Senate Floats Its Own Internet Tax Bill

The ban on Internet access taxes would be extended for another four years under legislation introduced today in the U.S. Senate. The current ban, originally passed in 1998 and extended twice since then, is set to expire on Nov. 17.

The Internet Tax Freedom Extension Act of 2007 narrows the definition of access to a consumer’s Internet connection and also exempts e-mail and instant messaging from taxation by local and state authorities.

In addition, the bill renews the grandfather clause that allows the nine states taxing Internet access prior to 1998 to continue to levy fees on connections.

“Our bill would ensure that consumers continue to enjoy tax-free access to the Internet,” Sen. Tom Carper (D-Del.) said in a statement. “In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don’t completely erode the tax base of state and local governments.”

States and local governments fear that under the current definition of access they will lose up to $20 billion in tax revenues if VoIP and IPTV are bundled as part of a consumer’s Internet access. Similar concerns arose in 2004, when the Internet Tax Freedom Act (ITFA) was last renewed.

Led by Sen. Lamar Alexander, the 2004 renewal legislation was held up for months as the Tennessee Republican fought to keep VoIP services outside the ban, a provision that was eventually accepted by the House and Senate. This time around, Alexander is co-sponsoring Carper’s bill.

“This is a common sense compromise that would extend the moratorium for another four years without blowing a hole in the budgets of state and local governments,” Alexander said in a co-statement with Carper.

Sen. Ron Wyden (D-Ore.) introduced legislation earlier this year to make the Internet access tax moratorium permanent, a move Congress has continually resisted since Wyden and former U.S. Rep. Chris Cox, now the chairman of the Securities and Exchange Commission, originally introduced the IFTA.

Rep. Anna Eschoo (D-Calif.) has also introduced legislation in the House to make the moratorium permanent. Both the Wyden and Eschoo bills would continue to exempt the states that currently tax Internet access.

Carper and Alexander said a four-year extension makes better sense.

“A temporary extension, as we have in our bill, will allow us to keep Internet-access tax free, while giving Congress more time to understand the Internet’s evolution and what it means for state and local governments,” Carper said.

Alexander added that a permanent moratorium would create a “massive federal unfounded mandate. “When the federal government starts restricting Tennessee’s ability to raise revenue, that means increased tuition, higher sales tax on food and even a state income tax are just around the corner.”

The introduction of the legislation comes just one day after the House began to consider renewing the IFTA. At a House Judiciary subcommittee hearing, 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.

Wednesday, Raymond C. Scheppach, NGA executive director, said in a statement the Carper-Alexander bill, “Represents a reasonable extension of IFTA that closes tax loopholes, promotes Internet usage and protects states.”

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