Congress Continues To Debate Internet Tax Freedom Extension
In February, Rep. Anna G. Eshoo (D-Calif.) introduced the "Permanent Internet Tax Freedom Act of 2007," seeking to extend the moratorium on Internet access taxes and duplicative taxes on e-commerce permanently. The moratorium applies to a variety of Internet services, including digital subscriber line (DSL), cable modem and other wireless transmission services.
The bill, H. 156, would forever prohibit three types of Internet taxes: taxes on Internet access, double taxation (for example, by two or more states) of a product or service bought over the Internet, and discriminatory taxes that treat Internet purchases differently from other types of sales. Co-sponsored by Rep. Bob Goodlatte (R-VA.), the bill has the additional endorsement of 19 Republicans and 14 Democrats.
The U.S. Congress first instituted the temporary moratorium in 1998 to encourage the growth of online commerce. In 2004, Congress extended the moratorium for an additional three years, and it now is scheduled to expire Nov. 1.
"Passage of this legislation will ensure, once and for all, that the growth of Internet access and e-commerce will not be hampered by unwarranted taxation," Rep. Eshoo said at the time her bill was introduced.
Dueling Senate Bills
On Jan. 4, Sens. Ron Wyden (D-Ore.), John McCain (R-Ariz.) and John Sununu (R-N.H.) introduced a similar bill in the Senate, but it, like its House counterpart, has had little success. Instead, a new Senate bill, one that offers another extension, apparently is more palatable to Capitol Hill. Several senators now say they would support a temporary ban on Internet access taxes, but only if language in the moratorium is changed to make clear that states are allowed to tax services packaged with access, including music and movies and television over Internet Protocol, called IPTV.
The bi-partisan 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. Introduced by Sens. Tom Carper (D-Del.), Lamar Alexander (R-Tenn.), Diane Feinstein (D- Calif.), George Voinovich (R-Ohio) and Mike Enzi (R-Wyo.), 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," said Carper. "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. There were similar fears three years ago during the debate to extend the moratorium yet again. This bill reportedly alters the definition of tax-free Internet access to ensure a consumer's e-mail and instant messaging remain free; it closes a loophole that puts state revenues at risk; it extends the moratorium for four years; and it continues the original grandfather clause to protect existing revenues.
The tax ban needs to stay limited to protect state and local governments' ability to offer essential services and pay firefighters, police officers, and teachers, said Enzi, adding, "You can't drink water from the Internet. You can't flush your toilet on the Internet. You can't drive your car on the Internet."
Added co-sponsor Alexander, "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."
Apparently, the states agree. "This bill represents a reasonable extension of ITFA that closes tax loopholes, promotes Internet usage and protects states," says Raymond C. Scheppach, executive director of the National Governors Association. "Governors must maintain the authority to manage their state's revenue streams. This legislation protects that authority and clarifies the definition of Internet access so states are not at risk of losing significant revenues."
Senate Testimony
In light of the new bill and in the face of a looming deadline, last week, the Senate Commerce, Science, and Transportation Committee hosted a hearing on the extension of the moratorium.
In his opening statement, Sen. Daniel Inouye (D-Hawaii), who chairs the committee, said, "Absent congressional action, this law will sunset on Nov. 1. However, as we consider legislation to extend this moratorium - either on a permanent or a temporary basis - it is essential that we carefully examine the ambiguities existing in current law, in the hope of avoiding unintended consequences. Indeed, following our most recent extension in 2004, a report conducted by Governmental Accountability Office (GAO) reveals that fundamental differences of opinion remain as to the interpretation of key terms in the current moratorium. Failing to address these ambiguities will only fuel, rather than resolve, ongoing confusion between industry and state and local governments as to the proper scope of services protected by the Internet access moratorium."
He continued, "As Americans increasingly turn to the Internet to conduct transactions online, Main Street businesses will increasingly be placed at a competitive disadvantage. While many debate the size of the sales tax revenue currently lost from the growth in Internet commerce, most observers agree that the tax loss is significant and will grow robustly over time. As pressures on state treasuries increase, the effects of such policies will increasingly be felt by teachers, firefighters, police, and others on the front lines of providing state services. As a result, it is important that we encourage ongoing efforts to simplify state tax codes in the hope that such action may facilitate further congressional action that would permit states to treat online and offline sales transactions in a nondiscriminatory fashion."
Added his co-chair, Sen Ted Stevens (R-Alaska), "Thanks to the Internet, more goods and services are sold in Alaska every day, and Alaskans are able to market their goods to customers in the lower 48. This is beneficial for small businesses. Access to the Internet has provided Alaskans with a means to get lower rates for hotel and air travel when they are planning trips outside the state. Additionally, broadband access has eliminated distance barriers for education and medicine."
He added, "To ensure those benefits continue to reach as many Americans as possible, Congress should reduce any obstacles to Internet access. One way to do that is to prevent federal, state and local taxes that drive up costs for Internet access. During the period of the imposition of the moratorium in 1998 and now, there has been tremendous investment, growth and innovation in broadband deployment, and I hope this continues."
The following are highlight from those testifying last week before the committee:
>>David Quam, director/Federal Relations, National Governors Association: "Governors remain steadfast in their insistence that decisions regarding state and local taxes should remain with state and local officials. We urge Congress to maintain the balance intended by the original moratorium - one that encourages the growth of the Internet and respects state sovereignty." Quam also said governors ask lawmakers to "be clear in their definitions, stay flexible and do no harm." The NGA also suggests Congress examine the scope of the moratorium in light of technological advancements, update definitions to help ensure they reflect congressional intent and don't interfere with taxing authority, extend the moratorium on a temporary basis to respect state sovereignty, and retain the original grandfather clause to preserve existing state and local tax revenues.
>>James R. White, director/Tax Issues and Strategic Issues, U.S. Government Accountability Office: "The revenue impact of eliminating grandfathering in states studied by Congressional Budget Office would be small, but the moratorium's total revenue impact has been unclear and any future impact would vary by state. In 2003, CBO reported that states and localities would lose from more than $160 million to more than $200 million annually by 2008 if all grandfathered taxes on dial-up and DSL services were eliminated, although part of this loss reflected acquired services.
"It also identified other potential revenue losses, although unquantified, that could have grown in the future but that now seem to pose less of a threat. CBO's estimated annual losses by 2007 for states that had grandfathered taxes in 1998 were about 0.1 percent of the total 2004 tax revenues for those states. Because it is difficult to know what states would have done to tax Internet access services if no moratorium had existed, the total revenue implications of the moratorium are unclear. In general, any future impact related to the moratorium will differ from state to state."
>>Harley Duncan, executive director, Federation of Tax Administrators: "The Federation urges Congress not to extend the Act because it is disruptive of and poses long-term dangers for state and local fiscal systems. Moreover, the GAO and other researchers have found that the moratorium is not effective in achieving its purported purpose of expanding the availability of Internet access to the American public and bridging what has been termed as the 'digital divide.' If, however, Congress believes the Act should be extended, we believe there are three principles that should be followed:
The definition of "Internet access" in current law must be changed. As currently written, we believe that an ISP could bundle virtually all types of Internet services, content and information (some of which may be currently taxable) into a package of 'Internet access' and claim that the state would be preempted from taxing any part of that package. The danger to state and local fiscal systems over the long term from the current expansive definition is considerable.
Any extension of the Act should be temporary in nature. The nature of the online world and the manner in which the public accesses and uses that world continues to change rapidly. The long-term impact on state and local finances is still evolving. Given what everyone acknowledges will be continuing rapid change, it seems only prudent that any extension be temporary, and that Congress revisit the policy and its impact in a few years.
The provision of the Act preserving those taxes on Internet access that were 'generally imposed and actually enforced' prior to 1998 should be continued if the Act is extended. The intent when the original Internet Tax Freedom Act was passed in 1998 was not to disrupt existing practices and that commitment should be maintained.
>>Annabelle Canning, vice president/State Tax Policy, Verizon Communications: "There three important reasons why Congress should make the Internet tax moratorium permanent--
"First, at a time when state and local economic development experts are touting broadband as critical to economic competitiveness, new taxes on Internet access could have a chilling effect on broadband investment.
"Second, now that competition between different types of Internet access providers is lowering prices for consumers and making high-speed Internet access more accessible and affordable to lower income households, regressive new taxes on Internet access would create a new obstacle in efforts to close the 'digital divide.'
"Finally, a number of states and localities are ignoring the will of Congress; therefore, Congress needs to make it clear once and for all that the transport underlying the provision of Internet access and high speed Internet access is covered by the moratorium on taxes on Internet access service. Otherwise, the record is clear that states and localities will seek to avoid the moratorium on Internet access taxes by imposing taxes on the underlying transport and high speed Internet access. Recent studies of the taxation of telecommunications services suggest that such taxes could be excessive and discriminatory."
>>Jeff Dircksen, director/Congressional Analysis, National Taxpayers Union & Foundation: "First, state and local governments already place sizeable taxes, fees, and other charges on taxpayers who subscribe to various telecommunications services, whether wired, wireless or online. Second, allowing governmental entities to increase this burden would be counterproductive for consumers and telecommunications providers. Third, the Supreme Court's 1992 Quill ruling has protected taxpayers by ensuring tax competition among state and local governments who might otherwise engage in round after round of tax hikes in a 'race to the top.' Finally, on behalf of our members, I would urge you to consider how taxpayers would be better served by low-tax, pro-free market policies that encourage economic growth and innovation in the telecommunications sector (in contrast to higher taxes, fees, and additional regulation).
"Rather than aggravating these economic losses with new or higher taxes, Congress should adopt a policy that bans new taxes and repeals those already in place (or at least lowers them). Given the potentially destructive impact that expanding or raising Internet and telecommunications taxes could have on this important economic sector, the remedy could not be clearer: Congress and the states should declare this tax territory permanently 'off limits.'"