Sen. Alexander Introduces Bill Regarding Internet Tax Moratorium

February 12, 2004. Sen. Lamar Alexander (R-TN) and others introduced S 2084, the "Internet Tax Ban Extension and Improvement Act". The title of the bill is not descriptive of its content. The bill would nominally extend the Internet Tax Freedom Act through November 1, 2005. However, it would also allow a range of new taxes that could be imposed by state and local governments.

The original moratorium, contained in the Internet Tax Freedom Act (ITFA), was passed in late 1998. It was extended in 2001. The extended moratorium expired on November 1, 2003.

	Sen. Lamar Alexander

The original cosponsors of S 2084 are Sen. Tom Carper (D-DE), Sen. Byron Dorgan (D-ND), Sen. Diane Feinstein (D-CA), Sen. Bob Graham (D-FL), Sen. Ernest Hollings (D-SC), Sen. Kay Hutchison (R-TX), Sen. Daniel Inouye (D-HI), Sen. Frank Lautenberg (D-NJ), Sen. Jay Rockefeller (D-WV), and Sen. George Voinovich (R-OH). Many are veterans of prior battles to defeat, weaken, and shorten the term of the internet tax moratorium.

Sen. Alexander's bill was referred to the Senate Commerce Committee, which has already passed a bill to extend the tax moratorium.

On July 31, 2003, the Senate Commerce Committee amended and approved S 150, the "Internet Tax Non-discrimination Act of 2003" by voice vote. See, amendment in the nature of a substitute [4 pages in PDF]. See also story titled "Senate Commerce Committee Approves Bill to Extend Internet Tax Moratorium" in TLJ Daily E-Mail Alert No. 709, August 1, 2003.

In addition, on September 17, 2003, the full House passed HR 49, its version of the "Internet Tax Non-discrimination Act".

In summary, the original Internet Tax Freedom Act (ITFA) imposed a temporary ban on taxes on internet access, and multiple or discriminatory taxes on e-commerce, subject to a grandfather clause. It expired in 2001. But, the Congress passed the Internet Non-Discrimination Act (INDA) in late 2001. It extended the ban of the ITFA through November 1, 2003. This extension has expired.

In the current Congress, the House version of the extension bill, which is again titled the "Internet Non-Discrimination Act" makes the ban of the ITFA permanent. It also eliminates the grandfather clause. Finally, it provides that the moratorium applies to telecommunications services, "to the extent such services are used to provide Internet access".

In the current Congress, the Senate version of the INDA that was passed by the Senate Commerce Committee makes the ban of the ITFA permanent, sunsets the grandfather language of the ITFA after October 1, 2006, provides that the moratorium applies to telecommunications services "to the extent such services are used to provide Internet access", and adds an exemption for any taxes imposed to fund universal service subsidies.

1998 ITFA. The Congress passed the original Internet Tax Freedom Act (ITFA) in the closing days of the 105th Congress. The Senate version of the bill, S 442 ES (105th), was ultimately added to the huge Omnibus Appropriation Bill, which was passed by both houses, and signed by former President Clinton in October of 1998. It became Public Law No. 105-277.

Rep. Chris Cox (R-CA) (at left) sponsored the House version of the bill. (He is also the sponsor of HR 49 in the current Congress). Sen. Ron Wyden (D-OR) sponsored the Senate bill. Sen. Wyden has throughout been one of the leading proponents of creating and maintaining the moratorium.

The ITFA's moratorium employs short and simple terms. The key language (which is at Section 1101(a) of the ITFA, and codified at 47 U.S.C. 151 note) provides as follows:

  "(a) Moratorium.--No State or political subdivision thereof shall impose any of the following taxes during the period beginning on October 1, 1998, and ending 3 years after the date of the enactment of this Act--
    (1) taxes on Internet access, unless such tax was generally imposed and actually enforced prior to October 1, 1998; and
    (2) multiple or discriminatory taxes on electronic commerce."

Thus, it is a moratorium on taxes on internet access, and multiple or discriminatory taxes on e-commerce; it lasts for three years; and it grandfathers existing taxes that were "generally imposed and actually enforced".

The ITFA also established the "Advisory Commission on Electronic Commerce" to write a report to Congress. This Commission, which came to be known as the Gilmore Commission, completed its study. This is not an issue in the current debate.

Finally, the ITFA contains some exceptions and definitions that are relevant to the current debate.

Subsection 1101(e) lists exceptions to the moratorium. Subsection 1101(e)(3) contains definitions. Subsection 1101(e)(3)(D) defines "Internet access service" as follows: "The term 'Internet access service' means a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. Such term does not include telecommunications services."

Section 1104 is the general definitions section. Subsection 1104(5) defines "Internet access" as follows: "The term 'Internet access' means a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. Such term does not include telecommunications services."

Extension in 2001. Rep. Cox introduced HR 1552, the "Internet Non-Discrimination Act" (INDA) of 2001, on April 24, 2001, in the 107th Congress. The House passed the bill on October 16, 2001. The Senate passed the bill on November 15, 2001. President Bush signed the bill on November 28, 2001. It became Public Law No. 107-75.

It is a remarkably short and simple bill. Its only substantive language provides that "Section 1101(a) of the Internet Tax Freedom Act (47 U.S.C. 151 note) is amended by striking `3 years after the date of the enactment of this Act' and inserting `on November 1, 2003'."

That is, all that it did was extend the duration of the moratorium.

And of course, November 1, 2003 has passed. There is no moratorium in effect.

HR 49. The House has passed a bill extending the moratorium.

Rep. Cox introduced the bill on HR 49, the "Internet Tax Nondiscrimination Act", on January 7, 2003. See, story titled "Rep. Cox and Sen. Wyden Introduce Bill to Make Permanent Net Tax Ban" in TLJ Daily E-Mail Alert No. 580, January 10, 2003.

The House Judiciary Committee's Subcommittee on Commercial and Administrative Law held a hearing on April 1, 2003. See, story titled "House Subcommittee Holds Hearing on Bill to Make Internet Tax Moratorium Permanent" in TLJ Daily E-Mail Alert No. 635, April 2, 2003.

The Subcommittee approved the bill on May 22, 2003. The full Committee amended and approved the bill on July 16, 2003. See, story titled "House Judiciary Committee Approves Internet Tax Bill", also published in TLJ Daily E-Mail Alert No. 700, July 17, 2003.

The full House passed the bill on September 17, 2003.

The key language of HR 49 amends Section 1101(a) of the ITFA to read as follows:

"(a) MORATORIUM- No State or political subdivision thereof may impose any of the following taxes:
(1) Taxes on Internet access.
(2) Multiple or discriminatory taxes on electronic commerce."

That is, is leaves unchanged the taxes that are banned. It continues the moratorium on taxes on internet access, and multiple and discriminatory taxes on e-commerce. However, it deletes the grandfather language (thus eliminating grandfathering of taxes that were "generally imposed and actually enforced" in 1998). It also deletes any reference to a termination of the moratorium (thus making it permanent). The bill also deletes another reference to grandfathering that was included in the original ITFA.

There is one other significant provision in HR 49. It is as follows: "CLARIFICATION- The second sentence of section 1104(5), and the second sentence of section 1101(e)(3)(D), of the Internet Tax Freedom Act (47 U.S.C. 151 note) are each amended by inserting `, except to the extent such services are used to provide Internet access' before the period."

This was added to the bill during the House Judiciary Committee markup on July 16, 2003. Rep. Mel Watt (D-NC) (at left) offered the amendment. It provides that the moratorium applies to telecommunications services, "to the extent such services are used to provide Internet access", thus clarifying that the ban on internet access taxes extends to broadband DSL and wireless services provided by phone companies or others.

That is, the 1998 ITFA imposed a moratorium on taxes on internet access, but, the ITFA's definition of "internet access" excluded "telecommunications services". Rep. Watt (at left) stated that some states currently impose a tax on DSL service when it is sold as part of a package with phone service. Thus, internet access, when provided by DSL, is taxed, while other technologies for providing broadband internet access are not taxed. He stated that his amendment would clarify that DSL service is covered by the ban on internet access taxes.

S 150. Sen. George Allen (R-VA) introduced S 150, also titled the "Internet Tax Nondiscrimination Act", on January 13, 2003. The Senate Commerce Committee, which has jurisdiction over this issue, held a hearing on July 16, 2003. See, story titled "Senate Commerce Committee Holds Hearing on Internet Tax Bill" in TLJ Daily E-Mail Alert No. 700, July 17, 2003.

On July 31, 2003, the Committee amended and passed the bill. See, story titled "Senate Commerce Committee Approves Bill to Extend Internet Tax Moratorium" in TLJ Daily E-Mail Alert No. 709, August 1, 2003. However, the full Senate has not passed either this bill, or the House version.

S 150, as amended by the Senate Commerce Committee, permanently extends the moratorium on internet access taxes and multiple and discriminatory taxes on e-commerce.

S 150 expands the scope of the grandfather provision, and sunsets it after three years.

S 150 also contains Rep. Watts' language providing that the moratorium applies to telecommunications services "to the extent such services are used to provide Internet access".

Finally, S 150 contains an exception for taxes collected to fund universal service subsidies. It provides that "Nothing in the Internet Tax Freedom Act shall prevent the imposition or collection of any fees or charges used to preserve and advance Federal universal service or similar State programs authorized by section 254 of the Communications Act of 1934."

There is also a related bill, S 52, also titled the "Internet Tax Nondiscrimination Act", which was introduced by Sen. Wyden on January 7, 2003. However, S 150 has become the vehicle for extending the moratorium. Nevertheless, S 150 is often referred to as the Allen Wyden bill, even though Sen. Wyden is technically not a cosponsor of S 150.

S 2084. Sen. Alexander's just introduced bill, S 2084, is titled the "Internet Tax Ban Extension and Improvement Act". It is an internet tax ban extension to the extent that it extends the ban contained in Section 1101 of the 1998 ITFA to November 1, 2005. The extension would also be retroactive, back to November 1, 2003, when the ban expired. Thus, there would be no gaps in the application of the ban.

However, the rest of this detailed bill creates exceptions, exclusions, and other opportunities for state and local governments to impose taxes that the original ban was passed to prevent.

S 2084 contains language that is related to Rep. Watts' amendment. However, it drafted more narrowly to allow more activities to fall outside of the moratorium on internet access taxes. HR 49 and S 150 both provide that the moratorium applies to telecommunications services "to the extent such services are used to provide Internet access". S 2084 provides that the moratorium does not apply to "telecommunications services, except to the extent such services are purchased, used, or sold by an Internet access provider to connect a purchaser of Internet access to the Internet access provider".

S 2084 deletes the grandfather language from 1101(a), only to add a pair of far broader grandfather clauses in a newly created Section 1104.

The ITFA grandfathered taxes on internet access that were "generally imposed and actually enforced" in 1998. S 2084 preserves this clause but then adds qualifying language.

It provides, in part, that "Section 1101(a) does not apply to a tax on Internet access ... that was generally imposed and actually enforced prior to October 1, 1998, if, before that date, the tax was authorized by statute and either -- (1) a provider of Internet access services had a reasonable opportunity to know by virtue of a rule or other public proclamation made by the appropriate administrative agency of the State or political subdivision thereof, that such agency has interpreted and applied such tax to Internet access services; or (2) a State or political subdivision thereof generally collected such tax on charges for Internet access."

This section of S 2084 lacks clarity. But, it lends itself to the interpretation that a state or local government may impose a tax on internet access, in the absence of having actually collected the tax, or even having promulgated a rule or ordinance, merely if it can show that it had articulated its interpretation that it could impose the tax. Evidence of this interpretation could be satisfied by any "public proclamation" -- which raises the question of what is a "public proclamation".

S 150 contains similar language. This taxing authority goes beyond the notion of grandfathering.

S 2084 also carves out three exceptions to the moratorium. First, like S 150, it contains an exception for taxes imposed for the purpose of providing universal support subsidies. But, it adds two exceptions not contained in S 150.

It creates an exception for taxes imposed for the purposes of funding 911 or E911 programs.

It may also be relevant that some states have a history of diverting E911 fees to fund other government programs. Sen. Conrad Burns (R-MT) and Sen. Hillary Clinton (D-NY) introduced S 1250, the "Enhanced 911 Emergency Communications Act of 2003 " in July of 2003 to, among other things, address this diversion. It would also require the Federal Communications Commission (FCC) to review twice a year fees charged to customers for enhancing 911 services. States would be required to certify that no E911 fees are being used for other purposes. The FCC would be required to notify Congress of states that divert E911 funds. Finally, the NTIA would be required to withhold grant funds to states that are found by the FCC to divert E911 funds.

The Senate Commerce Committee report on this bill states that "Currently, over 40 States have established some type of wireless fee or surcharge on consumers' mobile phone bills to fund, either in whole or in part, PSAP upgrades for wireless E-911 service. In the States relying on monthly surcharges, subscribers' fees range from 20 cents to $2 per month, with the average about 60 cents per month." It adds that "Recently, State lawmakers and administrators have begun investigating the use of E-911 funds, and have discovered instances in which E-911 funds have been used for purposes other than the provision of E-911 service. Observers claim as many as 11 States have been `raiding' their collected E-911 funds to satisfy other State obligations." See, Senate Report 108-130

S 2084 also creates exceptions for any taxes levied on "net income, capital stock, net worth, or property value".

That is, state and local governments could tax the internet access providers, who would then pass on this cost to their customers through higher prices. The net effect on consumers would be similar to a tax their internet access.

S 2084 also contains a section titled "Accounting Rule" which facilitates the ability of state and local governments to impose taxes on bundled service offerings, that include internet access. It states that "If charges for Internet access are aggregated with and not separately stated from charges for telecommunications services or other charges that are subject to taxation, then the charges for Internet access may be subject to taxation unless the Internet access provider can reasonably identify the charges for Internet access from its books and records kept in the regular course of business." This section restates the delineation of telecommunications and internet access: "The term `charges for telecommunications services' means all charges for telecommunications services except to the extent such services are purchased, used, or sold by an Internet access provider to connect a purchaser of Internet access to the Internet access provider."

Sen. Rockefeller (at right), an original cosponsor of the bill, stated that Sen. Allen and Sen. Wyden "have proposed legislation that would permanently bar States and cities from taxing Internet access, and they have defined the service broadly that many experts believe it will undermine some telecommunications taxes on which States currently depend. I am not interested in providing enormous tax breaks to the telecommunications industry, and so I oppose their approach. Taxes that businesses currently pay to access the Internet backbone are reasonable costs of doing business. I hope that my colleagues will not be intimidated by claims that those of us who oppose tax breaks for telecommunications companies actually want to tax people's e-mails." See, Congressional Record, February 12, 2004, at page S1295.

Reaction to S 2084. Software & Information Industry Association (SIIA) President Ken Wasch stated in a release that "Contradicting its name, this new legislation represents a means to empower states to not only begin taxing Internet access, but to do it in a way that will leave consumers wondering what hit them ... This legislation makes a mockery of tax and technological neutrality, and it denies consumers a real choice in high speed access to the Internet."

Wasch continued: "Let's be clear: This legislation would create a regime whereby taxes are applied to Internet access services and email. In fact, these taxes would be applied on the back-end, so it is the worst kind of taxation. If this legislation were enacted, consumers could expect their bill for DSL and wireless high-speed Internet access to increase significantly. Consumers could be looking at billions of dollars in taxes levied on Internet access through a back door."

"The legislation's sponsor, Senator Lamar Alexander, stated explicitly last year that he supports taxation of Internet access. This legislation seems to underscore that point", said Wasch.

Similarly, David McClure of the US Internet Industry Association (USIIA) said in a release that S 2084 "is a hoax".

The USIIA release asserts that it "allows taxation of the connection between the ISP and the Network Access Point (NAP), taxation of the Internet backbone, taxation of Internet connections required for redundancy and quality-of-service agreements, and any other Internet connections or circuits. These taxes would be passed along to consumers, and would significantly increase the cost of both broadband and dial-up Internet services."

BellSouth issued a release which states that "Even opponents of Internet tax freedom now concede the importance of keeping the internet tax free from State and local taxation. The bill they introduced today falls far short of accomplishing that objective. Instead the ``Alexander-Carper´´ legislation will leave millions of Americans vulnerable to increased costs every time they access the Internet. This will result in nothing more than a massive tax increase for millions of consumers." BellSouth adds that it support S 150.

BellSouth further states that this quote is attributable to the "Consumer Internet Access Coalition", of which BellSouth is a member. (TLJ possesses no information about this coalition, other than this release. Also, a Google search for this coalition only turns up references to this release.)

BellSouth is an incumbent local exchange carrier (ILEC) that offers internet access services via DSL.