The
Internet Taxation Moratorium
Since
1999 there has been a moratorium on the imposition
of Internet access taxes. Taken together with
the prohibition on taxation of inter-state sales,
absent 'nexus' in the taxing state on the part
of the seller, the result has been a rapidly increasing
loss of revenue for the states as Internet sales
have begun to grow.
Congress,
for its part, has refused to lift the inter-state
taxation ban until the states got their act together
in terms of simplification of sales taxes. That
led to the Streamlined Sales
Tax Program, (SSTP or SSUTA) which after some
years of effort now seems to be having results.
Without
any ability to put taxes directly on inter-state
Internet commerce, many states would have wanted
to tax the Internet directly; but the moratorium
has effectively prevented that.
With
the moratorium due to expire at the end of 2003,
the House of Representatives passed legislation
extending the moratorium on a permanent basis
to all forms of internet access, and removing
the grandfather clause contained within the temporary
moratorium which allowed the 10 states which began
to levy taxes on internet access prior to the
enactment of the moratorium to continue to do
so; however a similar bill stalled in the Senate
over concerns about the potential cost to state
authorities.
Senator
Lamar Alexander (R-Tennessee), one of the main
opponents of the Senate bill, which was sponsored
by Senators Ron Wyden (D-Oregon) and George Allen
(R-Virginia), had put forward proposals whereby
the language of the lapsed temporary moratorium
would be extended by two years, and would be changed
to cover DSL internet connections. However, the
grandfather clause allowing his and other states
to collect internet access taxes would have remained.
The
stand-off continued in 2004, and by mid-year it
still seemed that an extension of the moratorium
would be hard to achieve. The same applied to
the attempt to repeal the ban on sales taxes on
inter-state supplies, which the states hoped would
be accepted by Congress in response to the SSUTA
initiative to create a harmonised sales tax regime.
By July, 2004, 46 states had joined the initiative,
and most were working to bring their laws into
compliance with SSUTA's standardized regime. Once
states representing 20% of the population are
fully in compliance, the initiative was due to
come into force, something that happened during
2005.
In
November, however, in a 'lame duck' session of
Congress, the Senate voted unanimously to extend
the moratorium on the taxation of internet access
for a further four years. Under the legislation,
local and state governments were restricted from
levying taxes on internet access services, including
broadband and wireless services.
However, other services such as internet mobile
phones remained outside of the legislation’s remit,
as did the sale of goods and services made over
the internet. Expanded provisions covering high
speed broadband services had initially sparked
fears from local officials that their ability
to collect taxes at the local level would be severely
curtailed, although a last minute provision allowing
them to continue assessing existing telephone
taxes assuaged these fears somewhat.
Welcoming the Senate’s approval, Sen. George Allen
(R., Va.), who co-sponsored the legislation noted:
"I'm glad to see the majority of Congress stands
with those who want to see the Internet continue
to grow and flourish as a tool for information,
opportunity, prosperity and commerce."
The
House followed the Senate, and in December, 2004,
George W. Bush signed the bill into law. The moratorium
would be in place until November 1 2007, and was
also retroactive to cover the year of 2003, during
which the previous moratorium had lapsed. In fact,
the states had by and large refrained from imposing
new access taxes during that period.
The
move was welcomed by internet service providers
such as America Online and Time Warner, as well
as by representatives of the telecommunications
industry. “With forward-looking policies that
encourage real competition, like the Internet
tax moratorium, consumers and the nation’s economy
will benefit from increased investment and innovation
in the telecom sector,” enthused Walter B. McCormick,
Jr., President and CEO of the United States Telecom
Association, shortly after Mr Bush signed the
bill.
However,
not everyone was happy with the access tax ban
on internet services, especially municipal and
state governments, which were particularly upset
over the expanded provisions covering broadband
services.
In
February 2007, legislation was introduced into
the House of Representatives to permanently extend
the moratorium on internet access taxes and duplicative
taxes on internet commerce.
"Americans
across the country utilize the Internet for communication,
commerce, business, education and research,"
observed Congresswoman Anna G. Eshoo (D - Calif),
who introduced the Permanent Internet Tax Freedom
Act of 2007.
"Because
of the tremendous value it brings to all aspects
of our lives, we need to encourage its usage and
do everything we can to ensure that Internet access
is universal," she added.
"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,"
said Eshoo, a Member of the House Energy and Commerce
Subcommittee on Telecommunications and the Internet.
According
to Eshoo, a 2006 report by the Pew Internet and
American Life Project demonstrated that 73% of
those polled were Internet users, up from 66%
in a similar 2005 survey, while in 2006 alone,
online retail exceeded $100 billion, increasing
24% over 2005. However, Internet usage still lags
behind in rural and lower income areas of the
US, and the country has fallen from 4th to 16th
in broadband penetration worldwide since 2001.
"In
order to reverse this trend, we need to ensure
that access costs are kept to a minimum. Prohibiting
unnecessary access taxes will help accomplish
this goal," Eshoo told the House.
"We
also need to allow unfettered access to the products
and new services that are only available through
the Internet and prevent multiple layers of state
and local taxes. Otherwise, we will open the door
to a myriad of barriers to Internet commerce that
will drive consumers from a web-based marketplace
and stifle innovation," she argued.
Meanwhile,
in the Senate in May 2007, US Senators Tom Carper
(D-Del.) and Lamar Alexander (R-Tenn.) introduced
legislation that would extend the ban on Internet
access taxes for another four years.
The
Internet Tax Freedom Extension Act of 2007 sought
to improve the existing moratorium by closing
tax loopholes, and clarifying the definition of
"Internet access" to better protect
essential goods and services provided by state
and local governments.
The
Carper-Alexander bill would alter the definition
of 'Internet access' to ensure that a consumer's
connection to the Internet, including email and
instant messaging, remained tax-free. At the same
time, the bill would close a loophole in the original
1998 moratorium that could allow an Internet Service
Provider to bundle Internet access with other
services and make them all tax-free. The Senators
said that closing this loophole is important because
it could harm the traditional tax base of state
and local governments.
In
2004, the last time Congress had extended the
ban, Congress exempted voice-over-Internet-protocol
services from the moratorium because of fears
that states and localities could lose billions
of dollars in revenue as telephone services migrated
to the Internet.
As
the Internet continues to grow and more services
migrate to the Internet, Senators Carper and Alexander
explained that it makes sense to close that loophole
and define Internet access exclusively as the
connection between a consumer and the Internet
Service provider. Such clarity will continue to
ensure that Internet access is tax free, while
also ensuring state and local governments do not
have to come up with new - and potentially more
burdensome - sources of revenue to pay for teachers,
firefighters and health care services, they explained.
"Our
bill would ensure that consumers continue to enjoy
tax-free access to the Internet, including email
and instant-messaging," stated Sen. 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."
"We
should not undermine the ability of governors
and mayors to pay for goods and services that
everyone depends on. 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,"
he added.
"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," Sen. Alexander announced. "A
permanent moratorium would create a massive federal
unfunded mandate, which members of Congress have
repeatedly promised not to do. 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."
In
addition, the legislation sought to extend the
original "grandfather" clause, thereby
allowing the nine states that collected revenues
from Internet access before the 1998 tax moratorium
to continue to collect those taxes.
As finally passed, the Internet Tax Freedom Act
of 2007 extended the moratorium until 2014.
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