[Congressional Record Volume 153, Number 162 (Wednesday, October 24, 2007)]
[Senate]
[Pages S13354-S13355]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
INTERNET TAX MORATORIUM
Mr. ALEXANDER. Mr. President, the House voted recently 405 to 2 to
extend the current Internet tax moratorium which expires at the end of
this month. They voted to extend it for 4 more years. I believe the
Senate should do the same thing and do it before the end of the month
rather than enact a permanent moratorium, as some want to do, because
permanent action is likely to invoke a far higher law--the law of
unintended consequences.
We can't imagine the future impact of the World Wide Web, and a
permanent moratorium could produce at least two unintended
consequences: No. 1, a big unintended tax increase, or No. 2, a big
unintended, unfunded Federal mandate.
Here is an example of how a permanent moratorium could produce an
unintended new tax. At the time the original moratorium was enacted in
1998, Internet access meant dial-up. Today, Internet access also
includes broadband. Fortunately, Congress updated the moratorium
definition in 2004 so that access to broadband is exempt from taxation.
Or, here is an example of how an outdated moratorium could produce an
unintended, unfunded Federal mandate on States, cities, and counties.
States and local governments collect billions of dollars in sales tax
on telephone services to pay for schools, roads, police, and hospital
workers. Under the old definition of Internet access, telephone calls
made over the Internet might have escaped such taxation. That might
sound good to conservatives like me who favor lower taxes, but most
members of my Republican Party were elected promising to end the
practice of unfunded Federal mandates--that is, those of us in
Washington telling Governors, mayors, and county commissioners what
services to provide and how to pay for them. In fact, Republican
candidates for Congress stood with Newt Gingrich on the Capitol steps
in 1994 and said, as part of a Contract With America, ``No more
unfunded mandates. If we break our promise, throw us out.'' In 1995,
the new Republican Congress enacted a new Federal Unfunded Mandates
Reform Act, banning unfunded mandates.
Make no mistake, Mr. President, the permanent extension that is
proposed would be an unfunded Federal mandate because it would not
allow the grandfathered States--and there are currently nine of them
collecting this tax--the ability to continue to make their own
decisions about what revenues to collect. It would freeze into place
forever an Internet access definition that might not be wise for
industry and that might not be wise for State and local governments.
That is why so many people support the idea of a 4-year moratorium on
taxation of Internet access. It has the support of the National
Governors Association, the National Association of Counties, The U.S.
Conference of Mayors, the National League of Cities, the Multistate Tax
Commission, and the AFL-CIO.
In addition to that, even though many in the industry would like to
have a longer moratorium, the Don't Tax Our Web Coalition has written a
letter to John Conyers, chairman of the House Judiciary Committee,
saying that they prefer the permanent extension but that they believe
the House-passed bill is a step forward and one they can support.
Mr. President, I ask unanimous consent to have printed in the Record
a copy of the letter from the Don't Tax Our Web Coalition and also a
copy of the Congressional Budget Office cost estimate from September 9,
2003, which makes absolutely clear that such a law would be an unfunded
Federal mandate under the terms of the 1995 Unfunded Federal Mandate
Act.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Don't Tax Our Web Coalition,
October 2, 2007.
Hon. John Conyers, Jr.,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Chairman Conyers: On behalf of the Don't Tax Our Web
Coalition (``Coalition''), I am pleased to express the
Coalition's support of your effort to extend the Internet tax
moratorium. Your continued leadership on these and other
important matters affecting our industry is critical to
consumers, and to strengthening the economy and job creation.
H.R. 3678, if enacted, would provide a temporary, four-year
extension of the moratorium that is set to expire on November
1. Your bill also contains important definitional and
statutory changes that improve current law. H.R. 3678 will
provide much needed clarity to the communications and
internet industries. By helping keep Internet access
affordable, the moratorium promotes ubiquitous broadband
access.
As you know, the Coalition has long endorsed H.R. 743, the
Permanent Internet Tax Freedom Act. While we prefer a
permanent extension, we believe that H.R. 3678 is a step
forward and thus a bill we can support.
We look forward to continuing to work with you on this most
important issue.
Sincerely,
Broderick D. Johnson.
S. 150--Internet Tax Nondiscrimination Act
Summary: S. 150 would permanently extend a moratorium on
certain state and local taxation of online services and
electronic commerce, and after October 1, 2006, would
eliminate an exception to that prohibition for certain
states. Under current law, the moratorium is set to expire on
November 1, 2003. CBO estimates that enacting S. 150 would
have no impact on the federal budget, but beginning in 2007,
it would impose significant annual costs on some state and
local governments.
By extending and expanding the moratorium on certain types
of state and local taxes, S. 150 would impose an
intergovernmental mandate as defined in the Unfunded Mandates
Reform Act (UMRA). CBO estimates that the mandate would cause
state and local governments to lose revenue beginning in
October 2006; those losses would exceed the threshold
established in UMRA ($64 million in 2007, adjusted annually
for inflation) by 2007. While there is some uncertainty about
the number of states affected, CBO estimates that the direct
costs to states and local governments would probably total
between $80 million and $120 million annually, beginning in
2007. The bill contains no new private-sector mandates as
defined in UMRA.
Estimated cost to the Federal Government: CBO estimates
that enacting S. 150 would have no impact on the federal
budget.
Intergovernmental mandates contained in the bill: The
Internet Tax Freedom Act (ITFA) currently prohibits state and
local governments from imposing taxes on Internet access
until November 1, 2003. The ITFA, enacted as Public Law 105-
277 on October 21, 1998, also contains an exception to this
moratorium, sometimes referred to as the ``grandfather
clause,'' which allows certain state and local governments to
tax Internet access if such tax was generally imposed and
actually enforced prior to October 1, 1998.
S. 150 would make the moratorium permanent and, after
October 1, 2006, would eliminate the grandfather clause. The
bill also would state that the term ``Internet access'' or
``Internet access services'' as defined in ITFA would not
include telecommunications services except to the extent that
such services are used to provide Internet access (known as
``aggregating'' or ``bundling'' of services). These
extensions and expansions of the moratorium constitute
intergovernmental mandates as defined in UMRA because they
would prohibit states from collecting taxes that they
otherwise could collect.
Estimated direct costs of mandates to state and local
governments: CBO estimates that repealing the grandfather
clause would result in revenue losses for as many as 10
states and for several local governments totaling between $80
million and $120 million annually, beginning in 2007. We also
estimate that the change in the definition of Internet access
could affect tax revenues for many states and local
governments, but we cannot estimate the magnitude or the
timing of any such additional impacts at this time.
UMRA includes in its definition of the direct costs of a
mandate the amounts that state and local governments would be
prohibited from raising in revenues to comply with the
mandate. The direct costs of eliminating the grandfather
clause would be the tax revenues that state and local
governments are currently collecting but would be precluded
from collecting under S. 150. States also could lose revenues
that they currently collect on certain services, if those
services are redefined as Internet access under the bill.
Over the next five years there will likely be changes in
the technology and the market for Internet access. Such
changes are likely to affect, at minimum, the price for
access to the Internet as well as the demand for and the
methods of such access. How these technological and market
changes will ultimately affect state and local tax revenues
is
[[Page S13355]]
unclear, but for the purposes of this estimate, CBO assumes
that over the next five years, these effects will largely
offset each other, keeping revenues from taxes on Internet
access within the current range.
The grandfather clause
The primary budget impact of this bill would be the revenue
losses starting in October 2006--resulting from eliminating
the grandfather clause that currently allows some state and
local governments to collect taxes on Internet access. While
there is some uncertainty about the number of jurisdictions
currently collecting such taxes--and the precise amount of
those collections--CBO believes that as many as 10 states
(Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South
Dakota, Tennessee, Texas, Washington, Wisconsin) and several
local jurisdictions in Colorado, Ohio, South Dakota, Texas,
Washington, and Wisconsin are currently collecting such taxes
and that these taxes total between $80 million and $120
million annually. This estimate is based on information from
the states involved, from industry sources, and from the
Department of Commerce. In arriving at this estimate, CBO
took into account the fact that some companies are
challenging the applicability of the tax to the service they
provide and thus may not be collecting or remitting the taxes
even though the states feel they are obligated to do so. Such
potential liabilities are not included in the estimate.
It is possible that if the moratorium were allowed to
expire as scheduled under current law, some state and local
governments would enact new taxes or decide to apply existing
taxes to Internet access during the next five years. It is
also possible that some governments would repeal existing
taxes or preclude their application to these services.
Because such changes are difficult to predict, for the
purposes of estimating the direct costs of the mandate, CBO
considered only the revenues from taxes that are currently in
place and actually being collected.
Definition of Internet access
Depending on how the language altering the definition of
what telecommunications services are taxable is interpreted,
that language also could result in substantial revenue losses
for states and local governments. It is possible that states
could lose revenue if services that are currently taxed are
redefined as Internet ``access'' under the definition in S.
150. Revenues could also be lost if Internet access providers
choose to bundle products and call the product Internet
access. Such changes would reduce state and local revenues
from telecommunications taxes and possibly revenues from
content currently subject to sales and use taxes. However,
CBO cannot estimate the magnitude of these losses.
Estimated impact on the private sector: This bill would
impose no new private-sector mandates as defined in UMRA.
Previous CBO estimate: On July 21, 2003, CBO transmitted a
cost estimate for H.R. 49, the Internet Tax Nondiscrimination
Act, as ordered reported by the House Committee on the
Judiciary on July 16, 2003. Unlike H.R. 49, which would
eliminate the grandfather clause upon passage, S. 150 would
allow the grandfather clause to remain in effect until
October 2006. Thus, while both bills contain an
intergovernmental mandate with costs above the threshold, the
enactment of S. 150 would not result in revenue losses to
states until October 2006.
Estimate prepared by: Impact on State, Local, and Tribal
Governments: Sarah Puro; Federal Costs: Melissa Zimmerman;
Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
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