WASHINGTON — With the federal ban on Internet access taxes set to expire on Nov. 17, a longtime simmering feud between the states and Congress is beginning to warm up again.
A U.S. House panel began hearings this afternoon on the fate of the Internet connection tax moratorium. Congress has renewed the ban twice since the Internet Tax Freedom Act (ITFA) originally passed in 1998.
“Congress must decide whether to extend the moratorium permanently or temporarily, or simply to let it lapse,” said Rep. Linda Sanchez (D-Calif.), chairman of the Subcommittee on Commercial and Administrative Law.
The current ban is limited to three types of taxes: Internet connections; double taxation of a product or service bought over the Internet; and discriminatory taxes that treat Internet purchases differently from other types of sales. The moratorium covers dial-up, DSL, cable modem and wireless Internet connections.
Nine states, which were taxing Internet connections before 1998, are exempted from the ITFA.
“The astounding expansion of Internet commerce has changed our world,” Sanchez said. “Congress must now carefully consider Internet taxation so as to support the continued growth of e-commerce while at the same time taking into account the revenue needs of state and local government.”
David Quam, the director of federal relations for the National Governors Association (NGA), said governors support a temporary extension of the IFTA as long as the renewal clearly defines what constitutes Internet access. The states fear that as Internet protocol television (IPTV) and Voice over IP (VoIP) continue to grow in popularity, those services might also be considered exempt from taxation.
“NGA believes that the unlimited ability of providers to bundle together content and ‘other services’ into a single, tax-free offering represents a loophole,” Quam said.
Quam added the current language of the ITFA could have the “unintended effect of exempting” otherwise “applicable taxes merely because they are delivered over the Internet.”
The same issue arose in 2004, when Congress last renewed the moratorium. States held up the legislation over concerns that the ITFA definition of access could be interpreted to include VoIP services. The states stood to lose more than $20 billion annually in taxes if VoIP services began to replace traditional telephone service.
Congress responded by exempting VoIP services from the moratorium renewal.
“Much like VoIP in 2004, if a service like IPTV is packaged with Internet access and exempted from applicable taxes, it would create tax disparities for competitors offering similar services and undermine existing state and local revenues,” Quam said.
Jerry Johnson, vice chairman of the Oklahoma Tax Commission, said the ITFA should be avoided on a permanent basis.
“The nature of the online world and the manner in which the public accesses and uses that world continues to change,” Johnson said. “Given what everyone acknowledges will be continuing rapid change, it seems only prudent that any extension be temporary.”
Sanchez said Tuesday’s hearing was only the beginning of the debate, stressing the panel would hold meetings on specific legislation, including a bill by Rep. Anna Eschoo (D-Calif.) to make the moratorium permanent. The bill would continue to exempt the states that currently tax Internet access.
Sen. Ron Wyden (D-Ore.), a sponsor of the original 1998 ITFA, has introduced similar legislation in the Senate in January.