Congress Bans States from Taxing Internet Access

Congress wrapped up its work this weekend by making sure that states don't slap a new tax on the monthly charge that computer users pay to log on and surf the World Wide Web.

Before adjourning, the 108th Congress passed a bill (S 150) that renews a ban against taxing Internet access through 2007. However, nine states that already impose an Internet access tax can continue to do so through 2007. Twenty-seven states that collect taxes on high-speed DSL lines can do so until November 2005.

President Bush is expected to sign the bill.

The high-tech industry and anti-tax activists had been pressing Congress to act because a moratorium that kept states from taxing the Internet expired last year. Governors, threatened with losing millions of dollars of tax revenue, have been lobbying just as hard against a permanent ban.

Congress failed to act this year on a separate Internet issue even more important to states: the ability to impose a state sales tax on online purchases, which most consumers now consider to be tax-free. That got no attention from tax-leery Washington during this election-year.

At issue was whether states and localities could tax the $10-to-$50-a-month charge computer users pay to an Internet-access provider such as America Online, to reach the World Wide Web and send and receive e-mail.

"The nation's governors are pleased that Congress agreed on this reasonable extension of the previous ban on state and local taxation of Internet access," Raymond C. Scheppach, executive director of the National Governors Association, said in a statement. "The temporary moratorium is fiscally fair and preserves existing state and local government revenues."

The bill also makes clear that states and cities can continue to collect taxes on telephone services, even if telephone calls are made over the Internet. Governors feared that the final version of the bill would be written in such a way that it would eventually wipe out $20 billion in taxes that states and localities currently collect on local and long-distance telephone services.

The compromise was the work of three former governors: U.S. Sens. George Allen (R-Va.), Lamar Alexander (R-Tenn.) and Tom Carper (D-Del.).

"We have made sure that the avaricious tax commissars from every county, city and State in America cannot continue conniving new ways to tax the Internet and the people who use it," Allen said in a statement. Carper said, "The end result isn't perfect, but it is a big victory for states and for enhancing the development of the Internet."

The original bill from Allen would have permanently barred states from taxing Internet access, robbing nine states of $120 million a year they already collect in access taxes and 27 states of up to $80 million in taxes on DSL lines.

The nine states that already collect Internet access taxes are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin. These states imposed taxes before Congress put the ban in effect.

The anti-tax group FreedomWorks hailed the bill as a good first step. "While we would like to see Internet taxation banned permanently, passing S. 150 is a great start. Without the extension of the Internet tax moratorium, states and localities would have enacted a hodgepodge of onerous new taxes, restricting access to the educational and economic benefits of the broadband world," said FreedomWorks Chairman Dick Armey, a former majority leader of the U.S. House.

Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities, a group that focuses on budget and tax policies that affect the poor, said he was glad Congress accepted the compromise but called the bill "bad public policy."

He said Congress was denying the right of a state to impose a nondiscriminatory tax and yet is not accountable for the consequences.

Either someone else's taxes have to be raised or services have to be cut to make up the revenue, Mazerov said.