[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  Or, here is an example of how an outdated moratorium could produce an 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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