By Larry Jones
January 22, 2007

Soon after Congress convened for the first session of the 110th Congress, members wasted no time in introducing two separate bills January 4 that would impose a permanent ban on state and local taxes on Internet access fees and a three-year ban on any “new [state and local] discriminatory tax” on cell phones. In both instances, the bills would preempt state and local taxing authority and severely restrict the ability of state and local elected officials to raise revenues to address critical public service needs.

First, in a move to make permanent a temporary ban that dates back to 1998, Senator Ron Wyden (OR) was joined by Senators John McCain (AZ) and John Sununu (NH) in introducing S. 156, the Permanent Internet Tax Freedom Act of 2007. In a press statement, the cosponsors of the bill said it “would forever prohibit three types of taxes that unfairly single out the Internet, including taxes on Internet access, double taxation (for example, by two or more states) of a product or service bought over the Internet, and discriminatory taxes that treat Internet purchases differently from other types of sales.” But from 1998 up until now, very few states and even fewer local governments have imposed a tax on Internet access fees. Those that have imposed such a tax, did so before the original law was enacted and were allowed to retain them under a grandfather.

A key issue for state and local governments in any legislation proposing to make the ban on Internet access fees permanent is the definition of Internet access. If Internet access is not clearly defined, state and local governments are concerned that any service that is bundled with Internet access could become tax free. For example, if a service provider offers an Internet access package that in addition to Internet access includes taxable items such as movies, games and music, those items could end up being tax free when offered over the Internet. This would create an un-level playing field between merchants on Main Street who would still be required to collect such taxes and Internet retailers who would not be required to do the same. This would undoubtedly would cause significant revenue loss for many state and local governments.

In a similar move, McCain and Sununu were joined by Senators Jim DeMint (SC) and Gordon Smith (OR) in introducing S. 166, the Cell Phone Tax Moratorium Act of 2007. This bill would prohibit state and local governments from imposing any “new discriminatory tax” on mobile services, mobile service providers, or mobile service property for three years. In general the bill defines “new discriminatory tax” as any tax imposed by a state or local government:

1) on any mobile service that is not generally imposed or is generally imposed at a lower rate on “other services;”

2) on any mobile service provider that is not generally imposed or is generally imposed at a lower rate on “other persons that provide services other than mobile services;” and

3) on any mobile service property that is not generally imposed or is generally imposed at a lower rate on other commercial or industrial property subject to a property tax.

This proposed legislation would ban any new cell phone specific tax. Many state and local governments would be affected by this legislation since many of them currently only tax traditional wire line phones. A key concern is that consumers are abandoning traditional wire line phones in favor of cell phones. As they make the transition, state and local governments are suffering huge revenue loses. And the proposed moratorium is being introduced at a time when state and local governments are in the process of considering changes in their communications tax laws to ensure that they are applied equitably to all functionally equivalent telephone services, regardless of the technology used. Without defining “generally imposed” the bill also implies that only the lowest state and local “general imposed” tax can be applied to the cell phone.

As U.S.MAYOR went to press, no companion bills have been introduced in the House.