Internet Taxation: Issues and Legislation

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Media, telecommunications, and information

Type:

Abstract:

The Internet Tax Freedom Act (ITFA), enacted in October 1998 and extended for two years in November 2001, expired on November 1, 2003. The federal moratorium prohibited state and local governments from levying new taxes on Internet access and any multiple or discriminatory taxes on electronic commerce. Taxes on Internet access that were in place before October 1, 1998, were protected by a grandfather clause.

The House approved a permanent moratorium, H.R. 49, on September 17, 2003. H.R. 49 as passed would have (1) permanently extended the moratorium; (2) eliminated the grandfathering protections, and (3) exempted from state and local taxes any form of telecommunications used to provide Internet access. The Congressional Budget Office (CBO) found that H.R. 49 would have imposed an intergovernmental mandate because existing taxes would not be granted grandfathering protection. The Bush Administration supported permanent extension of the moratorium.

The Senate approved a temporary extension of the moratorium, S. 150, on April 29, 2004. S. 150 (1) extended the moratorium for four years, from November 1, 2003, through November 1, 2007; (2) expanded the definition of Internet access to include both providers and buyers of Internet access; (3) grandfathered through November 1, 2007, Internet access taxes enforced before October 1, 1998; (4) grandfathered through November 1, 2005, Internet access taxes enforced before November 1, 2003 (primarily taxes on DSL Internet access service); and (5) excluded from the moratorium taxes on voice or similar service utilizing Internet Protocol (VoIP). In the final days of the 108th Congress, the Senate on November 17, 2004, approved S.Con.Res. 146, which made two modifications to S. 150. It restricted the grandfathering protection for Internet access taxes in Wisconsin to two years instead of four and explicitly protected Texas municipal access line fees. On November 19, the House approved both S. 150 and S. Cons. Res. 146. President George W. Bush signed S. 150 into P.L. 108-435 on December 3, 2004.

An issue previously raised in connection with the Internet tax moratorium is streamlining sales taxes for remote tax collection authority. Companion bills introduced in the 108th, H.R. 3184 and S. 1736, would have granted states that comply with the Streamlined Sales and Use Tax Agreement (a multistate compact) the authority to require remote sellers to collect state and local taxes on interstate sales. A related issue is whether and how to have Congress set the nexus standards under which a state is entitled to impose a business activity tax (BAT, e.g., corporate net income tax, franchise tax, business and occupation tax, gross receipts tax) on a company located outside the state but with some business activities in the state. H.R. 3220 would have established a physical presence standard for business activity taxes. This report will be updated as legislative events warrant.