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The U.S. House of Representatives has joined the Senate in approving a seven-year extension of the moratorium on state and local Internet access taxes. President George W. Bush is expected to sign the legislation once it reaches his desk.
The moratorium was originally enacted in 1998 and, after having been renewed in 2001 and 2004, was set to expire on November 1, 2007. The House accepted unanimously the Senate amendments made to the bill that originally passed the House on October 16. Attempts to make the prohibition permanent were unsuccessful, despite support from many lawmakers and the administration.
The legislation on its way to the President, the Internet Tax Freedom Act Amendments Act of 2007, includes the following provisions:
- The moratorium on state and local taxes on Internet access, and multiple or discriminatory taxes on electronic commerce, that was originally enacted in October 1998 is extended until November 1, 2014.
- The grandfather clause that permits Internet access taxes that were generally imposed and actually enforced prior to October 1, 1998, is also extended until November 1, 2014. However, the grandfather clause will not apply to any state that has, more than 24 months prior to the enactment of this legislation, repealed its tax on Internet access or issued a rule that it no longer applies such a tax.
- State and local governments that continue to impose tax on telecommunications service purchased, used, or sold by a provider of Internet access have until June 30, 2008, to end these disputed taxes. However, this provision only operates if a public ruling applying such a tax was issued prior to July 1, 2007, or such a tax is the subject of litigation that was begun prior to July 1, 2007. Some states claim that taxes they impose on telecommunications service were grandfathered by Congress in the 2004 renewal of the moratorium. This provision and the revised definition of "Internet access" (discussed below) is intended to resolve these issues and end state and local taxation of telecommunications service purchased by Internet service providers to connect their customers to the Internet (so-called "backbone" services). According to the Congressional Budget Office, as many as eight states (Alabama, Florida, Illinois, Minnesota, Missouri, New Hampshire, Pennsylvania, and Washington) and several local governments in those states are currently collecting such taxes and will lose revenue as a result of this prohibition.
- A new definition of "Internet access" is enacted. It means a service that enables users to connect to the Internet to access content, information, or other services. The definition includes the purchase, use, or sale of telecommunications by an Internet service provider to provide the service or otherwise enable users to access content, information, or other services offered over the Internet. It also includes incidental services such as home pages, electronic mail, instant messaging, video clips, and personal electronic storage capacity, whether or not packaged with service to access the Internet. However, "Internet access" does not include voice, audio or video programming, or other products and services using Internet protocol for which there is a charge, regardless of whether the charge is bundled with charges for "Internet access."
- The moratorium is amended to clarify that it does not apply to state general business taxes, such as gross receipts taxes, that are structured in such a way as to be a substitute for or supplement the state corporate income tax. Therefore, Internet access providers may still be taxed on their receipts attributable to providing access under tax regimes such as the Michigan business tax, Ohio commercial activity tax, Texas margin tax, and Washington business and occupation tax.
Added to the news November 7, 2007.
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