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Senators Seek To Extend US Internet Tax Moratorium

by Mike Godfrey,, Washington

25 May 2007

US Senators Tom Carper (D-Del.) and Lamar Alexander (R-Tenn.) have introduced legislation that would extend the current ban on Internet access taxes for another four years.

The Internet Tax Freedom Extension Act of 2007 seeks to improve the existing moratorium by closing tax loopholes, and clarifying the definition of "Internet access" to better protect essential goods and services provided by state and local governments.

The Carper-Alexander bill alters the definition of 'Internet access' to ensure that a consumer's connection to the Internet, including email and instant messaging, remains tax-free. At the same time, the bill closes a loophole in the original 1998 moratorium that could allow an Internet Service Provider to bundle Internet access with other services and make them all tax-free. The Senators said that closing this loophole is important because it could harm the traditional tax base of state and local governments.

In 2004, the last time Congress extended the ban, Congress exempted voice-over-Internet-protocol services from the moratorium because of fears that states and localities could lose billions of dollars in revenue as telephone services migrated to the Internet.

As the Internet continues to grow and more services migrate to the Internet, Senators Carper and Alexander have said that it makes sense to close that loophole and define Internet access exclusively as the connection between a consumer and the Internet Service provider. Such clarity will continue to ensure that Internet access is tax free, while also ensuring state and local governments do not have to come up with new - and potentially more burdensome - sources of revenue to pay for teachers, firefighters and health care services, they explained.

"Our bill would ensure that consumers continue to enjoy tax-free access to the Internet, including email and instant-messaging," stated Sen. Carper. "In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments."

"We should not undermine the ability of governors and mayors to pay for goods and services that everyone depends on. A temporary extension, as we have in our bill, will allow us to keep Internet access tax free, while giving Congress more time to understand the Internet's evolution and what it means for state and local governments," he added.

"This is a common sense compromise that would extend the moratorium for another four years without blowing a hole in the budgets of state and local governments," Sen. Alexander announced. "A permanent moratorium would create a massive federal unfunded mandate, which members of Congress have repeatedly promised not to do. When the federal government starts restricting Tennessee's ability to raise revenue that means increased tuition, higher sales tax on food and even a state income tax are just around the corner."

In addition, the legislation extends the original "grandfather" clause, thereby allowing the nine states that collected revenues from Internet access before the 1998 tax moratorium to continue to collect those taxes.

The other bill cosponsors are Sens. Michael Enzi (R-Wyo.), Dianne Feinstein (D-Calif.) and George Voinovich (R-Ohio).

Among this legislation's supporters are the National Governors Association, the National League of Cities, the US Conference of Mayors and the National Association of Counties.

A comprehensive report in our Intelligence Report series examining offshore e-commerce and online gaming is available in the Lowtax Library at and a description of the report can be seen at

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