Sales Tax State Activity Update- December 2004

Congress Reinstates Internet Tax Ban Through 2007

The U.S. House of Representatives has followed the Senate’s lead in passing a bill reinstating the moratorium on the taxation of Internet access. President Bush is expected to sign the legislation into law.

Specifically, the legislation does the following:

• Prohibits the imposition of state and local taxes on Internet access and multiple or discriminatory state and local taxes on electronic commerce through November 1, 2007 (this provision was contained in the original Internet Tax Freedom Act (ITFA) passed in 1998).
• Extends the ability of the original states that were grandfathered under the original ITFA to continue to tax Internet access until November 1, 2007. (Note: The grandfather clause for Wisconsin’s telecommunications tax has been extended only until November 1, 2006).
• Enacts a new grandfather clause that until November 1, 2005 will permit the taxation of other Internet access taxes that have been enforced since November 1, 2003 (Example: Jurisdictions that have been taxing DSL service can continue to do so).
• Expands the definition of exempt Internet access to include telecommunication services, except to the extent such services are purchased, used, or sold by a provider of internet access to provide internet access. (This provision should presumably exempt those telecommunications services used by Internet service providers over the Internet “backbone”).
• Provides that the taxation of charges for voice or a similar service using Internet Protocol (i.e. VoIP) are not affected. However, this exception for VoIP services does not extend to services that are incidental to Internet access, such as voice capable e-mail or instant messaging.
• Specifies that the Act does not prevent the imposition or collection of Universal Service or E-911 fees.
• Provides that if charges for Internet access are aggregated with charges for telecommunications services or other charges that are subject to tax, then the charges for Internet access may be subject to tax. Unless the Internet access provider can reasonably identify the charges for Internet access from its books and records.
• Specifies that Texas municipal access line fees are unaffected.
• Directs the Comptroller General to conduct a study on the impact of the moratorium and its effects on the revenues of State and local governments and whether the moratorium has had an impact on the deployment and adoption of broadband technologies for Internet access.
  
  S. 150 and S. Con. Res. 146, passed by the House on 11/19/04
  

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