that was allowed to
continue for another four years, we’d never be able to get that off [the tax

In addition to keeping the new moratorium limited to four years, the new law also grandfathers the 12 states that were taxing Internet access before the passage of the 1998 act, a major victory for states’ concerns about losing tax revenues.

More than a year ago, the House of Representatives approved making the
moratorium permanent and eliminating all grandfather clauses. However, a
similar measure in the Senate, sponsored by Allen and Sen. Ron Wyden
(D-Ore.), ran into fierce opposition that forced compromise legislation.

“The reality is that in the Senate, getting perfection is difficult,” Allen
said. “I would like to make it permanent, but we did not have the votes. We
got the next best thing.”

According to Allen, the importance of the expanded connection definitions
will come in four years when the new moratorium expires. “We’ll not have to
listen to all the whining and bleating from folks saying, ‘Oh gosh, we’re
getting all millions of dollars off of broadband taxes,” he said.

Allen added, “This was an important step, particularly on the aspect of it
where state authorities were circumventing the previous moratorium by
finding ways to tax broadband. They will not be doing that when this
moratorium expires in 2007.”

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.

“Whether [people] get online from wireless, satellite, DSL, cable or even
over power lines, they are not going to be subject to, on average, an 18
percent tax,” Allen said. “People’s monthly Internet service bill will not
have an added tax. It will not look like their telephone bill.”

The new Internet tax moratorium does not apply to sales taxes on Web
transactions nor does it deal with the issue of telecommunication services,
such as Internet telephony.

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, a
process that is gaining momentum.

In November of 2002, representatives from 32 states approved model
legislation designed to create a system to tax Web and catalog sales.
Spearheaded by the National Governors Association, 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.

In the House debate over making the Internet access tax bill, Rep. Mel Watt
(D-N.C.) said there is a “long-term agreement and commitment” to making the
moratorium permanent.

“The thing that has held that up is that state and local governments have
wanted to work out a national uniform standards for taxing remote sales that
place over the Internet so that they do lose substantial revenues from that
source,” Watt said.

If a uniform sales tax system could be worked out, Watt said, “Making the
moratorium on Internet access would be a no-brainer and a very
non-controversial step.”

The White House did not immediately issue a statement with any comments from Bush. The actual signing was limited to photographers.

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