Congress Extends Ban on Internet Taxes

Published January 1, 2005

Shortly before adjourning for the Thanksgiving holiday, Congress presented Internet users with an early Christmas present: a three-year extension of the federal ban on Internet taxes.

The Internet Tax Nondiscrimination Act, which Congress approved on November 19, blocks state and local governments from taxing Internet connections, including dial-up and DSL. It also blocks multiple state and local taxes from being levied on online purchases and prohibits the creation of taxes unique to the Internet.

“I applaud Congress for their action and for recognizing the significant harm that tax increases can have on the development and deployment of high-tech service offerings,” said Steve Largent, president and CEO of the Cellular Telecommunications & Internet Association. “Broadband will continue to have an enormously beneficial impact on how we as a society access and consume information.

“Broadband holds the promise of revolutionizing the delivery of pertinent information to educators, law enforcement officials, emergency responders, and health care providers all across America,” Largent said. “I am very pleased that this promise will not be interrupted by the imposition of tax increases.”

House Wanted Permanent Ban

The bill was a compromise. The House voted last year to permanently ban Internet taxes, but there was not enough support in the Senate.

The lead sponsor of the original 1998 ban, House Policy Committee Chairman Christopher Cox (R-CA), was also a leader this time around. Cox argued for passage on the House floor by saying, “Republicans and Democrats have come together to say that no matter how we might choose to fund government services, we all agree the worst way to do it would be to create new taxes on the Internet. That would be harmful to consumers, destructive to technological innovation, and bad for our economy.

“The case for allowing Internet access to remain tax-free has never been stronger,” Cox said. “With 200 million Americans now online, a new tax on access would be a tax on working families. Our citizens recognize the danger. Eighty-eight percent of Americans oppose new Internet access taxes, making this legislation among the most popular tax issues in America.”

Cox also cited studies from a variety of sources–including the Brookings Institution, University of California, Harvard University, Stanford University, Congressional Budget Office, and U.S. Department of Commerce–showing the Internet has made America more productive.

“New taxes can only slow this powerful engine of our economy, job growth, productivity, and prosperity in America,” Cox said.

Wisconsin Tax to End

Another leader of the effort was House Judiciary Committee Chairman James Sensenbrenner (R-WI), who insisted his home state of Wisconsin be forced to drop its Internet access tax. Sensenbrenner wanted it dropped immediately, but Sen. Herb Kohl (D-WI) insisted the tax remain in place another two years. The legislation ended up leaving the tax in effect until November 1, 2006.

Wisconsin was one of several states that began taxing Internet access before the original ban in 1998. Those states had been allowed to continue collecting the tax.

However, the 1998 ban was enacted before high-speed broadband connections came into use, so the ban did not address those technologies. Several states have levied taxes on high-speed connections. Under the new federal legislation, they will have to phase out those taxes.

“Enacting this legislation is a big win for the majority of American Internet users,” Sensenbrenner said after the House approved the legislation and sent it to President George W. Bush for his signature.

America Online, one of the world’s largest Internet service providers, said in a statement, “With adoption of this critical legislation, Congress has recognized the tremendous virtues of an Internet unencumbered by unnecessary and undue taxation and regulation that would impede the growth of the Internet, rather than foster it.”

Sensebrenner said he pushed for Wisconsin to be forced to drop its 5 percent Internet tax because it was enacted without a vote by the state Assembly. The tax was enacted based on a Wisconsin Department of Revenue interpretation of the 1998 ban’s “grandfather” provision.

In 2002, the state billed Wisconsin Internet users an estimated $24.3 million, according to Sensenbrenner. Some Wisconsin localities also levy up to an additional 1/2-percent tax, he said.

“Whether it’s for checking e-mail, purchasing items online, or researching a subject for school, the Internet has become an integral part of life for many Americans,” Sensenbrenner said. “As one of only a handful of states that taxes Internet access, Wisconsin’s growth and ability to remain competitive in the technology sector are seriously hampered. Removing this tax is a step toward eliminating Wisconsin’s ‘high-tax’ reputation.”

The legislation also updates the definition of Internet access to ensure all types of Internet access are protected from taxation. It also ensures states and municipalities may continue to tax telecommunications services, including VoIP, or Voice over Internet Protocol.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.