Internet Tax Debate Is Going Down to the Wire

Senate leaders consider parliamentary maneuvers to salvage legislation already passed by House.
Posted October 28, 2003

Roy Mark

The U.S. Senate has yet to schedule a vote on the Internet Tax Moratorium, which expires Saturday, although staff members predict there will be some action on the legislation by the end of the week. The U.S. House of Representatives on Sept. 17 passed a bill to make the current moratorium permanent.

Similar legislation was passed by a Senate committee earlier this year. Since the House vote, however, opponents to a permanent ban say the House and Senate bills make substantive changes to the current law that could eventually cost states as much as $9 billion annually in taxes.

The opposition has prompted several senators to put a "hold" on the legislation.

The changes to current temporary moratorium include eliminating a grandfather clause that preserves state and local taxes on Internet access "imposed and actually enforced prior to October 1, 1998," and an expanded definition of "Internet access" to prevent states from taxing telecommunications services "used to provide Internet access."

"Senator (Ron) Wyden is certainly pressing for it to come up on the floor this week," Chris Fitzgerald, a spokesman for Wyden (D.-OR), a sponsor of the bill, told "But, the floor schedule is a matter for leadership to decide."

Amy Call, press secretary for Senate Majority Leader Bill Frist (R.-TN), said Monday it is "unclear at this point" when, and if, the bill will come up for a vote before Saturday's expiration date. However, Call said, other parliamentary maneuvers, such as passing a continuing resolution to extend the temporary moratorium or attaching Wyden's bill to budget legislation, were possible.

The original moratorium was established by the Internet Tax Freedom Act (ITFA) enacted for three years in 1998 and renewed by Congress for another two years in 2001.

The House and Senate bills require nine states that were grandfathered in the original 1998 legislation to repeal existing Internet access taxes. The legislation also introduces new definitions of Internet access meant, according to the bill sponsors, to include broadband access as well as the dialup access covered in the temporary moratorium.

A number of states, led by the National Governors Association (NGA) are concerned the new definitions would exempt not only certain telecommunications services, but would also expand the pre-emption beyond sales taxes to include some income, property and other business taxes.

Last week, Sens. Charles Grassley (R-IA), John Ensign (R-NV), John Sununu (R-NH), Gordon Smith (R-OR), and George Allen (R-VA) offered what they called a compromise to fix the broadened definition terms, but the governors claim it isn't enough.

In an NGA letter to Senate leadership, Oklahoma Gov. Brad Henry and South Dakota Gov. Mike Rounds, chair and vice chair of the group's economic development and commerce committee, said, "With little time to negotiate an appropriate definition of Internet access, we encourage you to support a simple, temporary extension of current law to allow Congress, industry, and state and local governments time to fashion a permanent moratorium that is thoughtful and fair."

Fitzgerald said there were "ongoing negotiations" about "certain aspects of the legislation." He added that the states have been "unable to show how they would be adversely affected."

The Congressional Budget Office (CBO) was unable to estimate the amount state and local revenue losses that would result from this change because telecommunications companies are not required to maintain records categorizing their sales by type of customer, making it impossible to distinguish sales of high-speed telephone lines to Internet access providers from sales of similar services to other business customers.

However, the CBO did state, "Depending on how the language altering the definition of what telecommunications services are taxable is interpreted, that language also could result in substantial revenue losses for states and local governments."

In addition to NGA's letter, individual governors have been writing to senators urging them to fix the legislation by clarifying that the moratorium applies only to access.

In a letter to Grassley, chairman of the Senate Finance Committee, Ohio Gov. Bob Taft wrote, "I urge you to continue working with your Senate colleagues to narrow the preemption language to its original intent so as to affect Internet access only."

State and local government groups including NGA also wrote to House and Senate leaders Sept. 17 to voice their concerns about the legislation.

The Center on Budget and Policy Priorities, a Washington policy group, issued a report last week claiming no state or local government would be permitted to tax DSL service in the future under the language changes in the proposed bills.

As a result of this prohibition, the report states, consumers who choose to lease a second regular voice telephone line to access the Internet would be subject to all applicable state and local taxes, while those who purchase more expensive DSL service, which permits simultaneous use of the Internet and a voice telephone, would not be subject to taxes.

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