US Internet Tax Moratorium Likely To Continue

by Mike Godfrey, Tax-News.com, Washington

27 February 2004

This is a crucial week for taxes on Internet access, as Congress - mostly in favour of an extension to the 1998 Internet Tax Freedom Act which expired last year - and the nation's governors - hurting from deficits and the growing volume of untaxable inter-state Internet trading - face off in Washington. Although a few states succeeded in maintaining 'grandfathered' access taxes when the legislation was put in place, and many have found limited ways in which to get around the rules, which apply mostly to dial-up connnections, they face a renewal of the legislation calling for a permanent moratorium that eliminates grandfathered states and broadens the definition of Internet access to include broadband connections from a variety of platforms.

Governors attending the winter meeting of the National Governors Association in Washington this week want to convince Congress to keep any Internet access tax moratorium on electronic commerce and online services temporary. The permanent moratorium was passed in the House last fall, and was later endorsed by the Senate Commerce and Science Committee. Since then, however, pressure from the states has halted further progress.

The Congressional Budget Office has estimated that a repeal of the grandfather clause will result in revenue losses between $80m and $120m annually for about 10 states. "We also estimate that the change in the definition of Internet access could affect tax revenues for many states and local governments, but we cannot estimate the magnitude or the timing of any such additional impacts at this time," said the CBO. Governors have claimed tax losses between 10 and 20 times these figures, however.

Legislation seems certain, according to Congressional staffers. "At the end of the day, there will be a moratorium on Internet access taxes, it's only a matter of how many years and what gets covered by the ban," said one. The open issue is the definition of 'access', and it remains likely that it will be broader than governors would like. Tennessee Republican Senator Lamar Alexander says: "I have yet to run into a senator who really wants to tax Internet access. Virtually all of us are willing to keep state and local governments from taxing Internet access."

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