Congress Extends Internet Tax Moratorium to 2007
Through a concurrent resolution, Congress recently passed a new version of the Internet Tax Nondiscrimination Act (“ITNA”), extending the moratorium on Internet access and multiple or discriminatory taxes on electronic commerce until Nov. 1, 2007.1 The ITNA had been stalled for months as the House and Senate worked to find language acceptable to both bodies. The House passed a permanent moratorium last year and the Senate passed a four-year moratorium in April. See update dated April 30, 2004. The final legislation is the earlier passed Senate bill with some slight modifications. The President supported the legislation and is expected to sign the bill into law.
The ITNA expands the scope of the prior moratorium contained in the Internet Tax Freedom Act (“ITFA”). While the ITFA specifically permitted state and local taxes of telecommunications services, the ITNA precludes taxation of such services when they are used to provide Internet access. The moratorium applies regardless of the regulatory treatment of the underlying platform—all transmission components used in the provision of Internet access will be exempt from state and local taxes. The exemption is therefore equally applicable to DSL, wireless, and cable modem Internet access services, and each of these medium’s respective transport mechanisms.
Under the ITNA, pure telecommunications services (not used to provide Internet access) remain taxable. Also, charges for Internet access that are bundled with pure telecommunications or other taxable charges remain taxable unless the Internet access charges can be separately identified. In addition, the ITNA exempts from the moratorium taxes on charges for voice over Internet protocol (VoIP) “or similar service utilizing Internet pProtocol or any successor protocol.” The effect of the VoIP exemption may be somewhat tempered by the FCC’s recent decision pre-empting traditional state public utility regulation of certain VoIP services, including those offered by cable companies. The ITNA clarifies that the VoIP exemption from taxes does “not apply to any services that are incidental to Internet access, such as voice-capable email or instant messaging.” The ITNA also excludes universal service, 911 and E-911 services charges and fees from the moratorium.
The ITNA contains a number of grandfathering provisions that were necessary to garner enough support to win passage. States and localities that were taxing Internet access as of October 1998 can continue doing so until November 2007. States and localities taxing Internet access as of November 2003 can continue doing so until November 2005, with the exception of Wisconsin, which can continue its tax for an additional year, until November 2006. In addition, the ITNA exempts from the moratorium altogether the collection of access line fees by Texas municipalities under current Texas law.
The ITNA does not affect the ability of states to collect retail sales or use taxes of general applicability to online sales. It does prohibit sales taxes that apply only to Internet transactions, sales taxes that apply to Internet transactions differently from other transactions, and the imposition of sales taxes by more than one state. The ITNA therefore has no impact on the Streamlined Sales 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 next Congress will likely consider legislation to facilitate more uniformity in sales tax collection. It is also likely that once again new legislation will be introduced to make permanent the Internet access tax moratorium.
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1The ITFA moratorium was initially for three years. In 2001, the ITFA was extended through Nov. 1, 2003.