Senators Slam GAO Report On Revenue Impact Of Internet Tax Moratorium

by Mike Godfrey, Tax-News.com, Washington

31 January 2006

Senators have criticized the latest General Accountability Office report on internet taxation, noting that by failing to consult with the authors of the law, the report’s conclusions about the impact of suspending taxation of wholesale internet services were flawed.

The report, mandated under the 2004 Internet Tax Nondiscrimination Act, aimed to examine the effect of the internet tax moratorium on state and local revenues.

The report, which was required as part of the Act's renewal provisions, divides Internet users into three categories: end users such as consumers, businesses and government; ISPs providing e-mail, Internet access, and instant messaging; and "providers of acquired services," which the report says are taxable under the Act.

Says the report: 'The moratorium applies only to taxes imposed on "Internet access," which is defined in the law as "a service that enables users to access content, information, electronic mail, or other services offered over the Internet...." In other words, it is the service of providing Internet access to the end user — not the acquisition of capacity to do so — that constitutes "Internet access" subject to the moratorium.'

“As the original author of the legislation, I am disappointed that GAO has issued a report that will be used by some to confuse, rather than clarify the debate,” said Senator Ron Wyden (D-OR).

“If the report’s authors chose to consult with the authors of the legislation, they would have understood the true impact of the moratorium on states – minimal," he added.

In 2003, the Congressional Budget Office estimated that the revenue loss for states with grandfathered taxes in 1998 was about 0.1 percent of those states’ 2004 tax revenues.

Senator George Allen (R-VA), a sponsor of the legislation which extended the internet tax ban also condemned the conclusion of the GAO report.

“The plain language of the statute, as well as the relevant legislative history, reflect a clear legislative intent to ban Internet access taxes at both the retail and wholesale level. The legislative language has previously been interpreted this way by the Congressional Budget Office, the National Governors Association, the Congressional Research Service as well as a number of States directly affected.

"As one of the lead sponsors of the Internet Tax Nondiscrimination Act, I am certain that it is not correct for the GAO to assert that this law allows for this type of taxation. Fortunately, the language of the statute and the relevant legislative history carry much more legal weight than the GAO’s flawed interpretation of the law.”

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