By Larry Jones
October 22, 2007

In a significant victory for local and state governments on October 16, the House voted 405 – 2 to pass H.R. 3678, legislation that would extend tax-free Internet access for four more years, and make a number of favorable changes for state and local governments in a law that bans taxes on Internet access fees. The House Judiciary Committee approved the measure on October 10 by a vote of 38 – 0 after defeating attempts to make the ban permanent, and numerous attempts to extend the number of years of the ban.

Under current law, the ban against taxes on Internet access is scheduled to expire on November 1. The bill would extend the ban for four more years, clarify the definition of “Internet access,” and allow state and local governments that taxed Internet access before the ban was enacted in 1998 to continue to collect such taxes. It would also make clear that the ban only applies to services providing Internet access and not to goods and services sold over the Internet. Commenting on the legislation, Conference Executive Director Tom Cochran said, “This legislation will clear up a number of ambiguities in current law, which should better protect state and local revenues. I commend the Chairman of the House Judiciary Committee, John Conyers (MI), and all members who voted in favor of this important legislation.”

In spite of a huge push form the telecommunications industry to make the ban permanent, Conyers decided to advance his own temporary bill which was supported by the Conference and a broad coalition of government, industry and consumer groups. Conyers was keenly sensitive to concerns raised by state and local government groups who have long argued that too many changes are occurring in technology and the Internet market place for Congress to consider a permanent ban.

Since the enactment of the original ban in 1998, Congress has only approved temporary extensions of the law. Following the vote on the House floor, Representative Mel Watt (NC), a proponent of H.R. 3678 and firm supporter of state and local governments explained, “Every time we have extended this moratorium, we have revised this moratorium. We changed it in 2001, in 2004 and we will probably change it again because every time we think we’ve found the outer limit of the Internet, somebody comes along and changes it.”

Representative Anna Eshoo (CA), who is sponsoring a bill to make the ban permanent, H.R. 743, and one of the two members who voted against H.R. 3678, argues that a permanent ban would provide certainty to Internet users and providers, hold down the cost of Internet access, and encourage broadband rollout across the nation.

In a significant improvement for state and local governments, H.R. 3678 would amend the definition of “Internet access” to clarify that the ban on state and local taxes only applies to the service that connects a user to the internet and not to good and services sold over the Internet. Under current law, “Internet access means a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users.” This language implies that numerous taxable services provided online such as movies, music, games, magazines and other services could be bundled with Internet access “as part of a package of services” and offered tax-free.

Under H.R. 3678, Internet access is defined merely as “a service that enables users to connect to the Internet to access content, information, or other services offered over the Internet.” This definition is much more narrowly focused, which closes the door on any future opportunities for providers of Internet access to bundle content and other services into a single package with Internet access and offer them tax-free.

Consistent with previous bills extending the ban, H.R. 3678 extends for four years the grandfather clause which would allow those state and local governments that were imposing taxes on Internet access before the original ban was enacted, to continue collecting such taxes.

Senate Action

Although similar legislation, S. 1453, has been introduced in the Senate by Senators Thomas Carper (DE) and Lamar Alexander (TN), Commerce, Science and Transportation Committee Chairman Daniel Inouye (HI) was forced to abandon mark up of the bill on September 27 because he did not have the support to pass a four-year extension. According to Senator Kay Bailey Hutchison (TX), all Republicans and one Democrat on the committee were prepared to vote in favor of an amendment to make the bill permanent. However, Inouye has voiced opposition to a permanent bill and has not rescheduled the bill for mark up.

Now that the House has passed a four-year extension of the ban, aides said it is possible that Majority Leader Harry Reid (NV) will schedule the House-passed bill for a quick vote on the Senate floor. With less than two weeks remaining before the current ban expires, this would be the quickest way to pass legislation and avoid a lapse in tax-free Internet access. It is uncertain if and when Reid will attempt to bring the bill to the floor.