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Press Release

    Background on the Senate "Internet Tax Non-discrimination Act"

    10/25/2003

    S. 150, The Internet Tax Non-discrimination Act

    What changes does S 150 make in current law – The Internet Tax Freedom Act?

    (1) It makes permanent the moratorium on multiple and discriminatory taxes against the Internet; (2) it allows for a 3-year phase-out of the grandfathering provision on Internet access taxes; (3) it ensures the ban on Internet access taxes is neutral among various Internet access technologies, such as high-speed DSL, cable modem service, wireless, satellite and dial-up.

    Why did the definition of Internet access need to be changed?

    Some States and localities began dividing high-speed Internet access into separate components and leaving a tax on the high-speed telecommunications component of Internet access. By doing this, States have circumvented the moratorium and the original intentions of the Internet Tax Freedom Act (ITFA).

    S. 150, as amended, would update the language of the ITFA in recognition of the significant technological developments in the Internet and Internet access since 1998. The updated change ensures that all Internet access, whether in the form of dial-up, DSL, cable, satellite, wireless, or any other technology platform, and components thereof would be covered by the Internet tax moratorium and therefore exempt from State and local taxation. However, the distinction in S. 150 is measured to ensure the clarification does not encompass all telecommunications, rather only those that are used to provide Internet access. Therefore, traditional telephone and telecommunications services that are not used to provide Internet access remain outside the moratorium.

    How does the definitional change affect State and local telecommunications taxes?

    The clarification to the definition of Internet access is to apply for telecommunications services that are used to provide Internet access. The modified definition of Internet access is not meant to affect State and local taxation of traditional telecommunications services and other services that are not used to provide Internet access. For example, the moratorium does not allow an Internet access provider to claim or seek immunity from State or local taxes for the provision of other services that are separate from Internet access. Additionally, the clarification is not intended to affect the State and local governments’ authority to assess and collect taxes or fees that do not fall within the tax categories set forth in the ITFA, such as traditional sales and use taxes, franchise fees excise taxes, property taxes, corporate income taxes, gross receipts taxes, as well as business and occupational taxes.

    Why do States and localities claim S. 150 will cost anywhere from $9 billion to $24 billion in lost revenues?

    This figure is based on a report issued by the Multi-State Tax Commission, which did its estimate based on the faulty assumption that the change to the definition of Internet access as well as the phase-out of the grandfathering clause will exempt: (1) all telecommunications services; and (2) all telecommunications providers’ property and income from all State and local taxes.

    This analysis is fundamentally flawed because it ignores the simple meaning of the terms used in the ITFA and the proposed bill, as well as the clear legislative intent of S. 150. The bill ensures that the ITFA tax exemption is applied only to those telecommunications services that are purchased or used to provide Internet access, not other telecommunications services that may be provided over the Internet. The only taxes that are preempted are “taxes on Internet access,” in other words, taxes on a service (i.e., transaction taxes). A property tax or franchising fee is a tax on physical infrastructure or rights of way, so these taxes CANNOT be covered by the ITFA preemption. Additionally, the ITFA has been in effect since 1998. If the analysis of the study were correct, taxes on corporate income or property would ALREADY have been challenged. No such challenge has been made by telecommunications companies or Internet service providers.

    Will the change in the definition of Internet access allow Internet access providers to “bundle” other taxable services with Internet access in order to shield the other taxable services from State and local taxes?

    No. The modified definition of Internet access does not exempt from State or local taxation otherwise taxable products or services that are bundled with Internet access. The change is narrowly construed to include only those telecommunications services that are actually being used to provide Internet access. Telecommunications services that are used to provide services other than Internet access would NOT fall under the ITFA’s tax exemption. For example, a package of services that includes local voice, long distance voice and Internet access would be covered under the Internet tax moratorium only with respect to the portion of the package that actually constitutes Internet access.

    The common tax principle on bundled services would apply and simply states that when a nontaxable charge or service, like Internet access, is “bundled,” or offered with a taxable charge in a single package to the consumer, the taxable charge will “taint,” or make taxable the nontaxable item unless the business or provider keeps separate account of the taxable and nontaxable items. A provider offering any taxable service with Internet access would either be force to pay tax on the entire bundle or breakout the items separately, and thus subject to tax.