Extending the Internet Tax Moratorium and Related Issues

Publication Date: January 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Media, telecommunications, and information

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Abstract:

The Internet Tax Freedom Act, enacted in 1998, placed a 3-year moratorium on the ability of state and local governments 1) to impose new taxes on Internet access or 2) to impose multiple or discriminatory taxes on electronic commerce. It grandfathered existing taxes on Internet access. The original moratorium expired on October 21, 2001. Numerous bills to extend the moratorium were introduced in the first session of the 107th Congress. The Congress approved H.R. 1552 (P.L. 107-75, enacted November 28, 2001) which extended the prior moratorium by 2 years, until November 1, 2003.

The bills under active consideration during 2001 addressed two major sets of issues. The first centered on how long to extend the moratorium and whether to continue to grandfather existing taxes on Internet access. The second addressed the simplification of state and local sales and use tax systems and whether Congress was willing to signal support for the states' effort to have out-of-state sellers collect taxes on interstate sales. (Tax simplification is treated as a prerequisite to Congress granting states the authority to require tax collection by remote sellers.)

The two issues were linked. Some supporters of granting the states sales and use tax collection authority wanted no extension of the moratorium. Others wanted the extension to be long enough for the states to accomplish meaningful sales tax simplification, but not so long that public perception of the Internet as a tax-free shopping zone could become entrenched. They preferred a shorter extension of the moratorium - of 2 years or less. They might have agreed to a longer extension if sales tax collection provisions were included in the extension bill. Those skeptical of the ability of state and local governments to quickly agree upon and implement meaningful sales tax simplification favored a longer extension - of 4 or 5 years. Those who opposed addressing the issue of tax collection by remote sellers typically favored a longer, if not permanent, extension of the moratorium.

The moratorium extension bill that was enacted, H.R. 1552 (P.L. 107-75), did not address the sales and use tax simplification and collection issue. However, before voting to approve H.R. 1552 as received from the House, the Senate debated the Enzi-Dorgan amendment (S.Amdt. 2155), which did address the issue in considerable detail. The amendment was tabled by a vote of 57 to 43. Still, both during the debate and after the votes in the Senate, several Senators expressed their intention to pursue an agreement on the sales and use tax simplification and collection issues raised in the amendment during the added 2 years of the moratorium.

Two other issues related to definitions in the Internet Tax Freedom Act were of particular concern to state and local revenue officials. One was including otherwise taxable products and services in the definition of tax-protected Internet access. Another was businesses using Internet kiosks and dot-com subsidiaries to avoid sales tax collection and other tax obligations, based on the definition of discriminatory tax. This report will not be updated.