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House Panel Approves 4-Year US Internet Tax Moratorium Extension

by Mike Godfrey,, Washington

15 October 2007

The House Judiciary Committee unanimously passed an amendment to the Internet Tax Freedom Act (ITFA) Amendments Act of 2007, which extends the ban on internet access taxes by a further four years.

Committee Chairman John Conyers (D-MI), who introduced the bill, said the amendment would extend the moratorium on state and local taxes on Internet access until November 1, 2011, thus allowing Congress to make any adjustments to the moratorium if necessary. He also claimed that the bill is "pro-consumer, pro-innovation, and pro-technology" while doing minimum harm to state and local government budgets.

"This bipartisan legislation proves that when working together, we can come to a good result on a complex issue. This is a strong bill that is supported by industry groups like the Don’t Tax Our Web coalition; various government organizations, like the National Governors Association, the Federal Tax Administration, and the National Conference of State Legislatures; and by a wide range of labor and union groups," Conyers remarked.

The bill also extends for four years the grandfather provisions which have preserved those taxes that were imposed prior to 1998, when the ban was first introduced, but phases out certain states that claim to be grandfathered as a result of the Internet Tax Nondiscrimination Act of 2004. Conyers added that the bill allows those states that have issued public rulings before July 1, 2007 that are inconsistent with the foregoing rules to be held harmless until November 1, 2007.

Conyers also said that the bill resolves a dilemma that has evolved concerning the treatment of gross receipts taxes 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 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 result is that an internet access provider could potentially decide not to pay the tax on its receipts attributable to providing internet access service in those select states. The bill attempts to address this problem by creating an exemption for states that have enacted laws that would structure their gross receipts taxes in such a way as to be a substitute for state corporate income taxes that are not taxes on internet access.

In addition, the bill clarifies the definition of "internet access" to mean a service that enables a user to connect to the internet.

"Overall, this is a good, strong, and necessary bill that will provide much needed clarity to the communications and internet industries, while addressing the needs of the states and local governments, all while helping to keep internet access affordable," Conyers remarked during Wednesday's committee session.

The ban on internet access taxes was first enacted in 1998 but, since then, Congress has had to renew the temporary moratorium twice, first in 2001, and again in 2004. Republican Senator John McCain is currently sponsoring legislation that would extend the moratorium on a permanent basis.

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