Bush Signs ‘Net Access Tax Moratorium

SMBs can keep a bit more of their income in their pocket now that new legislation has been signed into law. President Bush signed a new four-year ban on state and federal taxation of Internet connections, legislation the industry said was needed to promote universal broadband.

The latest version of the Internet Tax Nondiscrimination Act expands the
original dial-up definition of access to include DSL, cable modems and wireless
Internet connections. The bill blocks states from differentiating for tax
purposes between dial-up and broadband hookups.

“Under the previous moratorium, there were about 18 states that started
taxing high-speed connections over DSL lines,” U.S. Sen. George Allen (R-Va.)
said after the White House signing ceremony. “If that was allowed to continue
for another four years, we’d never be able to get that off [the tax rolls].”

In addition to keeping the new moratorium limited to four years, the new law
also grandfathers the 12 states that were taxing Internet access before the
passage of the 1998 act, a major victory for states’ concerns about losing tax

More than a year ago, the House of Representatives approved making the
moratorium permanent and eliminating all grandfather clauses. However, a similar
measure in the Senate, sponsored by Allen and Sen. Ron Wyden (D-Ore.), ran into
fierce opposition that forced compromise legislation.

“The reality is that in the Senate, getting perfection is difficult,” Allen
said. “I would like to make it permanent, but we did not have the votes. We got
the next best thing.”

According to Allen, the importance of the expanded connection definitions
will come in four years when the new moratorium expires. “We’ll not have to
listen to all the whining and bleating from folks saying, ‘Oh gosh, we’re
getting all millions of dollars off of broadband taxes,” he said.

Allen added, “This was an important step, particularly on the aspect of it
where state authorities were circumventing the previous moratorium by finding
ways to tax broadband. They will not be doing that when this moratorium expires
in 2007.”

The ban now is limited to three types of taxes: Internet access, double
taxation of a product or service bought over the Internet and discriminatory
taxes that treat Internet purchases differently from other types of sales.

“Whether [people] get online from wireless, satellite, DSL, cable or even
over power lines, they are not going to be subject to, on average, an 18 percent
tax,” Allen said. “People’s monthly Internet service bill will not have an added
tax. It will not look like their telephone bill.”

The new Internet tax moratorium does not apply to sales taxes on Web
transactions nor does it deal with the issue of telecommunication services, such
as Internet telephony.

Currently, sales and use taxes are owed on all online transactions, but
states are prohibited from requiring remote sellers to collect and remit those
levies. A 1992 U.S. Supreme Court decision said states could only require
sellers that have a physical presence or “nexus” in the same state as the
consumer to collect so-called use taxes.

The court ruled that the current patchwork of roughly 7,500 taxing
jurisdictions across the country is too complex and burdensome for online
retailers to charge and collect sales taxes. In order to collect the taxes, the
court ruled, states would need to first simplify the existing system, a process
that is gaining momentum.

In November of 2002, representatives from 32 states approved model
legislation designed to create a system to tax Web and catalog sales.
Spearheaded by the National Governors Association, the Streamlined Sales Tax
Project would require participating states to have only one tax rate for
personal property or services effective by the end of 2005. Included in those
services would be online sales.

In the House debate over making the Internet access tax bill, Rep. Mel Watt
(D-N.C.) said there is a “long-term agreement and commitment” to making the
moratorium permanent.

“The thing that has held that up is that state and local governments have
wanted to work out a national uniform standards for taxing remote sales that
place over the Internet so that they do lose substantial revenues from that
source,” Watt said.

If a uniform sales tax system could be worked out, Watt said, “Making the
moratorium on Internet access would be a no-brainer and a very non-controversial

The White House did not immediately issue a statement with any comments from
Bush. The actual signing was limited to photographers.

Adapted from internetnews.com.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

Must Read

Get the Free Newsletter!

Subscribe to Daily Tech Insider for top news, trends, and analysis.