Internet Taxation: Issues and Legislation in the 109th Congress

Publication Date: June 2006

Publisher: Library of Congress. Congressional Research Service

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Research Area: Media, telecommunications, and information

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Abstract:

Congress is involved in issues of state and local taxation of Internet transactions because commerce conducted by parties in different states over the Internet falls under the Commerce Clause of the Constitution. Currently, the "Internet Tax Moratorium" prohibits (1) new taxes on Internet access services and (2) multiple or discriminatory taxes on Internet commerce. The moratorium was created by the Internet Tax Freedom Act (ITFA) of 1998 (112 Stat. 2681) and has been extended twice. The original moratorium expired on October 21, 2001. Congress extended the moratorium through November 1, 2003, with P.L. 107-75. The moratorium was extended for an additional four years, through November 1, 2007, by P.L. 108-435. Taxes on Internet access that were in place before October 1, 1998, were protected by a grandfather clause.

In the 109th Congress, H.R. 1684, H.R. 1685, H.R. 4862, and H.R. 5422, would make the moratorium permanent by repealing the moratorium's sunset date. H.R. 1685 and H.R. 4862 would also strike the grandfather provision for digital subscriber line (DSL) taxes. The grandfather provision was added in the most recent extension of the ITFA (P.L. 108-435). In the Senate, S. 849 also would repeal the moratorium's sunset; it is similar, though not identical, to H.R. 1684.

On June 28, 2006, the Senate Commerce, Science, and Transportation Committee approved an amendment to a communications bill, S. 2686, that would make the moratorium on Internet access taxes permanent. Another amendment to the same legislation would impose a three-year moratorium on new taxes on wireless services.

An issue previously raised in connection with the Internet tax moratorium concerns states streamlining their sales taxes in order to gain remote tax collection authority. In the 109th Congress, S. 2152 and S. 2153 would grant states which 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. Another 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. In the 109th Congress, H.R. 1956 and its Senate companion, S. 2721, would establish a physical presence standard for business activity taxes. For more on state corporate income taxes, see CRS Report RL32297, State Corporate Income Taxes: A Description and Analysis, by Steven Maguire.

This report will be updated as legislative events warrant.