By Larry Jones
September 24, 2007

To the delight of state and local governments, the Senate Commerce, Science and Transportation Committee is expected to consider the Internet Tax Freedom Extension Act of 2007, S. 1453, on September 27. Sponsored by Senators Thomas Carper (DE) and Lamar Alexander (TN) on behalf of state and local governments, the legislation will extend a 1998 law that is scheduled to expire on November 1.

Under S. 1453 the moratorium on state and local taxes on Internet access fees would be extended for 4 years, the definition of Internet access would be clarified to make it clear that the moratorium 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 that protects taxes on Internet access fees that were in effect before the original moratorium took effect in 1998 would also be extended for 4 years.

The Conference of Mayors and other state and local groups, including the National Governors Association, National Association of Counties, National League of Cities and the Council of State Governments have been working closely to urge support for the bill and are delighted that the Committee Chairman, Senator Daniel K. Inouye (HI) decided to consider S. 1453 instead of S. 156, a separate bill sponsored by Senator Ron Wyden (OR) that would make the existing moratorium permanent.

There are flaws in the existing legislation which make a permanent bill unacceptable for state and local governments. For example, under current law the definition of Internet access is defined to “include access to proprietary content, information and other services as part of a package of services offered to users.” State and local governments are concerned that this could be interpreted to mean when services such as music, movies, games, magazines and other taxable services are bundled with Internet access and offered as a package, they would be exempt from state and local taxes.

They are also concerned about the effects of a permanent moratorium on state and local governments at a time when the Internet is evolving rapidly. As this rapid change occurs, it makes sense for Congress to pass temporary extensions. This will give members the opportunity to examine the impact of change on a periodic basis and make adjustments in the law to ensure that it remains sensitive to the current market environment. The Conference and other state and local groups are urging mayors, governors, and other elected leaders to contact their Senators and urge them to support S. 1453, and oppose S. 156 and other measure that would make the moratorium permanent.

No similar legislation has been introduced in the House. State and local groups have been working very closely with Representative Linda Sanchez (CA), who as chairs the House Subcommittee on Commercial and Administrative Law was developing a bill. Rep. Sanchez had hoped to introduce a bill last July but efforts were stalled when several satellite companies tried to get her to add language in the bill to ensure equal tax treatment with cable companies. The satellite industry’s concern has less to do with the Internet tax moratorium and more to do with their desire to reform telecommunications taxes. They argue that some states are imposing higher taxes on pay-TV services offered over satellites than their competitors in the cable industry. State and local groups strongly oppose adding the language from the satellite industry as it would amount to another federal preemption of state and local tax laws. Many industry groups also oppose adding these changes to the Internet tax moratorium bill.

There is speculation that Representative John Conyers (MI), Chairman of the House Judiciary Committee will soon introduce his own bill. While it is uncertain what a Conyers bill will look like, some believe it will provide for a temporary extension between 6 to 10 years, a definition of Internet access slightly different from the Senate version of the bill that addresses concerns of both government and industry, and a grandfather clause protecting existing taxes on Internet access that would be phased out over several years.