States Cry Foul Over Internet Access Tax Ban

The Multistate Tax Commission (MTC), a joint agency of state tax organizations, says sponsors of legislation to permanently extend the current temporary moratorium on Internet taxes inserted last minute language that vastly expands the scope of the tax exemption to give telecommunications firms “unprecedented church-like status.”

The MTC claims it was not consulted about the new language and the changes could cost state and local governments as much $9 billion in lost revenues by 2006, charges quickly and strongly denied by at least one high ranking staff member of the House Judiciary Committee, where the legislation originated.

H.R. 49, which amends the Internet Tax Freedom Act (IFTA) that expires on Nov. 1, was approved by the House last week on a voice vote. The bill 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.

“State revenue commissioners and other state and local officials understand that consumers need to be able to get Internet access and we are not disputing the original $500 million ‘bite’ that H.R. 49 presented to us,” Tennessee Revenue Commissioner Loren Chumley told reporters Wednesday. “But state tax officials have many decades of experience living with the effects of laws passed by Congress. Our legal reading of the new expansive language in H.R. 49 is that it will effectively rope off the telecommunications industry from local and state taxes.”

Chumley added that the legislation provides a “roadmap for the telecommunications industry to sidestep as much as $9 billion annually by 2006 in taxes and succeed in doing what no other industry has done: get Congress to relieve it of potentially all local and state taxes.”

Speaking on background to, a Judiciary Committee official who worked on the legislation said, “that is completely false.” The staffer said language in the legislation has not changed since mid-July and that those changes were aimed at states that wanted to tax DSL and other high-speed connections.

“The bill exempts taxes on Internet access, no matter the technology,” the staffer said. “We are not prohibiting taxes on any other services or sales over the Internet.”

Government Finance Officers Association President Ed Harrington, who also is controller for the city and county of San Francisco, disagreed, saying the exemption goes beyond Internet access and expands the definition to include telecommunications services.

“This could have a dramatic impact on virtually all state and local governments that collect any kind of tax on telecommunications companies — utility taxes, franchise taxes, gross receipts, property and other taxes could be called into question,” Harrington said. “All of this in a bill that has been touted as only making permanent the current temporary ban on taxes on Internet access charges.”

Multistate Tax Commission Executive Director Dan Bucks said his organization would now attempt to get the language changed in the Senate version.

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