Senate Votes to Extend Internet Tax Moratorium to 2007
Yesterday, by a vote of 93-3, the U.S. Senate passed S. 150, the Internet Tax Nondiscrimination Act (“ITNA”), which would extend by four years the moratorium imposed on state and local taxes on Internet access and electronic commerce. The moratorium was first established in 1998 by the Internet Tax Freedom Act (“ITFA”) and expired last November.1 Extending the moratorium has been the subject of intermittent congressional and executive attention since shortly before the ITFA’s expiration and has continued through to the present.
The Senate’s vote on S. 150 yesterday follows action by the House of Representatives back in September 2003 that would have made permanent the moratorium on all Internet taxes. Opponents of the House bill—largely state and local taxing authorities—focused their attention on the Senate and secured minor concessions for states taxing Internet access prior to November 2003 or October 1998. Under a compromise that would still need to be finalized in conference, states and localities taxing Internet access as of November 2003 could continue doing so until November 2005. States and localities taxing Internet access as of October 1998 could continue doing so until November 2007. The president is expected to sign the new ITNA into law after differences in the two bills are resolved in conference and final passage by both the House and Senate, which is expected soon.
The ITNA broadens the scope of the prior ITFA moratorium. For example, the ITFA did not prohibit state and local taxes on telecommunications services. The new ITNA would still allow state and local taxes on pure telecommunications services, but would preclude taxation on telecommunications services used to provide Internet access. Thus, regardless of the regulatory treatment of the underlying platform, all transmission components used in the provision of Internet access would be exempt from state and local taxes. This exemption would be equally applicable to DSL, wireless, and cable modem Internet access services, and each of these medium’s respective transport mechanisms. However, under the Senate bill, an Internet access provider’s charges for Internet access would be subject to taxation if those charges were bundled with pure telecommunications or other taxable charges unless the Internet access charges could be separately identified. At least 13 states have enacted laws to tax Internet access when it is bundled with voice services and three others impose sales tax directly on DSL service. The ITNA would prohibit such further taxes and those in existence would be subject to the grandfather clause, if that clause remains in the final bill.
Significantly, too, the Senate bill would exempt from the moratorium taxes based on charges for voice over Internet protocol (VoIP) “or similar service utilizing Internet Protocol or any successor protocol.” That section clarifies, however, that the VoIP exemption “shall not apply to any services that are incidental to Internet access, such as voice-capable email or instant messaging.” The Senate bill would also exclude universal service and 911 and E-911 service charges and fees from the moratorium.
Neither version of the legislation would affect the ability of states to collect sales taxes of general applicability to online sales. The old ITFA and new ITNA bills would prohibit sales taxes that apply just to Internet transactions or that tax Internet transactions differently than other transactions. The new ITNA therefore has no impact on the Streamlined Sales Tax Project—an attempt by nearly 40 states to level the playing field for the collection of sales taxes for online sellers and traditional retailers. The states are currently lobbying Congress for legislation to facilitate more uniformity in sales tax collection.
If you have additional questions about Internet taxes, the ITFA or the ITNA, please contact us.
1 The ITFA moratorium was initially for three years. In 2001, the ITFA was extended through Nov. 1, 2003. Under the Senate bill, the latest extension would expire on Nov. 1, 2007.