Congress Is About to Decide Whether to Tax Your Internet

The price of surfing the Web — or buying things online — could soon go up.

 Ethernet cables lead to a server at the Rittal stand at the 2013 CeBIT technology trade fair the day before the fair opens to visitors on March 4, 2013 in Hanover, Germany.
National Journal
Dustin Volz
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Dustin Volz
Sept. 17, 2014, 11:46 a.m.

Uncle Sam may start char­ging you for the right to ac­cess the In­ter­net.

Or you might soon find your­self pay­ing a sales tax on pur­chases made at on­line re­tail­ers like Amazon and eBay.

De­pend­ing on whom you ask, the two is­sues are either com­pletely un­re­lated or close cous­ins. The first is a sort of dooms­day scen­ario that would come to pass if a long-stand­ing fed­er­al ban on char­ging a tax for In­ter­net ac­cess isn’t re­newed by Con­gress. The second will be­come real­ity if an on­line-sales-tax bill, sup­por­ted by brick-and-mor­tar re­tail­ers, gets passed as a piggy­back meas­ure to the ban.

Be­fore Con­gress flees Wash­ing­ton later this week to be­gin its fi­nal burst of elec­tion-sea­son cam­paign­ing, it must ad­dress the ban on fed­er­al, state, and loc­al taxes on In­ter­net ac­cess due to ex­pire on Nov. 1.

This ban pre­vents loc­al­it­ies and all but sev­en states from char­ging you a sales tax for your In­ter­net hook­up in your monthly bill. Few in Con­gress want that ban to ex­pire, but in the face of the loom­ing dead­line, law­makers have de­cided to do what they do best: Punt.

House Re­pub­lic­ans have ad­ded a short-term ex­ten­sion to the ban to a con­tinu­ing res­ol­u­tion, a le­gis­lat­ive pack­age that will keep the gov­ern­ment from shut­ting down un­til Con­gress can ne­go­ti­ate its next budget deal. But that patch­work ex­ten­sion, which the Sen­ate ap­pears likely to con­sent to, only keeps the ban in place un­til Dec. 11.

That very brief push­back is set­ting up a hol­i­day-sea­son fight in a Con­gress where noth­ing is a sure bet. Com­plic­at­ing mat­ters is an ef­fort brew­ing in the Sen­ate to pair the ban ex­ten­sion with a far more con­ten­tious plan that would give states more power to ex­act sales taxes on on­line pur­chases of things like books and movies.


A ban on col­lect­ing taxes on In­ter­net ac­cess has been in place since Pres­id­ent Clin­ton signed it in­to law in 1998 as a means to pro­tect the then-nas­cent tech­no­logy power­ing a boom­ing In­ter­net bubble. Law­makers have re-upped the meas­ure three times, with the most re­cent re­new­al in 2007. The law also pro­hib­its levies on dis­crim­in­at­ory In­ter­net-spe­cif­ic tolls on things like email or band­width.

In Ju­ly, the House passed by voice vote a bill that would have banned In­ter­net-ac­cess taxes forever. In ad­di­tion, the Per­man­ent In­ter­net Tax Free­dom Act would end the ac­cess taxes that are col­lec­ted in sev­en states — Hawaii, New Mex­ico, North Dakota, Ohio, South Dakota, Texas, and Wis­con­sin. Those states already had be­gun col­lect­ing taxes pri­or to the 1998 law, which grand­fathered them in­to its lan­guage.

The meas­ure briefly looked like it had a chance to sail through the Sen­ate and land on the pres­id­ent’s desk be­fore the end of the year, which would have rep­res­en­ted one of only a hand­ful of sub­stant­ive bills to pass an oth­er­wise do-noth­ing Con­gress this year.

But just hours after the House passed its bill, a group of bi­par­tis­an sen­at­ors, led by Sens. Dick Durbin of Illinois and Mike En­zi of Wyom­ing, in­tro­duced a new bill com­bin­ing a 10-year tax ban with a more con­tro­ver­sial ef­fort that would boost the au­thor­ity of states to tax on­line pur­chases from re­tail­ers like Amazon and eBay. It would also keep the bans in those sev­en grand­fathered states in­tact.

The pack­age deal amounts to a last-ditch ef­fort to re­vive on­line-sales-tax le­gis­la­tion, which passed the Sen­ate last year but fizzled in the House. That stalled meas­ure, known as the Mar­ket­place Fair­ness Act, would let states col­lect sales tax on mer­chand­ise pur­chased on­line from out-of-state re­tail­ers. Cur­rent law al­lows states to col­lect sales tax only on re­tail­ers that main­tain a phys­ic­al pres­ence, such as a store or ware­house, with­in that same state.

The push to ex­pand states’ tax­ing au­thor­ity over on­line sales has been ban­died about in Con­gress for years. It has earned in­flu­en­tial sup­port from a num­ber of states try­ing to close budget short­falls and tra­di­tion­al re­tail­ers, who say on­line vendors have an un­fair, tax-free ad­vant­age be­cause they can of­fer con­sumers a lower price. An­ti­tax groups and a num­ber of on­line re­tail­ers such as eBay op­pose the plan.

Amazon, once res­ist­ant to on­line sales tax, has more re­cently been sup­port­ive, in part be­cause the on­line jug­ger­naut is already sub­ject to sales tax in 21 states where it has a phys­ic­al loc­a­tion.


An­ti­tax and open-In­ter­net ad­voc­ates re­main op­tim­ist­ic that Con­gress will fig­ure out a way to keep the In­ter­net-ac­cess tax ban in place after the elec­tion, though if Re­pub­lic­ans are due to re­take the Sen­ate, it could mean in­ac­tion un­til next year.

“We’re go­ing to win either way,” said Katie McAul­iffe, fed­er­al af­fairs man­ager at Amer­ic­ans for Tax Re­form. “If it passes now, if it passes later, we’re go­ing to win either way.”

Still, the morator­i­um has lapsed twice be­fore — once for a month in 2001 and for 13 months be­gin­ning in 2003. Neither ex­pir­a­tion promp­ted an open sea­son from states rush­ing to start tax­ing con­sumers, but back­ers of a per­man­ent ban say things might be dif­fer­ent this time around. The In­ter­net is far more ubi­quit­ous, for one, and some states might auto­mat­ic­ally start col­lect­ing taxes. In Montana, for ex­ample, state law would man­date that In­ter­net ac­cess be taxed at 3.75 per­cent should the ban lapse, ac­cord­ing to a re­port from the House Ju­di­ciary Com­mit­tee.

Op­pon­ents of the ban dis­agree that states are clam­or­ing to start char­ging.

“They view it as must-pass le­gis­la­tion; it’s be­ing char­ac­ter­ized that way, but it’s not like there is huge sup­port for state and loc­al of­fi­cials for tax­ing In­ter­net ac­cess,” said Mi­chael Maz­arov, a policy ana­lyst with the Cen­ter on Budget and Policy Pri­or­it­ies, which has called the per­man­ent tax-ban pro­pos­al “harm­ful” le­gis­la­tion.

A re­port from the group earli­er this year cal­cu­lated that an In­ter­net tax ban costs states up to $7 bil­lion in po­ten­tial an­nu­al rev­en­ue, and that the sev­en states that cur­rently have such taxes would col­lect­ively lose an es­tim­ated $500 mil­lion a year.

What’s less clear is wheth­er Con­gress will opt for a per­man­ent ex­ten­sion of the ban or a tem­por­ary one, likely last­ing 10 years. Even mur­ki­er is the fate of the push by some sen­at­ors to com­bine a ban ex­ten­sion with on­line-sales-tax le­gis­la­tion.

Sen­ate Fin­ance Com­mit­tee Chair­man Ron Wyden has been a vo­cal op­pon­ent of the Mar­ket­place Fair­ness Act, as well as a crit­ic­al boost­er of a bill that would per­man­ently ban ac­cess taxes. When the House passed the Per­man­ent In­ter­net Tax Free­dom Act this sum­mer, Wyden used it to take a shot at any ef­fort to pair it with an on­line-sales-tax meas­ure.

“It is so im­port­ant to re­ject ap­proaches like the Mar­ket­place Fair­ness Act that passed the Sen­ate last year, which would fun­da­ment­ally dis­crim­in­ate against states that do not levy a sales tax and against U.S. com­pan­ies versus their for­eign com­pet­it­ors,” the Ore­gon Demo­crat said. “It would amount to a body blow to on­line re­tail­ers and ser­vices across the coun­try.”

House lead­ers on the is­sue don’t ap­pear will­ing to budge any­time soon, either. Without dir­ectly con­demning the on­line-sales-tax push, House Ju­di­ciary Com­mit­tee Chair­man Bob Good­latte has in­dic­ated he wants a clean, per­man­ent ban ex­ten­sion passed this year.

“While I am pleased that there is a plan in place to tem­por­ar­ily ex­tend the morator­i­um bey­ond the Novem­ber 1, 2014, dead­line, what we really need is a per­man­ent ban on In­ter­net ac­cess taxes,” Good­latte said in a state­ment to Na­tion­al Journ­al. “The last thing Amer­ic­ans need is a tax on their In­ter­net ac­cess. I am con­tinu­ing to work to­ward a per­man­ent ban on these bur­den­some taxes.”

But re­tail­ers and oth­er back­ers of on­line-sales taxes see a way for­ward, and read­ily con­cede that the loom­ing lame-duck de­bate of­fers their “best shot” yet at punch­ing the long-stalled Mar­ket­place Fair­ness Act — which Pres­id­ent Obama has thrown his sup­port be­hind — through the Sen­ate.

“We’re close now. We’ve nev­er had a bill this close in Con­gress,” said Dav­id French, seni­or vice pres­id­ent of gov­ern­ment af­fairs at the Na­tion­al Re­tail Fed­er­a­tion. “It’s reck­less for Con­gress to not patch this hole … [which] could be done pretty quickly in Decem­ber.”

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