By Larry Jones and Ashanna Djemat, USCM Intern
June 4, 2007

Representatives from government and industry expressed opposite views on extending the Internet Tax Freedom Act during recent congressional hearings by House and Senate panels that oversee the implementation of the legislation. Enacted in 1998, the law imposes a moratorium on new state and local taxes on Internet access fees, and on multiple and discriminatory taxes. Since its enactment, Congress has decided against a permanent extension of the law and instead temporarily extended it two times, for two years in 2000 and for three years in 2004. With the law set to expire on November 1, Congress is once again considering whether the extension should be temporary or permanent.

With enormous changes occurring in technology and electronic commerce, which could affect state and local revenue streams, the Conference and other state and local groups have consistently argued for a temporary rather than a permanent extension of the ITFA. Industry groups on the other hand have argued in favor of making the legislation permanent, claiming it would prompt business investment and prevent excessive new taxes on businesses.

Testifying at the House Subcommittee on Commercial and Administrative Law on May 22 and at the Senate Commerce, Science and Transportation Committee on May 23, National Governors Association Director of Federal Relations David Quam told members of the hearing panels that although ITFA was designed to help stimulate new technology by making access to the Internet tax free, the original legislation “included three important restrictions to protect states:

1) The moratorium applied only to new taxes – existing taxes on Internet access were grandfathered;

2) The definition of Internet access, while broad, excluded telecommunications services; and

3) The moratorium expired after two years to allow Congress, states and industry the opportunity to make adjustments for rapidly developing technologies and markets.”

During the hearings, Quam made three primary recommendations that are supported by the Conference and other state and local groups: (1) the definition of Internet access should be clarified so that it is clear the moratorium on state and local taxes only applies to the service that hooks up a customer to the Internet and not to goods and services sold over the Internet; (2) the extension of the moratorium should be temporary to allow room for adjustment in the law as new technologies and changes in the market occur; (3) the grandfather clause should be maintained to allow state and local governments with taxes on Internet access in 1998 to continue collecting such taxes.

Testifying on behalf of industry, Verizon Vice President of Tax Policy Annabelle Canning told members of the hearing panels, “Making the Internet tax moratorium permanent will ensure that regressive new tax burdens are not imposed on lower-income Americans.” She also explained, “A permanent moratorium will send a strong, pro-investment signal to Internet entrepreneurs who depend on affordable broadband access. And it will prevent the imposition of excessive new taxes and administrative burdens on businesses that compete in the global economy.”

Legislation has been introduced in Congress on behalf of both government and industry. For state and local governments, Senators Tom Carper (DE), Lamar Alexander (TN), Dianne Feinstein (CA), George Voinovich (OH), and Michael Enzi (WY) introduced S. 1453, the ITFA Extension Act of 2007 on May 23, which would extend the ITFA for four years; clarify the definition of “Internet access” by dropping language that implies that other services (i.e. music, movies, games, books, newspapers and other taxable goods and services) bundled with Internet access must be offered tax free; and maintain the grandfather clause which protects state and local government with taxes on Internet access when the original bill was enacted in 1998. Carper and Alexander took the lead role in championing the cause for state and local governments the last time Congress considered extending the ITFA. And state and local governments received strong support from Feinstein, Voinovich and Enzi.

Earlier this year, Senators Ron Wyden (OR), John McCain (AZ) and John Sununu (NH), introduced S. 156, the Permanent Internet Tax Freedom Act of 2007, on behalf of industry which would impose a permanent moratorium on state and local taxes on Internet access fees, retain the existing definition of Internet access without addressing the bundling issue, and allow the grandfather clause, which protects state and local governments with taxes on Internet access fees, to expire.