Extended yet again: the debate over state taxation of Internet access will be one for the 114th Congress.

• Author: McGahan, Sarah

Billions of dollars in potential state taxes are at stake in the decision on whether to continue the ban on internet access taxes.

At the end of the 113th Congress, lawmakers kicked the proverbial can down the road when they left the issue of taxing internet access to the 114th Congress. Doing things on a temporary or stopgap basis was not unique to the 113th Congress: Congress has batted the issue of taxation of internet access about for almost two decades. Will 2015 be the year something changes?

Background

As originally enacted in 1998, the Internet Tax Freedom Act (ITFA) (1) prohibited states and local governments during the following three-year period from imposing (1) any new taxes on charges for internet access, or (2) any multiple or discriminatory taxes on electronic commerce. States and localities that had generally imposed and actually enforced taxes on internet access before ITFA's effective date of Oct. 1,1998, were allowed to continue taxing under the so-called grandfather provisions. In the original act, "Internet access service" was defined as:

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. (2) The impetus behind ITFA in 1998 was simple: The world was entering the digital age--the age of information--and the internet was going to become a critically important tool. Because the internet was in its infancy, it was widely believed that burdensome taxation would likely impede its growth. In fact, then-Rep. Chris Cox, R-Calif., a co-sponsor of the original act, stated that "the Internet Tax Freedom Act is based on a simple principle: Information should not be taxed." (3)

For reasons largely unrelated to ITFA, internet use grew exponentially in the years after 1998. In 2000, according to the U.S. Census Bureau, 42% of households reported at least one member who used the internet at home. (4) In contrast, 26% of households used the internet in 1998 and only 18% in 1997. (5) By 2013, the U.S. Census Bureau said that 74.4% of households reported using the internet at home. (6)

After the original ITFA expired on Nov. 1, 2001, the Internet Tax Nondiscrimination Act of 2001 (7) was signed into law on Nov. 28, 2001. This bill extended the moratorium to Nov. 1, 2003. No changes were made to the act's substantive provisions.

On Dec. 3, 2004, another Internet Tax Nondiscrimination Act (8) was enacted, extending the provisions to Nov. 1, 2007. The extension was retroactive for a one-year period to November 2003. With this extension, Congress made substantive changes to the moratorium's provisions. Notably, the act was revised to provide that the term "Internet access" does not include telecommunications services "except to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access." (9) Some thought that this expanded definition of internet access captured the type of services provided by telecommunications, cable, and other internet "backbone" service providers to internet service providers (ISPs) and their customers.

The 2004 Internet Tax Nondiscrimination Act also specifically created an exception to the general prohibition for taxes imposed on charges for voice or similar services using internet protocol (e.g., voice over IP, or VoIP). Also, the 2004 legislation revised the grandfather provisions and mandated that the U.S. comptroller general study the impact of the moratorium on state and local government revenues and on the deployment and adoption of broadband technologies for internet access throughout the United States and report the findings to specified congressional committees. The 2004 extension was set to expire on Nov. 1, 2007.

From the time the 2004 Internet Tax Nondiscrimination Act was signed through 2007, there was much debate over whether the moratorium should be extended temporarily, be made permanent, or be allowed to sunset so that states and localities could impose taxes on internet access. In addition, much debate centered on whether the grand-fathered states should continue to enjoy preferential status.

After months of...