By Larry Jones
July 30, 2007

Congressional staff has informed the Conference of Mayors that the House Subcommittee on Commerce and Administrative Law plans to consider legislation on August 2 to extend the Internet Tax Freedom Act, which is currently scheduled to expire November 1 of this year. The original law was enacted in 1998 to help encourage the growth of the Internet in its infancy by imposing a moratorium on state and local taxes on Internet access fees, as well as prohibiting multiple and discriminatory taxes. Although numerous attempts have been made to make the law permanent, Congress has rejected every attempt and has only granted a temporary extension of the law.

State and local groups have consistently pushed for a temporary extension due in large part to the rapid changes occurring in technology and electronic commerce which could affect state and local revenues. Industry groups on the other hand have argued for a permanent extension.

In a significant move in favor of state and local governments, the Subcommittee has decided to not mark up proposals opposed by the Conference and other state and local groups. These proposals (H.R. 1070 and H.R. 743), introduced earlier in the year by Representatives John Campbell (CA) and Anna Eshoo (CA) respectively, would make the moratorium permanent and eliminate protections of existing state and local revenues. For the past several months Representative Linda Sanchez (CA), who serves as chairwoman of the subcommittee, has worked very closely with state and local groups and representatives from the telecommunications industry to develop her own bill, which is expected to attract strong bipartisan support. As U.S. Mayor went to press, her bill had not been introduced.

While the Conference would like to have seen the Subcommittee introduce and take up a companion bill similar to S. 1453, which is the legislation introduced in the Senate by Senators Thomas (DE) Carper and Lamar Alexander (TN) on behalf of state and local governments, the draft language circulated by staff addresses, as well as in a positive way, most of the concerns of state and local governments, and a key concern of the telecommunications industry.

Under S. 1453, ITFA would be extended for four years, the definition of Internet access would be clarified to make clear that the moratorium on state and local taxes only applies to the service that connects a user to the Internet and not to goods and services sold over the Internet, and the grandfather clause would be extended to allow those state and local governments that had taxes on Internet access fees in place before the 1998 law was adopted to continue collecting such taxes.

The proposal that Representative Sanchez is developing will probably extend ITFA for either six or eight years. It will most likely clarify the definition of Internet access in a manner similar to the language in S. 1453, but also address a key concern of industry groups. They believe it should be made clear that an amendment adopted in 2004 that states taxes on telecommunications services “purchased, used or sold” in providing Internet access applies to all states. Because the 2004 amendments contained two grandfather clauses on this provision (one pertaining to pre-1998 taxes and another pertaining to pre-2003 taxes), ambiguity caused a few states to issue rulings following the 2004 amendments that their taxation of such services are protected, and they have continued to collect such taxes. However, most states have not imposed a tax on these services. The proposal is also expected to continue, but phase out over an extended period, another grandfather clause that protects state and local taxes on Internet access fees.