States protest congressional Internet tax ban

A piece of congressional legislation intended to ban taxes unique to the Internet could end up exempting many telecommunications services from state and local taxes, costing states billions of dollars a year, according to a group representing 45 state governments.

The Internet Tax Nondiscrimination Act, which passed the U.S. House Sept. 17, was amended to define Internet access, which bill authors intend to exempt from taxes, to include telecommunications services offered over the Internet, which would then include the growing trend of offering voice telephone services through packet switching technology, according to the Multistate Tax Commission (MTC). [See, “House passes Internet tax ban,” Sept. 17.]

The Internet Tax Nondiscrimination Act, which has not yet passed the Senate, would permanently replace a moratorium on Internet-only taxes that has been in place since 1998. Backers of the bill argue that taxes unique to the Internet, such as bit taxes on information that flows through each taxing jurisdiction, would create a jurisdictional mess and hamper the growth of the Internet.

“This moratorium makes sure e-tailers have an equal shot at success in today’s economy, and I believe they should be protected once and for all from unfair taxes that threaten their survival,” Senator Ron Wyden, an Oregon Democrat and sponsor of the bill, said earlier this year. “States have never proven they’ve been injured by their inability to discriminate against online sellers.”

The MTC released a study Wednesday that said the bill as amended and passed out of the House could cause state and local governments to collectively lose between US$4 billion and $8.75 billion a year by 2006, rather than the $500 million projected when the bill was originally introduced. MTC members said they fear the legislation, as it passed the House, could also exempt telecommunications companies from other taxes, such as property and income tax.

While exempting voice services may not be what the bill’s authors intended, MTC members said they’re lobbying the Senate, where the bill has not yet passed, to make the wording in the legislation more clear. “Intent doesn’t count when you’re in court,” said Dan Bucks, executive director of the MTC. “What counts is the actual language.”

But backers of the bill said the MTC is misreading the legislation. The bill bans only taxes unique to the Internet, such as bit taxes or Internet access taxes, but it does not roll back any property or income taxes telecommunication carriers now pay, said a spokesman for Representative Christopher Cox, a California Republican and prime sponsor of the bill in the House.

“That’s completely false,” Cox’s spokesman said of the bill’s potential to ban property or income taxes. “I don’t know why they think that. I think they just don’t understand the bill.”

As for banning taxes on telecommunications services such as voice over IP (Internet protocol), the bill doesn’t attempt to address that issue, Cox’s spokesman said. Such services represent a small portion of telecommunication services at this point, and Congress has not yet decided how to tax voice over IP services, he added. “We’re not trying to solve all the problems or the debates of the telecom industry in this bill,” the spokesman added.

But MTC officials argued voice services over the Internet could easily fall under the tax bans in the bill. The Cox legislation amends the language in the Internet Tax Freedom Act, a tax moratorium passed in 1998. At issue is a change in the wording from the original law.

The original law defines Internet access this way: “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. Such term does not include telecommunications services.”

The new House bill added language to the last sentence: “except to the extent such services are used to provide Internet access.”

MTC officials argued that the addition to the definition of Internet access could easily be interpreted to mean voice or other telecommunications services offered through packet switching technology. With telecommunications companies expected to transition a growing amount of their voice services from land-line to voice over IP services, the impact to state and local governments could grow beyond the estimated $8.75 billion in the MTC study, said Loren Chumley, Tennessee’s revenue commissioner.

States would not object to a narrow ban on Internet access taxes, she added. “The new, multibillion losses for state and local governments would result from language in the House bill as courts interpret it as providing a blanket exemption for non-federal taxes for the telecommunications industry, granting that industry an unprecedented church-like exemption status,” Chumley added.

Chumley and others at an MTC press conference noted that when the predicted $8.75 billion is spread out over 50 states, the impact to each state is much lower. But every $1 billion that state and local governments lose would mean nearly 20,000 fewer police officers on the streets, nearly 20,000 fewer firefighters or nearly 25,000 fewer teaching staff in schools. With many states already facing budget shortages, governments faced with those decisions would have to reduce services or raise taxes in other areas, such as sales, property or income taxes, Bucks said.

“This is the perfect decision for Congress, so they can look like heroes at no cost to themselves,” added Ed Harrington, president of the Government Finance Officers Association and controller for the city and county of San Francisco. “We need to remind Congress that real-life individual taxpayers rarely show up in Washington, D.C. asking for services. We’re the ones they call when their homes are on fire.”

MTC members also criticized the House bill for ending a grandfather clause allowed in the earlier Internet tax moratorium for the 10 states that have already passed Internet access taxes. The state of Washington will lose about $9 million a year if the grandfather clause on Internet access taxes is eliminated, said Jim McIntire, the Democratic chairman of the Washington state House Finance Committee.

“That’s not much, compared to the federal deficit, but it still hurts because last spring, we closed a $2.6 billion deficit by cutting schools, universities, public health and closing parks,” McIntire said.

The MTC study is available at