By Larry Jones
October 8, 2007

In a significant move for state and local governments, Representative John Conyers (MI), chair of the House Judiciary Committee, introduced legislation September 27 that would extend for four more years a moratorium on state and local taxes on Internet access fees due to expire November 1. Similar to a bill (S. 1453) introduced in the Senate on behalf of state and local governments, H.R. 3678 would also amend the definition of “Internet access” and extend the grandfather clause to protect those states and localities that imposed taxes on Internet access fees before the original moratorium passed in 1998.

The House Judiciary Committee is expected to take action on H.R. 3678 the week of October 8 or the following week. State and local groups are pleased Conyers decided to consider a temporary extension instead of any of the permanent extension bills (H.R. 743/H.R. 1077) supported by the telecommunications industry. Due to the rapid changes in technologies and the ever-changing nature of the Internet, state and local groups have argued against making the bill permanent. In an October 2 joint letter to the Committee leadership, the Conference and other state and local groups explained that a temporary extension “…ensures that Congress revisits the moratorium to correct any unintended consequences for state and local governments, consumers or industry.”

Under H.R. 3678, the definition of “Internet access” has been further refined to address concerns raised by government groups and the grandfather clauses have been modified to address concerns raised by industry groups. For state and local governments the bill clarifies that the moratorium on state and local taxes applies to the service that connects a user to the Internet and not to goods and services sold over the Internet. This will clear up ambiguities in current law which imply that items such as movies, games, music and magazines, when bundled with Internet access, should be offered tax-free.

For industry, there are ambiguities surrounding two grandfather clauses that have different termination dates contained in the 2004 amendments to the act. As a result, the telecommunications industry claims that seven states have been imposing taxes on telecommunications services “purchased used or sold” in providing Internet access that should have terminated November 1, 2005. To address this concern, H.R. 3678 would provide that if a state “issued a public ruling prior to July 1, 2007, that applied such tax to such service” that state would be prohibited from taxing those telecommunications services after November 1, 2007. Further, the bill would continue to allow those state and localities imposing taxes on Internet access fees in 1998 before the original bill was enacted, to continue to do so until 2011.

On the Senate side, Commerce, Science and Transportation Committee Chairman Daniel Inouye (HI) abruptly pulled S. 1453 from the committee’s agenda on September 27 over fears that a few Democratic members would vote to make the bill permanent. According to Senator Kay Bailey Hutchison (TX), “All Republicans and one Democrat were going to vote to make it permanent.” According to Committee staff, Senator Barbara Boxer (CA), one of 12 Democrats on the Committee indicated she was prepared to support a permanent Internet Tax moratorium after Inouye refused to allow her to amend an unrelated water bill, which was one of five bills on the committee’s September 27 agenda for action.

Senator John Kerry (MA), another Democrat who is a cosponsors of S. 156, a permanent bill, indicated he would be willing to support a six-year extension of the Internet Tax moratorium as a compromise. Chairman Inouye is open to the idea of moving a six-year compromise. It is unclear when the Senate will consider S. 1453. Committee staff expects it will be after the House Judiciary Committee votes on its version of the bill.