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.
