[House Report 110-372]
[From the U.S. Government Publishing Office]



110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    110-372

======================================================================



 
            INTERNET TAX FREEDOM ACT AMENDMENTS ACT OF 2007

                                _______
                                

October 12, 2007.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Conyers, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                           SUPPLEMENTAL VIEWS

                        [To accompany H.R. 3678]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 3678) to amend the Internet Tax Freedom Act to 
extend the moratorium on certain taxes relating to the Internet 
and to electronic commerce, having considered the same, reports 
favorably thereon with an amendment and recommends that the 
bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................     3
Background and Need for the Legislation..........................     4
Hearings.........................................................     6
Committee Consideration..........................................     7
Committee Votes..................................................     7
Committee Oversight Findings.....................................    12
New Budget Authority and Tax Expenditures........................    12
Congressional Budget Office Cost Estimate........................    12
Performance Goals and Objectives.................................    14
Constitutional Authority Statement...............................    14
Advisory on Earmarks.............................................    14
Section-by-Section Analysis......................................    14
Changes in Existing Law Made by the Bill, as Reported............    15
Supplemental Views...............................................    19

                             The Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Internet Tax Freedom Act Amendments 
Act of 2007''.

SEC. 2. MORATORIUM.

    The Internet Tax Freedom Act (47 U.S.C. 151 note) is amended--
            (1) in section 1101(a) by striking ``2007'' and inserting 
        ``2011'', and
            (2) in section 1104(a)(2)(A) by striking ``2007'' and 
        inserting ``2011''.

SEC. 3. GRANDFATHERING OF STATES THAT TAX INTERNET ACCESS.

    Section 1104 of the Internet Tax Freedom Act (47 U.S.C. 151 note) 
is amended by adding at the end the following:
    ``(c) Application of Definition.--
            ``(1) In general.--Effective as of November 1, 2003--
                    ``(A) for purposes of subsection (a), the term 
                `Internet access' shall have the meaning given such 
                term by section 1104(5) of this Act, as enacted on 
                October 21, 1998; and
                    ``(B) for purposes of subsection (b), the term 
                `Internet access' shall have the meaning given such 
                term by section 1104(5) of this Act as enacted on 
                October 21, 1998, and amended by section 2(c) of the 
                Internet Tax Nondiscrimination Act (Public Law 108-
                435).
            ``(2) Exceptions.--Paragraph (1) shall not apply until 
        November 1, 2007, to a tax on Internet access that is--
                    ``(A) generally imposed and actually enforced on 
                telecommunications service purchased, used, or sold by 
                a provider of Internet access, but only if the 
                appropriate administrative agency of a State or 
                political subdivision thereof issued a public ruling 
                prior to July 1, 2007, that applied such tax to such 
                service in a manner that is inconsistent with paragraph 
                (1); or
                    ``(B) the subject of litigation instituted in a 
                judicial court of competent jurisdiction prior to July 
                1, 2007, in which a State or political subdivision is 
                seeking to enforce, in a manner that is inconsistent 
                with paragraph (1), such tax on telecommunications 
                service purchased, used, or sold by a provider of 
                Internet access.
            ``(3) No inference.--No inference of legislative 
        construction shall be drawn from this subsection or the 
        amendments to section 1105(5) made by the Internet Tax Freedom 
        Act Amendments Act of 2007 for any period prior to November 1, 
        2007, with respect to any tax subject to the exceptions 
        described in subparagraphs (A) and (B) of paragraph (2).''.

SEC. 4. DEFINITIONS.

    Section 1105 of the Internet Tax Freedom Act (47 U.S.C. 151 note) 
is amended--
            (1) in paragraph (1) by striking ``services'',
            (2) by amending paragraph (5) to read as follows:
            ``(5) Internet access.--The term `Internet access'--
                    ``(A) means a service that enables users to connect 
                to the Internet to access content, information, or 
                other services offered over the Internet;
                    ``(B) includes the purchase, use or sale of 
                telecommunications by a provider of a service described 
                in subparagraph (A) to the extent such 
                telecommunications are purchased, used or sold--
                            ``(i) to provide such service; or
                            ``(ii) to otherwise enable users to access 
                        content, information or other services offered 
                        over the Internet;
                    ``(C) includes services that are incidental to the 
                provision of the service described in subparagraph (A) 
                when furnished to users as part of such service, such 
                as a home page, electronic mail and instant messaging 
                (including voice- and video-capable electronic mail and 
                instant messaging), video clips, and personal 
                electronic storage capacity; and
                    ``(D) does not include voice, audio or video 
                programming, or other products and services (except 
                services described in subparagraph (A), (B), or (C)) 
                that utilize Internet protocol or any successor 
                protocol and for which there is a charge, regardless of 
                whether such charge is separately stated or aggregated 
                with the charge for services described in subparagraph 
                (A), (B), or (C).'',
            (3) by amending paragraph (9) to read as follows:
            ``(9) Telecommunications.--The term `telecommunications' 
        means `telecommunications' as such term is defined in section 
        3(43) of the Communications Act of 1934 (47 U.S.C. 153(43)) and 
        `telecommunications service' as such term is defined in section 
        3(46) of such Act (47 U.S.C. 153(46)), and includes 
        communications services (as defined in section 4251 of the 
        Internal Revenue Code of 1986 (26 U.S.C. 4251)).'', and
            (4) in paragraph (10) by adding at the end the following:
                    ``(C) Specific exception.--
                            ``(i) Specified taxes.--Effective November 
                        1, 2007, the term `tax on Internet access' also 
                        does not include a State tax expressly levied 
                        on commercial activity, modified gross 
                        receipts, taxable margin, or gross income of 
                        the business, by a State law specifically using 
                        one of the foregoing terms, that--
                                    ``(I) was enacted after June 20, 
                                2005, and before November 1, 2007 (or, 
                                in the case of a State business and 
                                occupation tax, was enacted after 
                                January 1, 1932, and before January 1, 
                                1936);
                                    ``(II) replaced, in whole or in 
                                part, a modified value-added tax or a 
                                tax levied upon or measured by net 
                                income, capital stock, or net worth 
                                (or, is a State business and occupation 
                                tax that was enacted after January 1, 
                                1932 and before January 1, 1936);
                                    ``(III) is imposed on a broad range 
                                of business activity; and
                                    ``(IV) is not discriminatory in its 
                                application to providers of 
                                communication services, Internet 
                                access, or telecommunications.
                            ``(ii) Modifications.--Nothing in this 
                        subparagraph shall be construed as a limitation 
                        on a State's ability to make modifications to a 
                        tax covered by clause (i) of this subparagraph 
                        after November 1, 2007, as long as the 
                        modifications do not substantially narrow the 
                        range of business activities on which the tax 
                        is imposed or otherwise disqualify the tax 
                        under clause (i).
                            ``(iii) No inference.--No inference of 
                        legislative construction shall be drawn from 
                        this subparagraph regarding the application of 
                        subparagraph (A) or (B) to any tax described in 
                        clause (i) for periods prior to November 1, 
                        2007.''.

SEC. 5. CONFORMING AMENDMENTS.

    (a) Accounting Rule.--Section 1106 of the Internet Tax Freedom Act 
(47 U.S.C. 151 note) is amended--
            (1) by striking ``telecommunications services'' each place 
        it appears and inserting ``telecommunications'', and
            (2) in subsection (b)(2)--
                    (A) in the heading by striking ``services'',
                    (B) by striking ``such services'' and inserting 
                ``such telecommunications'', and
                    (C) by inserting before the period at the end the 
                following: ``or to otherwise enable users to access 
                content, information or other services offered over the 
                Internet''.
    (b) Voice Services.--The Internet Tax Freedom Act (47 U.S.C. 151 
note) is amended by striking section 1108.

SEC. 6. EFFECTIVE DATE.

    This Act, and the amendments made by this Act, shall take effect on 
November 1, 2007, and shall apply with respect to taxes in effect as of 
such date or thereafter enacted, except as provided in section 1104 of 
the Internet Tax Freedom Act (47 U.S.C. 151 note).

                          Purpose and Summary

    H.R. 3678, the ``Internet Tax Freedom Act Amendments Act of 
2007,'' would amend the Internet Tax Freedom Act to extend the 
moratorium on certain taxes relating to the Internet and to 
electronic commerce from November 1, 2007, until November 1, 
2011, and make other clarifications to the law.

                Background and Need for the Legislation

         BACKGROUND AND HISTORY OF THE INTERNET TAX FREEDOM ACT

    The Internet Tax Freedom Act (ITFA) was enacted on October 
21, 1998 as Title XI of Division C of the Omnibus Consolidated 
and Emergency Supplemental Appropriations Act. The ITFA placed 
a 3-year moratorium on the ability of State and local 
governments to: (1) impose new taxes on Internet access, or (2) 
impose any multiple or discriminatory taxes on electronic 
commerce. The Act also grandfathered the State and local access 
taxes that were ``generally imposed and actually enforced prior 
to October 1, 1998.''
    This initial Internet tax moratorium expired on October 21, 
2001. The Internet Tax Nondiscrimination Act was then enacted 
on November 28, 2001. It provided for a 2-year extension of the 
prior moratorium, through November 1, 2003. The moratorium was 
then extended for an additional 4 years, through November 1, 
2007, by the Internet Tax Nondiscrimination Act of 2003, P.L. 
108-435, enacted on December 3, 2004. Taxes on Internet access 
that were in place before October 1, 1998, were protected by a 
grandfather clause.
    The 2004 extension also grandfathered pre-November 1, 2003 
taxes (mostly on digital subscriber line or DSL services) 
through November 1, 2005, and excluded from the moratorium 
taxes on voice or similar services utilizing voice over 
Internet protocol (VoIP), mainly because these services were 
not as prevalent at the time the original moratorium was 
enacted in 1998. As part of compromise negotiations in the 
108th Congress, the grandfathering protection for Internet 
access taxes in Wisconsin was limited to 3 years (through 
November 1, 2006) instead of four, and the ability of Texas 
municipalities to collect franchise fees from 
telecommunications providers that use public lands was 
protected. The 2004 Act also included several modifications to 
the original ITFA.
    Specifically, the 2004 Act accomplished the following:

         LExtended the Internet tax moratorium for 4 
        years, retroactively 1 year to November 1, 2003, and 
        forward 3 years until November 1, 2007. The moratorium 
        bars State and local governments from imposing any new 
        taxes on Internet access or imposing any multiple or 
        discriminatory taxes on electronic commerce.

         LClarified that the term ``tax on Internet 
        access'' applies regardless of whether the tax is 
        imposed on a provider or buyer of Internet access.

         LMade explicit that a ``tax on Internet 
        access'' does not include a tax levied on net income, 
        capital stock, net worth, or property value.

         LProvided that the terms ``Internet access'' 
        and ``Internet access service'' do ``not include 
        telecommunications services, except to the extent such 
        services are purchased, used, or sold by a provider of 
        Internet access to provide Internet access.'' This 
        permits some portion (the ``backbone'') of 
        telecommunications services to be included under the 
        tax moratorium.

         LExtended the grandfather protection from 
        November 1, 2003 until November 1, 2007 for State and 
        local governments that taxed Internet access prior to 
        October 1, 1998. An exception was made for a State 
        telecommunications service tax in Wisconsin, for which 
        protection was extended only until November 1, 2006. 
        Protection was extended only until November 1, 2005 for 
        taxes on Internet access that were generally imposed 
        and actually enforced as of November 1, 2003. This 
        provision applies mainly to taxes on digital subscriber 
        line (DSL) services.

         LExplicitly protected the Texas municipal 
        access line fee, to protect the ability of Texas 
        municipalities to collect franchise fees from 
        telecommunications providers that use public lands.

         LIncluded a new accounting rule that charges 
        for Internet access may be subject to taxation in cases 
        where they are aggregated with charges for 
        telecommunications services or other charges that are 
        subject to taxation, unless the Internet access 
        provider can reasonably identify the charges for 
        Internet access.

         LClarified that the moratorium does not apply 
        to taxes on Voice over Internet Protocol (VoIP) 
        services, but does apply to services that are 
        incidental to Internet access, such as voice-capable e-
        mail or instant messaging.

         LProvided for the Government Accountability 
        Office (GAO) to study and report to Congress on the 
        effects of the Internet tax moratorium on the revenues 
        of State and local governments and on the deployment 
        and adoption of broadband technologies for Internet 
        access throughout the United States, including under-
        served rural areas. The GAO study, issued in January 
        2006, compared deployment in States that tax broadband 
        Internet access service with States that do not.

    Although the Act called for a 3-year moratorium going 
forward, the grandfather provision protects those Internet 
access taxes that were generally imposed and actually enforced 
prior to October 1, 1998, if, before that date, the tax was 
authorized by statute, and either: (1) a provider of Internet 
access services had a reasonable opportunity to know, by virtue 
of a rule or other proclamation made by the appropriate 
administrative agency of the State or political subdivision 
thereof, that such agency had interpreted and applied such tax 
to Internet access services, or (2) a State or political 
subdivision thereof generally collected such tax on charges for 
Internet access.

       H.R. 3678, THE ``INTERNET TAX FREEDOM ACT AMENDMENTS ACT 
                               OF 2007''

    H.R. 3678 was introduced by Chairman John Conyers, Jr., 
with bipartisan support from six original cosponsors, on 
September 27, 2007. The bill would extend the moratorium for 4 
years, extend grandfather protection for 4 years for Internet 
access taxes levied before October 1998, and provide a more 
narrowly focused definition for Internet access.
    Specifically, the bill defines Internet access as the 
service of providing a connection to the Internet, with 
closely-related Internet communications services such as e-mail 
and instant messaging. In addition, the bill amends the current 
definition of ``telecommunications'' to include unregulated or 
non-utility telecommunications (such as cable service), and 
removes the current exception from the moratorium for taxing 
Voice over Internet Protocol (VoIP), so that States and 
localities will now be free to tax these services.

              GROSS RECEIPTS TAX ISSUES IN CERTAIN STATES

    A small group of States have recently enacted taxes that 
apply to almost all large businesses in the State, including 
Internet access providers. The new gross receipts taxes in 
these States, including Michigan, Texas, Ohio, and Washington, 
serve as general business taxes and either substitute for or 
supplement the corporate income tax currently in place in those 
States, whereas in all other States, corporate income taxes 
serve as the general business tax.
    The problem that has arisen for those four States is that 
the originally enacted and further amended ITFA contains an 
explicit protection for corporate income taxes imposed on 
Internet access providers, but not for gross receipts taxes. 
Thus, these States could suffer a disproportionate loss, 
because their approach to general business taxation is not 
excepted, while the more prevalent approach, a tax on corporate 
profits is excepted and can be used to impose a tax on profits 
earned from providing Internet access services. If an Internet 
access provider in a gross receipts tax State refused to pay 
the tax on its receipts attributable to providing Internet 
access service, under the current wording of ITFA a court might 
well uphold that refusal.
    H.R. 3678 addresses this problem by creating an exemption 
for States that have enacted gross receipts taxes as a 
substitute for State corporate income taxes and not as taxes 
directed to Internet access. To be exempt, the State law must 
meet certain criteria. First, the law must have been enacted 
between June 20, 2005 and November 1, 2007, or, in the case of 
a State business and occupation tax, enacted after January 1, 
1932 and before January 1, 1936. Second, the law must replace, 
in whole or in part, a modified value-added tax or a tax levied 
upon or measured by net income, capital stock, or net worth. 
Finally, the law must be imposed on a broad range of business 
activity and must not be discriminatory in its application to 
providers of communication services, Internet access, or 
telecommunications.

                                Hearings

    The Committee's Subcommittee on Commercial and 
Administrative Law held an oversight hearing on ``The Internet 
Tax Freedom Act: Internet Tax Moratorium'' on May 22, 2007. 
Witnesses at the hearing included: David C. Quam, Director of 
Federal Relations at the National Governors Association; Mark 
Murphy, Fiscal Policy Analyst for the American Federation of 
State, County and Municipal Employees; Jerry Johnson, Vice 
Chairman of the Oklahoma Tax Commission; Scott Mackey, a 
partner at Kimbell Sherman Ellis; and Dr. John Rutledge, Senior 
Fellow at the Heartland Institute. The purpose of this hearing 
was to gather information for members regarding the significant 
issues concerning the moratorium.
    In addition, the Subcommittee held a hearing on proposed 
legislation to amend the ``Internet Tax Freedom Act,'' on July 
26, 2007. Witnesses at the hearing included Representative John 
Campbell (D-CA); Representative Anna G. Eshoo (R-CA); David C. 
Quam, Director of Federal Relations at the National Governors 
Association; and Meredith Garwood, Vice President Tax Policy at 
Time Warner Cable.

                        Committee Consideration

    On October 10, 2007, the Committee met in open session and 
ordered the bill H.R. 3678 favorably reported with amendment, 
by a rollcall vote of 38 to 0, a quorum being present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
following rollcall votes occurred during the Committee's 
consideration of H.R. 3678:
    1. An amendment by Mr. Goodlatte to the amendment by Mr. 
Conyers, to extend the moratorium on taxing Internet access 
permanently. Defeated 15-21. (The Conyers amendment was later 
adopted by voice vote.)

                                                 ROLLCALL NO. 1
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................                              X
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Ms. Sanchez.....................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Ms. Sutton......................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Mr. Davis.......................................................
Ms. Wasserman Schultz...........................................                              X
Mr. Ellison.....................................................                              X
Mr. Smith (Texas)...............................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Goodlatte...................................................              X
Mr. Chabot......................................................
Mr. Lungren.....................................................              X
Mr. Cannon......................................................              X
Mr. Keller......................................................              X
Mr. Issa........................................................
Mr. Pence.......................................................
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Feeney......................................................              X
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             15              21
----------------------------------------------------------------------------------------------------------------

    2. An amendment by Mr. Goodlatte to the amendment by Mr. 
Conyers, to extend the moratorium on taxing Internet access for 
8 years, until November 1, 2015. Adopted 20 to 18.

                                                 ROLLCALL NO. 2
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................                              X
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Ms. Sanchez.....................................................              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Ms. Sutton......................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Mr. Davis.......................................................              X
Ms. Wasserman Schultz...........................................
Mr. Ellison.....................................................                              X
Mr. Smith (Texas)...............................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Goodlatte...................................................              X
Mr. Chabot......................................................              X
Mr. Lungren.....................................................              X
Mr. Cannon......................................................              X
Mr. Keller......................................................              X
Mr. Issa........................................................              X
Mr. Pence.......................................................              X
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Feeney......................................................              X
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             20              18
----------------------------------------------------------------------------------------------------------------

    3. A motion by Mr. Davis to reconsider the vote on the 
Goodlatte amendment to extend the moratorium for 8 years. 
Adopted 21 to 16.

                                                 ROLLCALL NO. 3
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................              X
Mr. Berman......................................................              X
Mr. Boucher.....................................................              X
Mr. Nadler......................................................              X
Mr. Scott.......................................................              X
Mr. Watt........................................................              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................              X
Ms. Waters......................................................              X
Mr. Delahunt....................................................              X
Mr. Wexler......................................................              X
Ms. Sanchez.....................................................              X
Mr. Cohen.......................................................              X
Mr. Johnson.....................................................              X
Ms. Sutton......................................................              X
Mr. Gutierrez...................................................              X
Mr. Sherman.....................................................
Ms. Baldwin.....................................................              X
Mr. Weiner......................................................              X
Mr. Schiff......................................................
Mr. Davis.......................................................              X
Ms. Wasserman Schultz...........................................              X
Mr. Ellison.....................................................              X
Mr. Smith (Texas)...............................................                              X
Mr. Sensenbrenner, Jr...........................................                              X
Mr. Coble.......................................................                              X
Mr. Gallegly....................................................                              X
Mr. Goodlatte...................................................                              X
Mr. Chabot......................................................                              X
Mr. Lungren.....................................................                              X
Mr. Cannon......................................................                              X
Mr. Keller......................................................                              X
Mr. Issa........................................................                              X
Mr. Pence.......................................................                              X
Mr. Forbes......................................................                              X
Mr. King........................................................                              X
Mr. Feeney......................................................
Mr. Franks......................................................                              X
Mr. Gohmert.....................................................                              X
Mr. Jordan......................................................                              X
                                                                 -----------------------------------------------
    Total.......................................................             21              16
----------------------------------------------------------------------------------------------------------------

    4. The amendment by Mr. Goodlatte to extend the moratorium 
for 8 years, on reconsideration. Defeated 17 to 22.

                                                 ROLLCALL NO. 4
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................                              X
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Ms. Sanchez.....................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Ms. Sutton......................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Mr. Davis.......................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Ellison.....................................................                              X
Mr. Smith (Texas)...............................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Goodlatte...................................................              X
Mr. Chabot......................................................              X
Mr. Lungren.....................................................              X
Mr. Cannon......................................................              X
Mr. Keller......................................................              X
Mr. Issa........................................................              X
Mr. Pence.......................................................              X
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Feeney......................................................
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             17              22
----------------------------------------------------------------------------------------------------------------

    5. An amendment by Mr. Goodlatte to amend the bill to 
extend the moratorium on taxing Internet access for 6 years, 
until November 1, 2013. Defeated 16 to 21.

                                                 ROLLCALL NO. 5
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................                              X
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Ms. Sanchez.....................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Ms. Sutton......................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................
Ms. Baldwin.....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Mr. Davis.......................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Ellison.....................................................                              X
Mr. Smith (Texas)...............................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Goodlatte...................................................              X
Mr. Chabot......................................................              X
Mr. Lungren.....................................................              X
Mr. Cannon......................................................              X
Mr. Keller......................................................              X
Mr. Issa........................................................              X
Mr. Pence.......................................................
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Feeney......................................................
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             16              21
----------------------------------------------------------------------------------------------------------------

    6. Reporting the bill favorably as amended. Approved 38 to 
0.

                                                 ROLLCALL NO. 6
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................              X
Mr. Berman......................................................              X
Mr. Boucher.....................................................              X
Mr. Nadler......................................................              X
Mr. Scott.......................................................              X
Mr. Watt........................................................              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................              X
Ms. Waters......................................................              X
Mr. Delahunt....................................................              X
Mr. Wexler......................................................              X
Ms. Sanchez.....................................................              X
Mr. Cohen.......................................................              X
Mr. Johnson.....................................................              X
Ms. Sutton......................................................              X
Mr. Gutierrez...................................................              X
Mr. Sherman.....................................................
Ms. Baldwin.....................................................              X
Mr. Weiner......................................................              X
Mr. Schiff......................................................              X
Mr. Davis.......................................................              X
Ms. Wasserman Schultz...........................................              X
Mr. Ellison.....................................................              X
Mr. Smith (Texas)...............................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Goodlatte...................................................              X
Mr. Chabot......................................................              X
Mr. Lungren.....................................................              X
Mr. Cannon......................................................              X
Mr. Keller......................................................              X
Mr. Issa........................................................              X
Mr. Pence.......................................................              X
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Feeney......................................................
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             38               0
----------------------------------------------------------------------------------------------------------------

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 3678, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 12, 2007.
Hon. John Conyers, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3678, the Internet 
Tax Freedom Act Amendments Act of 2007.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Elizabeth 
Cove, who can be reached at 225-3220.
            Sincerely,
                                           Peter R. Orszag,
                                                  Director.

Enclosure

cc:
        Honorable Lamar S. Smith.
        Ranking Member
H.R. 3678--Internet Tax Freedom Act Amendments Act of 2007.

                                SUMMARY

    H.R. 3678 would extend a moratorium on certain State and 
local taxation of online services and electronic commerce until 
November 1, 2011. The bill also would amend part of an 
exception to that prohibition for certain States. Under current 
law, the moratorium is set to expire on November 1, 2007. CBO 
estimates that enacting H.R. 3678 would have no impact on the 
Federal budget, but 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, H.R. 3678 would impose an 
intergovernmental mandate as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the mandate would cause 
some State and local governments to lose revenue beginning in 
November 2007; those losses would exceed the threshold 
established in UMRA ($66 million in 2007, adjusted annually for 
inflation) beginning in fiscal year 2008. 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 more than $80 million annually. The bill 
contains no new private-sector mandates as defined in UMRA.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    CBO estimates that enacting H.R. 3678 would have no impact 
on the Federal budget.

            INTERGOVERNMENTAL MANDATES CONTAINED IN THE BILL

    The Internet Tax Freedom Act (ITFA), as amended, currently 
prohibits State and local governments from imposing taxes on 
Internet access until November 1, 2007. The ITFA, enacted in 
1998, also contains an exception to this moratorium, sometimes 
referred to as the grandfather clause, which allows certain 
State and local governments to continue taxing Internet access 
if such tax was generally imposed and enforced prior to October 
1, 1998.
    H.R. 3678 would extend the moratorium until November 1, 
2011, and would amend part of an exception to that prohibition, 
effective on November 1, 2007. The effect of that amendment 
would be to prohibit State and local taxation of 
telecommunications services ``purchased, used, or sold by a 
provider of Internet access'' that the provider uses to connect 
its customers to the Internet. The new prohibition would ban 
taxes currently levied by some States on telecommunications 
services purchased by Internet service providers, also known as 
``backbone'' 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, and in some cases, are 
currently collecting.

              ESTIMATED DIRECT COSTS OF MANDATES TO STATE 
                         AND LOCAL GOVERNMENTS

    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. 
Amending the grandfather clause would result in direct costs 
(in the form of forgone tax revenues) to those State and local 
governments that are currently collecting such revenues but 
would be precluded from doing so after H.R. 3678 is enacted.
    The primary budget impact of the bill would be the revenue 
losses--starting in November 2007--resulting from prohibiting 
State and local taxation of telecommunications services 
purchased by providers of 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 eight States 
(Illinois, Pennsylvania, Alabama, Florida, New Hampshire, 
Missouri, Washington and Minnesota) and several local 
jurisdictions in those States are currently collecting such 
taxes. Those taxes total more than $80 million annually in just 
two States. This estimate is based on information from the 
States involved and from industry contacts.
    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 being 
collected.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    This bill contains no new private-sector mandates as 
defined in UMRA.

                         ESTIMATE PREPARED BY:

Impact on State, Local, and Tribal Governments: Elizabeth Cove 
    (225-3220)
Federal Costs: Susan Willie (226-2860)
Impact on the Private Sector: Paige Piper/Bach (226-2940)

                         ESTIMATE APPROVED BY:

Theresa Gullo
Deputy Assistant Director for Budget Analysis

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
3678 is intended to amend the Internet Tax Freedom Act to 
extend the moratorium on certain taxes relating to the Internet 
and to electronic commerce.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in article 1, section 8, clause 3 of the 
Constitution.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 3678 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(d), 9(e), or 9(f) of Rule XXI.

                      Section-by-Section Analysis

    Sec. 1. Short Title. Section 1 sets forth the short title 
of the bill as the ``Internet Tax Freedom Act Amendments Act of 
2007.''
    Sec. 2. Moratorium. Section 2 of the bill extends the 
moratorium on taxation of Internet access for 4 years, until 
November 1, 2011. It also extends for 4 years the 
grandfathering of States that tax Internet access, until 
November 1, 2011.
    Sec. 3. Grandfathering of States that Tax Internet Access. 
Section 3 of the bill phases out any grandfather protection 
that States may have received under the Internet Tax 
Nondiscrimination Act of 2004. This section clarifies that, 
effective as of November 1, 2003, the 1998 definition of 
Internet access applies to the 1998 grandfathering provision in 
section 1104(a) of the Internet Tax Freedom Act (ITFA) (47 
U.S.C. 151 note); and the 2004 definition of Internet access 
applies to the 2003 grandfathering provision in section 1104(b) 
of ITFA.
    In addition, section 3 of the bill holds harmless until 
November 1, 2007, those States who satisfy three criteria: they 
taxed the transport of the Internet (the ``backbone'') before 
July 1, 2007; they issued public rulings or had sought to 
enforce the collection of taxes through litigation commenced 
before July 1, 2007; and they have asserted that they are 
covered by the grandfathering provisions amended by Public Law 
No. 108-435. This section further provides that there shall be 
no inference of legislative construction from the amendments 
made by the bill as to the validity of such taxes that were 
imposed before November 1, 2007.
    Sec. 4. Definitions. Section 4 of the bill amends current 
law to define Internet access as the service of providing a 
connection to the Internet, and includes closely-related 
Internet communications services such as e-mail and instant 
messaging; amends the definition of ``telecommunications'' to 
include unregulated non-utility telecommunications (such as 
cable service); affirmatively protects from taxation the 
transport of the Internet (the ``backbone''); and removes the 
current exception to the moratorium for taxing Voice over 
Internet Protocol (VoIP), so that States and localities will be 
free to tax those services.
    In addition, this section creates a specific exception to 
ensure that recently-enacted general business taxes in certain 
States will be applied to Internet services providers (as they 
are to most other businesses in the State) and are not 
inadvertently preempted by an extension of the Internet Tax 
Freedom Act. To be exempt the State tax law must meet certain 
criteria. First, the law must have been enacted between June 
20, 2005 and November 1, 2007 or, in the case of a State 
business and occupation tax, enacted after January 1, 1932, and 
before January 1, 1936. Second, the law must replace, in whole 
or in part, a modified value-added tax or a tax levied upon or 
measured by net income, capital stock, or net worth. Finally, 
the law must be imposed on a broad range of business activity 
and must not be discriminatory in its application to providers 
of communication services, Internet access, or 
telecommunications.
    Sec. 5. Conforming Amendments. Section 5 of the bill makes 
conforming amendments to the Internet Tax Freedom Act.
    Sec. 6. Effective Date. Section 6 of the bill provides that 
the bill and the amendments made by it shall take effect on 
November 1, 2007, and shall apply to taxes in effect as of that 
date or enacted thereafter, except as provided in section 1104 
of ITFA.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                        INTERNET TAX FREEDOM ACT



           *       *       *       *       *       *       *
TITLE XI--MORATORIUM ON CERTAIN TAXES

           *       *       *       *       *       *       *


SEC. 1101. MORATORIUM.

    (a) Moratorium.--No State or political subdivision thereof 
may impose any of the following taxes during the period 
beginning November 1, 2003, and ending November 1, [2007] 2011:
            (1) * * *

           *       *       *       *       *       *       *


SEC. 1104. GRANDFATHERING OF STATES THAT TAX INTERNET ACCESS.

    (a) Pre-October 1998 Taxes.--
            (1) * * *
            (2) Termination.--
                    (A) In general.--Except as provided in 
                subparagraph (B), this subsection shall not 
                apply after November 1, [2007] 2011.

           *       *       *       *       *       *       *

    (c) Application of Definition.--
            (1) In general.--Effective as of November 1, 2003--
                    (A) for purposes of subsection (a), the 
                term ``Internet access'' shall have the meaning 
                given such term by section 1104(5) of this Act, 
                as enacted on October 21, 1998; and
                    (B) for purposes of subsection (b), the 
                term ``Internet access'' shall have the meaning 
                given such term by section 1104(5) of this Act 
                as enacted on October 21, 1998, and amended by 
                section 2(c) of the Internet Tax 
                Nondiscrimination Act (Public Law 108-435).
            (2) Exceptions.--Paragraph (1) shall not apply 
        until November 1, 2007, to a tax on Internet access 
        that is--
                    (A) generally imposed and actually enforced 
                on telecommunications service purchased, used, 
                or sold by a provider of Internet access, but 
                only if the appropriate administrative agency 
                of a State or political subdivision thereof 
                issued a public ruling prior to July 1, 2007, 
                that applied such tax to such service in a 
                manner that is inconsistent with paragraph (1); 
                or
                    (B) the subject of litigation instituted in 
                a judicial court of competent jurisdiction 
                prior to July 1, 2007, in which a State or 
                political subdivision is seeking to enforce, in 
                a manner that is inconsistent with paragraph 
                (1), such tax on telecommunications service 
                purchased, used, or sold by a provider of 
                Internet access.
            (3) No inference.--No inference of legislative 
        construction shall be drawn from this subsection or the 
        amendments to section 1105(5) made by the Internet Tax 
        Freedom Act Amendments Act of 2007 for any period prior 
        to November 1, 2007, with respect to any tax subject to 
        the exceptions described in subparagraphs (A) and (B) 
        of paragraph (2).

SEC. 1105. DEFINITIONS.

     For the purposes of this title:
            (1) Bit tax.--The term ``bit tax'' means any tax on 
        electronic commerce expressly imposed on or measured by 
        the volume of digital information transmitted 
        electronically, or the volume of digital information 
        per unit of time transmitted electronically, but does 
        not include taxes imposed on the provision of 
        telecommunications [services].

           *       *       *       *       *       *       *

            [(5) Internet access.--The term ``Internet access'' 
        means a service that enables users to access content, 
        information, electronic mail, or other services offered 
        over the Internet, and may also include access to 
        proprietary content, information, and other services as 
        part of a package of services offered to users. The 
        term ``Internet access'' does not include 
        telecommunications services, except to the extent such 
        services are purchased, used, or sold by a provider of 
        Internet access to provide Internet access.]
            (5) Internet access.--The term ``Internet 
        access''--
                    (A) means a service that enables users to 
                connect to the Internet to access content, 
                information, or other services offered over the 
                Internet;
                    (B) includes the purchase, use or sale of 
                telecommunications by a provider of a service 
                described in subparagraph (A) to the extent 
                such telecommunications are purchased, used or 
                sold--
                            (i) to provide such service; or
                            (ii) to otherwise enable users to 
                        access content, information or other 
                        services offered over the Internet;
                    (C) includes services that are incidental 
                to the provision of the service described in 
                subparagraph (A) when furnished to users as 
                part of such service, such as a home page, 
                electronic mail and instant messaging 
                (including voice- and video-capable electronic 
                mail and instant messaging), video clips, and 
                personal electronic storage capacity; and
                    (D) does not include voice, audio or video 
                programming, or other products and services 
                (except services described in subparagraph (A), 
                (B), or (C)) that utilize Internet protocol or 
                any successor protocol and for which there is a 
                charge, regardless of whether such charge is 
                separately stated or aggregated with the charge 
                for services described in subparagraph (A), 
                (B), or (C).

           *       *       *       *       *       *       *

            [(9) Telecommunications service.--The term 
        ``telecommunications service'' has the meaning given 
        such term in section 3(46) of the Communications Act of 
        1934 (47 U.S.C. 153(46)) and includes communications 
        services (as defined in section 4251 of the Internal 
        Revenue Code of 1986).]
            (9) Telecommunications.--The term 
        ``telecommunications'' means ``telecommunications'' as 
        such term is defined in section 3(43) of the 
        Communications Act of 1934 (47 U.S.C. 153(43)) and 
        ``telecommunications service'' as such term is defined 
        in section 3(46) of such Act (47 U.S.C. 153(46)), and 
        includes communications services (as defined in section 
        4251 of the Internal Revenue Code of 1986 (26 U.S.C. 
        4251)).
            (10) Tax on internet access.--
                    (A) * * *

           *       *       *       *       *       *       *

                    (C) Specific exception.--
                            (i) Specified taxes.--Effective 
                        November 1, 2007, the term ``tax on 
                        Internet access'' also does not include 
                        a State tax expressly levied on 
                        commercial activity, modified gross 
                        receipts, taxable margin, or gross 
                        income of the business, by a State law 
                        specifically using one of the foregoing 
                        terms, that--
                                    (I) was enacted after June 
                                20, 2005, and before November 
                                1, 2007 (or, in the case of a 
                                State business and occupation 
                                tax, was enacted after January 
                                1, 1932, and before January 1, 
                                1936);
                                    (II) replaced, in whole or 
                                in part, a modified value-added 
                                tax or a tax levied upon or 
                                measured by net income, capital 
                                stock, or net worth (or, is a 
                                State business and occupation 
                                tax that was enacted after 
                                January 1, 1932 and before 
                                January 1, 1936);
                                    (III) is imposed on a broad 
                                range of business activity; and
                                    (IV) is not discriminatory 
                                in its application to providers 
                                of communication services, 
                                Internet access, or 
                                telecommunications.
                            (ii) Modifications.--Nothing in 
                        this subparagraph shall be construed as 
                        a limitation on a State's ability to 
                        make modifications to a tax covered by 
                        clause (i) of this subparagraph after 
                        November 1, 2007, as long as the 
                        modifications do not substantially 
                        narrow the range of business activities 
                        on which the tax is imposed or 
                        otherwise disqualify the tax under 
                        clause (i).
                            (iii) No inference.--No inference 
                        of legislative construction shall be 
                        drawn from this subparagraph regarding 
                        the application of subparagraph (A) or 
                        (B) to any tax described in clause (i) 
                        for periods prior to November 1, 2007.

SEC. 1106. ACCOUNTING RULE.

    (a) In General.--If charges for Internet access are 
aggregated with and not separately stated from charges for 
[telecommunications services] telecommunications or other 
charges that are subject to taxation, then the charges for 
Internet access may be subject to taxation unless the Internet 
access provider can reasonably identify the charges for 
Internet access from its books and records kept in the regular 
course of business.
    (b) Definitions.--In this section:
            (1) Charges for internet access.--The term 
        ``charges for Internet access'' means all charges for 
        Internet access as defined in section 1105(5).
            (2) Charges for telecommunications [services].--The 
        term ``charges for [telecommunications services] 
        telecommunications'' means all charges for 
        [telecommunications services] telecommunications, 
        except to the extent [such services] such 
        telecommunications are purchased, used, or sold by a 
        provider of Internet access to provide Internet access 
        or to otherwise enable users to access content, 
        information or other services offered over the 
        Internet.

           *       *       *       *       *       *       *


[SEC. 1108. EXCEPTION FOR VOICE SERVICES OVER THE INTERNET.

    [Nothing in this Act shall be construed to affect the 
imposition of tax on a charge for voice or similar service 
utilizing Internet Protocol or any successor protocol. This 
section shall not apply to any services that are incidental to 
Internet access, such as voice-capable e-mail or instant 
messaging.]

           *       *       *       *       *       *       *


                           Supplemental Views

    The mark-up of H.R. 3678 was a clear triumph of politics 
over policy. While we all supported the bill on final passage, 
this legislation had the potential to be so much better.
    We support a permanent ban on the ability of states and 
localities to impose taxes on Internet access or multiple or 
discriminatory taxes on e-commerce. We are not alone in this 
support. Collectively, 242 Members of the House are sponsors or 
co-sponsors of the two bills, H.R. 743 and H.R. 1077, that 
would make the Internet tax moratorium permanent. This support 
is broad and bipartisan with 88 Democrats and 154 Republicans 
calling for a permanent ban. A permanent extension is also 
consistent with the past actions of the House, which passed a 
permanent ban in 2003.
    We support permanence because it is the best way to ensure 
that the Internet continues to grow and to drive the American 
economy.
    A permanent moratorium gives businesses the certainty that 
they need to make the significant capital expenditures that are 
necessary to build a broadband Internet networks. Broadband 
networks do not build themselves. They require companies to 
spend billions of dollars to construct, maintain, and update 
those systems. Those companies, in turn, need to know what 
their cost structure will be in order to secure the financing 
necessary to spend those billions of dollars. Only a permanent 
ban gives the kind of long term security necessary to procure 
that financing on the best possible terms.
    A permanent moratorium helps to keep Internet access 
affordable. According to CRS, while roughly 99% of all U.S. zip 
codes have at least some access to broadband Internet 
technology, only 45% of U.S. households have purchased 
broadband Internet access.\1\ According to the FCC, one of the 
main reasons why more households have not adopted broadband is 
cost.\2\ At a time when America is falling behind other 
countries in terms of broadband penetration, why would Congress 
do anything that makes accessing the Internet more expensive?
---------------------------------------------------------------------------
    \1\Congressional Research Service, Broadband Internet Access and 
the Digital Divide: Federal Assistance Programs 2 (Aug. 14, 2007).
    \2\Federal Communications Commission, Fourth Report to Congress, 
``Availability of Advanced Telecommunications Capability in the United 
States, ``GN Docket No. 04-54, FCC 04-208, September 9, 2004, p. 38 
(available at http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-04-
208A1.pdf).
---------------------------------------------------------------------------
    In addition to the 242 co-sponsors in the House, a 
permanent ban on Internet access taxes enjoys support from a 
broad swath of society, including the Don't Tax Our Web 
Coalition, which is made up of the following companies and 
organizations: Association for Competitive Technology, the 
American Electronics Association, AOL, Apple, Americans for Tax 
Reform, AT&T, Americans for Technology Leadership, Charter 
Communications, Comcast, the Computing Technology Industry 
Association, Corning Inc., CTIA - the Wireless Association, 
Direct Marketing Association, Ebay, Electronic Industries 
Alliance, Embarq, Freedom Works, Information Technology 
Association of America, Level 3 Communications, NAM, National 
Cable and Telecommunications Association, National Taxpayers 
Union, NetChoice, Qwest, Software Information Industry 
Association, Small Business & Entrepreneurship Council, 
Software Finance & Tax Executives Council, Sprint/Nextel, 
TechNet, Telecommunications Industry Association, Time Warner 
Communications, T-Mobile, US Chamber of Commerce, US Telecom 
Association, US Internet Industry Association, Verizon, and 
Yahoo. The Business Software Alliance also ``believes that a 
permanent ban is the best way to make the Internet an even more 
important economic force for growth and jobs.''
    In addition to the business community, publications such as 
the Wall Street Journal,\3\ the Los Angeles Times,\4\ and the 
National Journal\5\ have all called for a permanent ban. 
Permanence has the support of the Administration\6\ and 
consumer groups such as the Michigan Taxpayers Alliance, The 
American Conservative Union, American Legislative Exchange 
Council, the Club for Growth, and the Hispanic Technology & 
Telecommunications Partnership among others.
---------------------------------------------------------------------------
    \3\Editorial, Broadband Taxman, Wall St. J., Sept. 26, 2007, at 
A20.
    \4\Editorial, Don't Tax Internet Access, +L.A. Times, Oct. 8, 2007 
(available at http://www.latimes.com/news/printedition/asection/la-ed-
moratorium8oct08,1,4443110.story?ctrack=3&cset=true).
    \5\Editorial, Hands Off the `Net, +National Review, Oct. 11, 2007 
(available at http://article.nationalreview.com/
?q=MTdiYzhlMDY1ODFkOTc3OTdmMmQ1MjE0ZWE3ZmY2NTE=).
    \6\Press Release, Paulson and Gutierrez Call for Permanent 
Moratorium on Internet Taxes, Sept. 26, 2007 (available at http://
treasury.gov/press/releases/hp577.htm).
---------------------------------------------------------------------------
    Opponents of permanence argue that the sunsets allow 
Congress to consider any problems in the administration of the 
Internet Tax Freedom Act. The general implication is that the 
moratorium should be revisited to prevent Internet access 
providers from unjustly denying states access to their revenue. 
But that argument ignores two things. First, while it is true 
that Congress has made changes to the law virtually every time 
it has extended the moratorium, those changes have largely been 
directed at preventing states from circumventing the law, not 
the other way around. For example, the definition of ``Internet 
access'' was modified in 2004 to prevent states from taxing 
Internet access providers that purchase capacity over wire, 
cable, fiber to connect end-users to the Internet backbone. 
That definition is modified again in this bill, also to ensure 
that States do not tax the Internet backbone. Why does Congress 
have to make this change again? Because eight States (Alabama, 
Florida, Illinois,\7\ Minnesota,\8\ New Hampshire,\9\ 
Pennsylvania,\10\ Washington,\11\ and Missouri\12\) continue to 
tax the Internet backbone, despite Congress' clear admonitions 
to the contrary. Second, even if there are problems with the 
Act, making the Internet tax moratorium permanent would not 
prevent future Congresses from addressing those concerns. The 
sheer number of carve-outs in the current moratorium is a 
testament to the fact that the States' tax collectors have no 
shortage of allies in Congress.
---------------------------------------------------------------------------
    \7\Illinois Department of Revenue FY 2006-09 (March 2006).
    \8\Minnesota Revenue, 2006 Sales and Use Tax Law Changes at 4 (July 
2006).
    \9\New Hampshire Department of Revenue Administration, TECHNICAL 
INFORMATION RELEASE, TIR 2006-001 (January 18, 2006).
    \10\Sales Tax Bulletin 2005-03, Pennsylvania Department of Revenue 
(September 30, 2005) (available at http://www.revenue.state.pa.us/
revenue/cwp/view.asp?A=318&QUESTION_ID= 251653).
    \11\Washington State Department of Revenue, Excise Tax Authority, 
2029.04.245 (Feb. 24, 2006).
    \12\Letter Ruling No. LR3375, Missouri Department of Revenue, 
October 12, 2006.
---------------------------------------------------------------------------
    More importantly, putting sunsets in the moratorium raises 
the specter that some future Congress will allow it to expire. 
This is not some theoretical concern; it has already happened 
twice. In 2001, when Congress extended the moratorium for an 
additional two years, it allowed the law to lapse for 1 month. 
And in 2004, despite the fact that the House approved a 
permanent extension before the moratorium expired, the Senate 
did not act until almost 14 months after the law had already 
lapsed.
    What happens if the moratorium is allowed to lapse, or to 
expire completely? Millions of U.S. citizens in thousands of 
taxing jurisdictions around the country could face an increase 
in their Internet access bills. These taxes, such as generally 
imposed telecommunications and sales taxes, would go into 
effect regardless of whether the states passed any new taxes on 
Internet access. According to testimony before the Subcommittee 
on Commercial and Administrative Law, state and local sales and 
telecommunications tax rates average 13.5%, marking a 
significant increase in a consumer's bill for Internet access. 
Furthermore, some states, such as Montana, have ``springing'' 
Internet access taxes that will go into effect as soon as the 
moratorium expires.\13\
---------------------------------------------------------------------------
    \13\Mont. Admin. R. 42.31.507 (2007) (``Imposition of the retail 
telecommunication excise tax shall not be applied to internet revenue 
that may be included in the sales price, until the federal moratorium 
has been lifted.'').
---------------------------------------------------------------------------
    Even supporters of sunsets, such as Mr. Watt, indicated at 
the mark-up that they will likely support an extension of the 
moratorium the next time it comes up for review. Which begs the 
question: when is it going to be a good time to allow states 
and localities to tax the Internet? When is it going to be a 
good idea to make Internet access more expensive for the 
American consumer? When is it going to be a good idea to allow 
states to tax a purchase of a book on Amazon.com at a higher 
rate than they tax the purchase of the same book on Main 
Street? Supporters of sunsets have no answers for these 
questions.
    This begs a second question: why, despite the support of 
242 Members, the business community, and consumer groups does 
H.R. 3678 not contain a permanent extension? The short answer 
is that Chairman Conyers does not want it and he is willing to 
twist the arms of Committee Members to ensure that it does not 
pass.
    Of the 242 Members that have co-sponsored permanence, 21 
are Members of the House Judiciary Committee. This represents a 
majority of the Committee. These 21 Members include six 
Democrats: Mr. Boucher, Ms. Lofgren, Ms. Jackson Lee, Mr. 
Wexler, Mr. Cohen, and Mr. Davis. However, when Mr. Goodlatte 
offered an amendment at the markup that would have extended the 
moratorium permanently, only Ms. Lofgren joined with the 
Committee's Republicans to support permanence. The amendment 
was defeated by a vote of 15 ayes to 21 nays.
    After the amendment on permanence failed, the real fun 
began. Mr. Goodlatte offered an amendment that would extend the 
moratorium for eight years and that would allow the grandfather 
exemption to expire in four years. This amendment passed by a 
vote of 20 ayes to 18 nays, with Ms. Lofgren, Ms. Sanchez, and 
Mr. Davis joining all of the Committee Republicans in support 
of the measure.
    Clearly displeased with the outcome of the vote, Chairman 
Conyers pursued a two-tiered strategy to ensure that it was 
reversed. He first introduced an amendment that provided that 
notwithstanding Section 2 of the bill, which now contained the 
eight year extension, the Internet tax moratorium would only be 
extended by 4 1/2 years. While Chairman Conyers slowly read the 
amendment, his staff worked on the three Democrats that voted 
in favor of the eight year extension. They were finally able to 
convince Mr. Davis to offer a motion to reconsider the vote, 
which passed by a straight party line vote of 21 ayes to 16 
nays. Following the motion to reconsider, the eight year 
extension was defeated by a vote of 17 ayes to 22 nays, with 
only Ms. Lofgren joining the Committee Republicans in support 
of the measure. Mr. Goodlatte then offered an amendment to 
extend the moratorium by six years, which also failed by a vote 
of 16 ayes to 21 nays.
    Why did the Committee Democrats defeat these amendments? 
Why did five Democratic co-sponsors of a permanent moratorium 
vote against permanence at the Committee? Why did two 
Democratic Members that voted for an eight year extension at 
one point turn around and vote against the same eight year 
extension moments later? American consumers and businesses will 
have to guess, because none of those Members offered an 
explanation. What is clear is that consumers and businesses are 
worse off than they would have been had the amendments passed - 
or, in the case of the eight year extension, stayed passed.
    Despite these heavy-handed tactics, we support the 
underlying legislation because any extension of the Internet 
Tax Freedom Act is better than no extension. We will continue 
to insist that the Majority allow the House to consider a 
permanent extension when this bill goes to the Floor. If that 
happens, we hope that the tactics that prevailed on five of the 
Committee's Members will not work on the other 83 Democratic 
co-sponsors of permanence. The American people deserve much 
better.
    This markup confirms President Ronald Reagan's observation 
that ``Republicans believe every day is the Fourth of July, but 
the Democrats believe every day is April 15th.''

                                   Lamar Smith.
                                   F. James Sensenbrenner, Jr.
                                   Howard Coble.
                                   Bob Goodlatte.
                                   Steve Chabot.
                                   Daniel E. Lungren.
                                   Chris Cannon.
                                   Tom Feeney.
                                   Jim Jordan.

                                  
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