By Larry Jones
September 29, 2003

By a voice-vote the House approved on September 17 the Internet Tax Nondiscrimination Act (H.R. 49), legislation that would permanently ban state and local taxes on Internet access fees. If enacted, the immediate impact will be felt in several state and local governments. Effective November 1, the proposed legislation will prohibit ten states and local governments in Colorado, Ohio, South Dakota, Texas, Washington and Wisconsin from collecting taxes on Internet access fees. A grandfather clause, which allowed these taxes to continue when the original law was adopted in 1998, would be eliminated. According to the Congressional Budget Office, this change could cause state and local governments to lose between $80 million and $120 million annually.

Another big issue for state and local governments is language that would amend the definition of Internet access. Under current law, Internet access "does not include telecommunication services." The amendment would change this to "does not include telecommunication services except to the extent that such service is used for Internet access." Although the amendment was adopted to ensure that the moratorium does not favor one technology over another, many believe it will create more problems than it solves. The fear among state and local officials is that telecommunications services that are currently being taxed will be bundled with Internet access and sold as a package to consumers and, therefore, will no longer be taxable.

In a joint letter signed by the Conference and other state and local groups in Washington, Republican and Democratic leaders of committees in both chambers with jurisdiction over the bill were told that the language "is too broad and could result in significant revenue losses for state and local governments." The letter also pointed out that the language could be interpreted "to include traditional taxable telecommunications." It further stated that "This ambiguity will only add to uncertainty for industry and consumers, encourage litigation, and unnecessarily expose state and local governments to unanticipated revenue loses they cannot afford." Members were urged to clarify the definition of Internet access to clarify that the moratorium applies only to access, and not to other services and products.

The Conference and other state and local groups are working with the Senate to get language adopted in S. 150, the Senate companion bill, to clarify the definition of Internet access to make it clear that it does not include traditional taxable telecommunications services.