By Larry Jones
November 22, 2004

The Senate approved legislation, S.150, November 17 that will reinstate a temporary ban which expired last year on state and local taxes on Internet access fees. The Conference and other state and local groups are pleased that Congress decided to adopt the Senate's temporary ban instead of the permanent ban approved by the House. Adoption of the House version would have amounted to a huge revenue loss for state and local governments. The bill would have expanded the definition of Internet access and prevented state and local governments from collecting taxes on telecommunications services.

In a victory for cities, counties and states, the legislation will allow state and local governments with existing taxes on Internet access fees to continue collecting them for the next four years, and those with taxes on digital subscriber lines (DSLs) to continue collecting them for the next for two years. In another significant victory, the new legislation makes clear that state and local governments may continue to collect taxes on telephone calls even when calls are made over the Internet. A number of attempts were made during negotiations on the bill to exempt Voice Over Internet Protocol (VOIP) or calls made over the Internet from state and local taxes.

Under the final Senate version, which was adopted by the House on November 19, state and local governments will be prohibited from imposing new taxes on Internet access fees, multiple and discriminatory taxes through November 1, 2007. The President has indicated he will sign the bill.

Two changes were made to the Senate bill before it was sent to the House. These changes were made to accommodate Rep. James Sensenbrenner (WI), who chairs the House Judiciary Committee and Senator Kay Bailey (TX), a member of the Senate Commerce Committee. The first change provides a carve out for Wisconsin. Instead of allowing the state and local governments in Wisconsin with existing taxes on Internet access to collect them for the next four years, the bill will only allow them to collect such taxes for the next two years. The carve out for Texas merely clarifies that the legislation will not prevent local governments in Texas from collecting municipal access line fees.9

During negotiations on the final compromise Senators Lamar Alexander (TN) and Thomas Carper (DE) fought hard for state and local governments to ensure minimal harm to state and local revenues. They argued effectively that a permanent moratorium would be a huge tax giveaway to the telecommunications industry. However, Rep. Sensenbrenner said he would introduce legislation next year to once again make the legislation permanent.