Order Code RL31929
CRS Report for Congress
Received through the CRS Web
Internet Tax Bills in the 108th Congress
Updated August 7, 2003
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Internet Tax Bills in the 108th Congress
Summary
The Internet Tax Freedom Act, enacted in October 1998 and extended for two
years in November 2001, is scheduled to expire on November 1, 2003. The federal
moratorium prohibits state and local governments from levying new taxes on Internet
access and any multiple or discriminatory taxes on electronic commerce. Taxes on
Internet access that were in place prior to October 1, 1998, are protected by a
grandfather clause. Three bills introduced in the first session of the 108th Congress
would (1) make the Internet tax moratorium permanent and (2) remove the
grandfather protection for pre-existing access taxes provided under current law.
These are the companion bills H.R. 49 (Cox) and S. 52 (Wyden), as well as S. 150
(Allen). H.R. 1481 (Lofgren) would extend the current moratorium by five years,
until November 1, 2008. The Bush Administration supports extending the
moratorium.
The House Judiciary Committee, Subcommittee on Commercial and
Administrative Law, held a hearing on H.R. 49 on April 1, 2003. On May 22, 2003,
the subcommittee considered and marked up the bill. A technical amendment in the
nature of a substitute was approved by voice vote. H.R. 49 (amended) was
forwarded to the full committee. On July 16, 2003, the Judiciary Committee held a
markup, adopted one amendment to provide for technological neutrality, and ordered
the amended bill reported to the full House. The bill would permanently extend the
moratorium, eliminate the grandfathering protection, and exempt from state and local
taxes any form of telecommunications used to provide Internet access. CBO found
that eliminating the grandfathering would impose an intergovernmental mandate.
The Senate Commerce Committee held a hearing on the moratorium on July 16,
2003. On July 31, the Commerce Committee marked up S. 150 (Allen), amended the
bill, and ordered it reported. S. 150 would permanently extend the moratorium,
continue the grandfathering protection for three more years, alter the definition of
access like H.R. 49, and clarify that the ITFA does not prevent the federal
government or the states from imposing or collecting fees or charges on
telecommunications used to finance the universal service program. Senators Allen
and Wyden agreed to further refine the definition of Internet access before the bill
reaches the Senate floor.
An issue often raised in connection with the Internet tax moratorium is
streamlined sales taxes and remote tax collection authority. This involves setting the
conditions for simplifying state and local sales and use taxes sufficiently that
Congress would grant states the authority to require out-of-state sellers to collect use
taxes on interstate sales. Chairmen Cannon and McCain have promised that separate
hearings on this issue will be held in the House Subcommittee on Commercial and
Administrative Law and in the Senate Commerce Committee, respectively. Another
related issue is codifying nexus standards for state and local business activity taxes
(BATs, e.g., corporate income taxes). The task is to set federal standards
determining whether a state is entitled to impose its business activity tax on a
company located outside the state but involved in commerce within the state. This
report will be updated as legislative events warrant.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Extension of the Moratorium: Permanent, Temporary, or Sunset? . . . . . . . 2
Grandfathering of Existing Access Taxes: Continue or Not? . . . . . . . . . . . . 3
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Taxation of Internet Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Multiple Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Discriminatory Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Streamlined Sales Taxes and Remote Collection Authority . . . . . . . . . . . . . 7
Business Activity Tax (BAT) Nexus Standards . . . . . . . . . . . . . . . . . . . . . . 9
Action in Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
H.R. 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
S. 150 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Internet Tax Bills Introduced in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . 13
House of Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
H.R. 49 (Cox) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
H.R. 1481 (Lofgren) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
S. 52 (Wyden) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
S. 150 (Allen) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
For Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Hearings in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CRS Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Comparison of Internet Tax Bills in the House . . . . . . . . . . . . . . . . . . 13
Table 2. Comparison of Internet Tax Bills in the Senate . . . . . . . . . . . . . . . . . . 14

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Internet Tax Bills in the 108th Congress
Background
The Internet Tax Freedom Act (ITFA) was enacted on October 21, 1998, as
Title XI of P.L. 105-277 (47 U.S.C. 151 note) the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999. The ITFA placed a three-year
moratorium on the ability of state and local governments to (1) impose new taxes on
Internet access or (2) impose any multiple or discriminatory taxes on electronic
commerce. The Act grandfathered the state and local access taxes that were
“...generally imposed and actually enforced prior to October 1, 1998....”
The original Internet tax moratorium expired on October 21, 2001. The Internet
Tax Nondiscrimination Act, P.L. 107-75, was enacted on November 28, 2001. It
provided for a two-year extension of the prior moratorium, through November 1,
2003. It also continued the grandfathering protection for pre-existing Internet access
taxes. Thus, absent congressional action, the moratorium will expire in 2003, during
the first session of the 108th Congress.
The House Judiciary Committee ordered H.R. 49 reported on July 16, 2003.
The Senate Commerce Committee ordered S. 150 reported on July 31, 2003. Each
bill would extend the moratorium permanently and make other changes to the ITFA.
Issues
The five main issues surrounding legislation to extend the Internet tax
moratorium are:
! Should the moratorium be extended temporarily, permanently, or
allowed to sunset?
! Should the grandfathering from the moratorium of existing taxes on
Internet access be continued or eliminated?
! Should the definitions of Internet access and discriminatory taxes be
amended?
! Will Congress consider granting states the authority to require
remote sellers to collect use taxes if the states adopt a streamlined
sales tax system?
! Will Congress codify guidelines for establishing whether or not a
business engaged in interstate commerce has nexus in a jurisdiction

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for purposes of business activity tax (BAT, e.g. corporate income
tax) liability?1
Extension of the Moratorium:
Permanent, Temporary, or Sunset?
The intent of the Internet Tax Freedom Act enacted in 1998 was to halt the
proliferation of taxes on Internet access, to guarantee that more than one jurisdiction
could not tax the same electronic commerce transaction, and to guarantee that
commerce over the Internet would not be singled out for discriminatory tax
treatment, that is, taxation not applied to commerce in similar products that is
conducted by other means. Supporters of the moratorium felt that the Internet should
be protected from the administrative and financial burdens of taxation in order to
encourage the advance and dissemination of Internet technology and the economic
activity developing around it. Opponents objected that a federal moratorium was an
infringement on the states’ independent authority to levy taxes and argued that taxes
specifically on the Internet were not proliferating.
Strong supporters of the original moratorium would generally like to see the
moratorium extended beyond 2003, preferably permanently. Those who acquiesced
to a temporary moratorium as a pause to evaluate the effects of the Internet and the
condition of state and local sales taxes might agree to another temporary moratorium,
accompanied by an agenda to be accomplished during the extension. Those who feel
that the states can be trusted to treat the Internet in a fair manner believe that the
federal moratorium could be allowed to sunset.
A permanent extension of the moratorium would eliminate the need for
Congress to revisit the issues surrounding Internet taxation when a temporary
moratorium expired. Permanent extension presumably would also provide both the
producers and consumers of Internet services greater certainty about the absence of
future state and local taxation of the Internet.
In contrast, a temporary extension of the moratorium would set a future time for
Congress to review the conditions of the moratorium. The reassessment could be
made in the context of developments in computer technology and business
organization, as well as state and local government revenues. A temporary extension
would also provide an interval for the states to further simplify their sales and use
taxes. States could then hope that, the next time an extension of the moratorium was
considered, Congress might consider granting states the authority to require remote
(out-of-state) sellers to collect use taxes from customers at the time of the sale. (See
the discussion below on Streamlined Sales Taxes and Remote Collection Authority.)
1 The issues remain similar to those considered in 2001 when the Internet tax moratorium
was temporarily extended for two years. For a longer discussion of the extension of the
moratorium, grandfathering of existing access taxes, and collecting sales and use taxes on
interstate sales — in relation to bills introduced in the first session of the 107th Congress —
see CRS Report RL31177, Extending the Internet Tax Moratorium and Related Issues, by
Nonna A. Noto.

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Allowing the moratorium to sunset would permit the states to tax Internet
access. In practice, however, the trend has been for states to repeal their Internet
access taxes. With or without the moratorium, Congress would need to act before
states could gain the authority to require out-of-state sellers without physical
presence in the state to collect use taxes from consumers.
The Bush Administration supports extending the Internet tax moratorium before
the current moratorium ends on November 1, 2003.2 Both H.R. 49, as reported by
the House Judiciary Committee, and S. 150, as ordered reported by the Senate
Commerce Committee, would permanently extend the moratorium.
Grandfathering of Existing Access Taxes: Continue or Not?
The Internet Tax Freedom Act grandfathered from the moratorium taxes on
Internet access that were “... generally imposed and actually enforced prior to October
1, 1998....” When ITFA legislation was being considered in the spring of 1998, 10
states and the District of Columbia were applying their sales and use tax to Internet
access.3 Subsequently, Connecticut, Iowa, and the District of Columbia eliminated
their tax on Internet access, and South Carolina has not enforced the collection of its
tax during the federal moratorium. This left seven states imposing a sales and use tax
on Internet access as of April 2003: New Mexico, North Dakota, Ohio (on
businesses only, not consumers), South Dakota, Tennessee, Texas (on monthly
charges over $25), and Wisconsin.4 In addition, Hawaii levies its general excise tax,
New Hampshire its communications services tax (imposed on all two-way
communications equipment), and Washington state its business and occupation tax
(a gross receipts tax levied on business) on Internet access.
The grandfathering protection was continued when the ITFA moratorium was
extended for two years in 2001. The issue now is whether the grandfathering will be
continued if the moratorium is extended beyond 2003, either temporarily or
permanently.
In the 107th Congress, bills to temporarily extend the moratorium typically
extended the grandfathering protection. In contrast, bills to permanently extend the
moratorium were divided between those retaining the grandfathering and those
eliminating it. In the 108th Congress, H.R. 49, as reported by the House Judiciary
Committee, would eliminate the grandfathering protection. S. 150, as ordered
reported by the Senate Commerce Committee, would extend the grandfathering
protection for three years, until September 30, 2006, before eliminating it.
2 Letter from Treasury Secretary John W. Snow and Commerce Secretary Donald L. Evans
to House Judiciary Committee Chairman F. James Sensenbrenner, Washington, May 14,
2003.
3 National Conference of State Legislatures, “Which States Tax Internet Access?” March
25, 1998, available online at [http://www.ncsl.org/programs/fiscal/intertax.htm].
4 Vertex, Inc., Tax Cybrary, available online at [http://www.vertexinc.com].

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Removing the grandfathering protection would, in effect, ban all state and local
taxes on Internet access. In its cost estimate for H.R. 49, the Congressional Budget
Office determined that eliminating the grandfathering protection would impose an
intergovernmental mandate as defined in the Unfunded Mandates Reform Act
(UMRA, P.L. 104-4, 2 U.S.C. 1501-1571).5
Definitions
The ITFA tax moratorium prohibits new taxes on Internet access and multiple
or discriminatory taxes on electronic commerce. The Act’s definition of Internet
access and of discriminatory tax, in particular, have been the source of some concern
and legal uncertainty for state and local governments, providers of new-technology
Internet access service, telecommunications companies offering bundled
communications and information services, supporters of federal and state universal
service programs, and companies with “dot.com” subsidiaries.
Taxation of Internet Access. The taxation of Internet access most
commonly refers to the application of state and local sales taxes to the monthly
charge that subscribers pay for access to the Internet through Internet service
providers (ISPs) such as America Online (AOL), Microsoft Network (MSN), or
EarthLink. Some examples can help illustrate the size of the tax burden at issue. If
the tax were levied at a combined state and local sales tax rate of 7%, the tax on a
dial-up modem service costing $22 per month would be $1.54 per month or $18.48
per year. On a cable modem service costing $40 per month, the tax would be $2.80
per month or $33.60 per year. On DSL (digital subscriber line) service costing $55
per month, the tax would be $3.85 per month or $46.20 per year.6
Bundling of Services. According to Section 1104(5) of the Internet Tax
Freedom Act,
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.
The breadth of this definition gives rise to concern on the part of state and local
revenue departments that the tax-protection of Internet access may extend to
“bundled” products and services that might otherwise be taxable if purchased on their
own. This could include data and information services, cable television, books,
5 Congressional Budget Office. Cost Estimate for H.R. 49, Internet Tax Nondiscrimination
Act, as ordered reported by the House Committee on the Judiciary on July 16, 2003.
Washington, July 21, 2003. Available on the Web at [http://www.cbo.gov] and on the LIS
for H.R. 49 under CBO Cost Estimates.
6 Monthly prices from 2003 Internet Service Provider (ISP) Directory, Washington Post,
Sunday, February 2, 2003, p. H10. Common state-local sales tax rate selected from
Federation of Tax Administrators, Comparison of State and Local Retail Sales Taxes,
January 2003. Available online at [http://www.taxadmin.org/fta/rate/sl_sales.html].
Calculation of sample tax bills by CRS.

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magazines, games, music, video on demand, and Internet telephony. These types of
products and services can be offered online and sold together with Internet access
service.
Link to Telecommunications. There is concern on the part of
telecommunications carriers that Internet access offered through some technologies,
such as DSL or wireless services, might not be treated as exempt, while access
offered over other technologies, such as dial-up telephone lines and cable modem,
is exempt. In an attempt to make the tax exemption neutral across the various
technologies delivering Internet access, both H.R. 49 as reported by the House
Judiciary Committee and S. 150 as ordered reported by the Senate Commerce
Committee would provide that all forms of telecommunications services used to
provide Internet access would be exempt from state and local taxes.
State and local governments are concerned that this language could also exempt
from tax the underlying telephone and cable services used to provide Internet access,
which heretofore have remained subject to state and local tax under the current ITFA
law. While not quantifying the likely cost, in its cost estimate of H.R. 49 CBO
indicated that the expected negative effect on state and local revenues from the
taxation of telecommunications would be considered an intergovernmental mandate.7
Senators Allen and Wyden (cosponsors of the amendment in the nature of a
substitute to S. 150 approved by the Senate Commerce Committee) have agreed to
further refine the definition of Internet access before S. 150 reaches the Senate floor.
They seek to clarify that the moratorium is on taxation of Internet access and not the
underlying telecommunications services and that it is neutral with respect to the
technology delivering the access.
Funding Universal Service. Member of Congress are concerned about
protecting the financing source for the Universal Service Fund (USF).8 The USF,
operated under the auspices of the Federal Communications Commission (FCC), is
financed by mandated contributions from interstate telecommunications carriers.9 A
7 Congressional Budget Office. Cost Estimate for H.R. 49, Internet Tax Nondiscrimination
Act, as ordered reported by the House Committee on the Judiciary on July 16, 2003.
Washington, July 21, 2003. Available on the Web at [http://www.cbo.gov] and on the LIS
for H.R. 49 under CBO Cost Estimates.
8 The USF subsidizes telephone service to low income consumers and to high-cost rural and
insular areas. Through the E-rate or education-rate program instituted by the
Telecommunications Act of 1996, the USF subsidizes telecommunications discounts for
schools and libraries. Also as a result of the 1996 Act, the USF subsidizes communications
links between rural health care providers and urban medical centers. For further information
on the E-rate program, See CRS Issue Brief IB98040, Telecommunications Discounts for
Schools and Libraries: The “E-Rate” Program and Controversies, by Angele A. Gilroy.
9 All telecommunications companies that provide service between states must contribute to
the USF. This includes long distance companies, local telephone companies, wireless
telephone companies, paging companies, and payphone providers.

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company’s USF contribution is calculated as a percentage10 of its end-user
revenues.11 Individual states also levy fees and charges on telecommunications
carriers for their state’s universal service fund.12
Supporters of the universal service programs are concerned that efforts to
protect Internet access and associated telecommunications services from tax not be
allowed to reduce the funding base for universal service. S. 150 as reported by the
Commerce Committee states that the ITFA does not prevent the federal government
or the states from imposing or collecting the fees or charges on telecommunications
that are used to finance the universal service program authorized (in 1996) by Section
254 of the Communications Act of 1934. At the Commerce Committee markup of
S. 150 on July 31, 2003, Chairman McCain agreed to hold a hearing on the future of
the Universal Service Fund.
Multiple Taxes. In order to eliminate the possibility of double taxation, the
ban on multiple taxes prohibits more than one state, or more than one local
jurisdiction at the same level of government (i.e., more than one county or one city)
from imposing a tax on the same transaction — unless a credit is offered for taxes
paid to another jurisdiction. However, the state, county, and city in which an
electronic commerce transaction takes place could all levy their sales tax on the
transaction. There has not been much controversy over this definition.
Discriminatory Taxes. In practice, the ban on discriminatory taxes on
electronic commerce means that transactions arranged over the Internet are to be
taxed in the same manner as mail order or telephone sales. Under the current judicial
interpretation of nexus as applied to mail-order sales, a state cannot require an out-of-
state seller to collect a use tax from the customer unless the seller has a physical
presence in the taxing state.13 (A use tax is the companion tax to the sales tax,
applicable to interstate sales.) Congress or the Supreme Court would need to act to
grant or approve the states’ ability to require out-of-state tax collection, whether the
transaction was arranged over the Internet or by mail-order, telephone, or other
means.
The second part of the ITFA’s definition of discriminatory tax lists conditions
under which a remote seller’s use of a computer server, an Internet access service, or
online services does not establish nexus. These circumstances include the sole ability
10 The percentage, know as the contribution factor, is set quarterly, depending on the
financing needs of the universal service programs. The federal universal service
contribution factor for the third quarter of 2003 is 0.095 or 9.5%. Federal Communications
Commission, Contribution Factors & Quarterly Filings. Available online at
[http://www.fcc.gov/web/universal_service/quarter.html].
11 The high-cost and low-income programs are financed on the basis of interstate (and
international) revenues only, while the E-rate and rural health care programs are based on
both the interstate and intrastate revenues of interstate carriers.
12 State charges are typically levied on the intrastate retail revenues of wireline carriers and,
in some states, wireless carriers as well.
13 For additional discussion, see CRS Report RS20577, State Sales Taxation of Internet
Transactions, by John R. Luckey.

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to access a site on a remote seller’s out-of-state computer server; the display of a
remote seller’s information or content on the out-of-state computer server of a
provider of Internet access service or online services; and processing of orders
through the out-of-state computer server of a provider of Internet access service or
online services. Some businesses have taken advantage of these nexus limits in the
ITFA’s definition of discriminatory tax to establish what are referred to as Internet
kiosks or dot-com subsidiaries. The businesses claim that these Internet-based
operations are free from sales and use tax collection requirements. Critics object that
these methods of business organization are an abuse of the definition of
discriminatory tax.
Streamlined Sales Taxes and Remote Collection Authority
In the 106th and 107th Congresses, a major controversy surrounding the bills to
extend the original Internet tax moratorium involved the states’ quest for sales and
use tax collection authority. The issue was whether or not Congress was willing to
indicate its willingness to eventually grant states the authority to require remote (out-
of-state) sellers to collect use taxes on interstate sales. To possibly earn that
authority, states would need to simplify their state and local sales and use tax systems
to an acceptable degree.
Under current law, sellers with substantial nexus (defined as physical presence)
in a state are already required to collect state (and local) tax on their sales arranged
over the Internet (or by telephone, mail order, or other means) to customers in that
state. In-state sellers are required to collect sales taxes from the buyer. Out-of-state
sellers with a physical presence in the state (such as a warehouse or retail store) are
required to collect use taxes from the buyer. (A use tax is complementary to a sales
tax. It is levied on purchases made outside the state for use within the state.) In
contrast, out-of-state sellers without nexus in the state are not required to collect the
use tax. Some of these sellers may collect use tax voluntarily. If the out-of-state
seller does not collect the use tax, it is technically the buyer’s obligation to pay the
tax to his home state. In practice, however, use tax compliance by non-business
purchasers is low.

Aware of this low consumer compliance, many states have long wanted to be
able to require out-of-state sellers without physical presence in the state (referred to
as remote sellers) to collect the use tax from the customer and remit it to the
customer’s home state. This would apply to all interstate sales, whether arranged
over the Internet or by other means. Whether or not there is an Internet tax
moratorium, separate congressional action would be needed in order for states to
obtain the authority to require remote sellers to collect use taxes from customers at
the time of the sale.
In its 1967 National Bellas Hess14 decision, and again in its 1992 Quill
decision,15 the U.S. Supreme Court denied states the ability to require a seller to
14 National Bellas Hess, Inc., v. Illinois Department of Revenue, 386 U.S. 753 (1967).
15 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

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collect use taxes on interstate mail-order sales unless the seller had a physical
presence in the taxing state. The Court concluded that the complexity of the state and
local sales tax systems imposed an undue burden on interstate commerce.
Acknowledging administrative complexity as an obstacle to remote collection,
the states began a serious effort at state and local sales and use tax simplification
through the Streamlined Sales Tax Project (SSTP). The project commenced in
March 2000, midway through the initial ITFA moratorium (October 1998 - October
2001).
The SSTP continued its work after the moratorium was extended in November
2001. On November 12, 2002, 34 states and the District of Columbia approved a
model interstate agreement to simplify their sales tax systems, known as the
Streamlined Sales and Use Tax Agreement. The agreement establishes uniform
definitions for taxable goods and services. It would require participating states and
local governments to have only one statewide tax rate for each type of product
effective in 2006. Each state would retain the power to determine which products are
taxed or exempt and the rate of tax for the state. The agreement provides for
streamlined tax administration and audit requirements for sellers.
During their 2003 sessions, individual state legislatures considered legislation
to bring their own state and local sales tax laws into conformity with the model tax
agreement. For the agreement to come into effect, at least 10 states representing at
least 20% of the combined population of the 45 states with a state sales tax were
required to petition for membership into the agreement and be found to be in
conformance with the agreement. (There is some question about whether in order to
qualify as conforming 10 states must simply approve the agreement or must actually
change the administration of their sales tax system to conform with the agreement.)
As of July 18, 2003, 20 states had enacted legislation conforming with all or part of
the agreement.16 These 20 states represent approximately 30% of the population of
states with sales taxes. The Streamlined Sales Tax Implementing States (SSTIS) still
need to meet to confirm whether these states meet the required conformity.
Separately, a coalition of a few nationwide sellers reached agreements with 38
states and the District of Columbia to begin collecting their use tax voluntarily,
starting February 3, 2003, in exchange for amnesty on previously uncollected taxes.
Among the retailers participating initially were Wal-Mart Stores Inc., Target Corp.,
and Toys R Us Inc. Other retailers have entered into similar voluntary agreements.
In the 106th and 107th Congresses, bills were introduced that enumerated criteria
for a simplified sales and use tax system and procedures for Congress to grant tax
collection authority — in conjunction with an extension of the moratorium.17 In the
16 Streamlined Sales Tax Project, State Legislative Status of Streamlined Sales and Use Tax
Agreement (As of July 7, 2003). Available online at [http://www.streamlinedsalestax.org]
under St. Legislative Status. Updated by phone by the National Conference of State
Legislatures (NCSL), on July 18, 2003.
17 In the 106th Congress, the bills addressing sales tax simplification and tax collection
(continued...)

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108th Congress, the chairmen of the committees of jurisdiction in both the House and
Senate have indicated that they want to pursue the moratorium extension
independently from the sales tax issue. Representative Cannon, Chairman of the
Subcommittee on Commercial and Administrative Law of the House Judiciary
Committee, and Senator McCain, Chairman of the Senate Committee on Commerce,
Science, and Transportation, have each indicated that their committee will hold a
hearing on the sales tax issue, in addition to the hearing held on the moratorium
extension.
Business Activity Tax (BAT) Nexus Standards
The states’ efforts to expand sellers’ interstate collection responsibilities for
sales and use taxes has heightened another interstate tax concern of business. For
several years some representatives of business have urged Congress to clarify the
determinants of nexus for state and local business activity taxes (BATs) in the
context of interstate commerce. (Business activity taxes are commonly thought of
as corporate income taxes, but may also include franchise taxes, business license
taxes, business and occupation taxes, apportionable gross receipts taxes, value-added
taxes, single business taxes, and capital stock taxes.) The issue is whether and how
to codify in federal law conditions that would not establish the nexus required for a
state to be able to impose its business activity taxes (BAT) on a company located
outside the state but involved in certain types of commercial relationships within the
state.
Some businesses feel that states have become too aggressive in trying to tax
them based on an indirect, transitory (short-term), or Internet-based presence in the
state. Bills were introduced in the 106th and 107th Congresses that set forth the new
term of “substantial physical presence” as the nexus requirement for business activity
taxes. The bills enumerated several situations that would not establish substantial
physical presence in a jurisdiction. These included certain non-agent business
relationships, uses of the Internet or communications, techniques for advertizing and
soliciting sales, and the presence of intangible property. In some bills the same nexus
criteria were applied to sales and use tax collection responsibility as to BAT liability.
Representatives of state and local governments objected that enacting the
proposed nexus guidelines would seriously restrict the ability of states to levy their
corporate income taxes (or other BATs) on business activities being conducted in
their state by companies located or headquartered in other states. Critics cited
Internet kiosks located in a retail store, warranty services offered in the state, and the
ability to return products ordered over the Internet to retail stores as examples of
activities that were evidence of a company’s physical presence in a state, even if the
17 (...continued)
authority were H.R. 3709 (Cox) which passed the House, H.R. 4267 (Hyde and Conyers,
representing the majority on the Advisory Commission on Electronic Commerce (ACEC)),
H.R. 4460 (Hyde and Conyers, representing the ACEC minority), H.R. 4462 (Bachus), and
S. 2775 (Dorgan). In the 107th Congress, the bills addressing sales tax simplification and
tax collection authority were the companion bills H.R. 1410 (Istook)/S. 512 (Dorgan), S. 288
(Wyden), S. 1542 (Enzi), S. 1567 (Enzi), and S.Amdt. 2155 (Enzi-Dorgan) to H.R. 1552.

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business activities were conducted in the name of the company’s “dot.com”
subsidiary.
In the 106th and 107th Congresses, nexus language was introduced both
independently from and in combination with an extension of the Internet Tax
Freedom Act moratorium.18 To help keep the BAT nexus issue separate from the
sales tax issue, the bills in earlier Congresses that addressed streamlined sales taxes
and remote collection authority typically provided that a business’s being required
to collect sales and use taxes from customers from other states would not imply an
obligation to pay business activity taxes to those other states.
Action in Congress
Four Internet tax bills have been introduced in the first session of the 108th
Congress. Two of those, H.R. 49 and S. 150, have been amended and reported by the
House Judiciary Committee and Senate Commerce Committee, respectively.
Of the four bills introduced, three would make the moratorium permanent and
remove the grandfathering protection offered under current law to states that had
Internet access taxes in place prior to October 1, 1998. These are the companion bills
H.R. 49 (Cox) and S. 52 (Wyden), as well as S. 150 (Allen). The fourth bill, H.R.
1481 (Lofgren), would extend the current moratorium for five years.
H.R. 49
The House Judiciary Committee, Subcommittee on Commercial and
Administrative Law, held a hearing on H.R. 49 (Cox) on April 1, 2003.
Subcommittee consideration and markup were held on May 22, 2003. A technical
amendment in the nature of a substitute was approved by voice vote. H.R. 49
(amended) was forwarded to the full committee by voice vote.
Three other amendments were proposed but withdrawn in the subcommittee,
with the hope by the sponsors that the issues they raised would be considered again.
The Delahunt amendment addressed the interstate sales tax collection issue.
Subcommittee Chairman Christopher B. Cannon had agreed at the April 1 hearing
to hold a separate hearing on the sales tax collection issue. The Watt amendment
addressed the tax protection for Internet access delivered in variously bundled
service packages and for different forms of telecommunications used to access the
Internet (e.g., DSL and wireless). Chairman Cannon agreed to work with
Representative Watt on the effort to further define Internet access before the full
committee took up the bill. The Baldwin amendment would have preserved the
grandfathering protection.
18 In the 106th Congress, BAT nexus guidelines were included as part of H.R. 4267 (Hyde
and Conyers, representing the majority opinion of the Advisory Commission on Electronic
Commerce) and were the main purpose of S. 2401(Gregg and Kohl). The BAT nexus bills
in the 107th Congress were H.R. 2526 (Goodlatte and Boucher) and S. 664 (Gregg and
Kohl).

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On July 16, 2003, the House Judiciary Committee held a markup of H.R. 49 (as
amended in the nature of a substitute). The Committee approved one amendment and
defeated two others. The bill was then reported favorably to the full House. The two
defeated amendments were both introduced by Representative Sheila Jackson Lee.
One would have preserved the current grandfathering protection permanently. The
other would have gradually eliminated the grandfathering protection, cutting the
permitted state and local tax rates in half two years after enactment of the bill and
eliminating the taxes entirely four years after enactment of the bill.
The amendment that was approved was introduced on a bipartisan basis by
Representative Melvin Watt and Subcommittee Chairman Chris Cannon.19 It was
intended to provide technological neutrality in the exemption from taxes on Internet
access, without regard to the means by which Internet access is delivered. The
amendment would add to the definition of Internet access (in Section 1104(5) of the
Internet Tax Freedom Act) the phrase shown below in bold type:
(5) INTERNET ACCESS. — 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, except to the
extent such services are used to provide Internet access.20 [Emphasis added.]
This amendment would protect from state and local taxes all forms of
telecommunications services used to provide Internet access. Purportedly, it is
intended to make Internet access service made available via DSL (digital subscriber
line) or wireless services free from tax, just as Internet access service delivered via
dial-up phone and cable modem has been. However, the language of the amendment
could also free from tax the underlying telephone and cable services used to provide
Internet access. These underlying telecommunications services may currently be
taxed by state and local governments.
In its cost estimate of July 21, 2003, the Congressional Budget Office (CBO)
determined that H.R. 49, as ordered reported by the House Judiciary Committee,
would impose an intergovernmental mandate. CBO estimated that repealing the
grandfather clause would lead to revenue losses (on Internet access) totaling $80
19 The language of the Watt-Cannon amendment that was approved in the full Judiciary
Committee was different from the Watt amendment introduced but withdrawn in the
Subcommittee on Commercial and Administrative law.
20 The highlighted phrase was also added to the definition of Internet access services in
Section 1101(e)(3)(D) of the Internet Tax Freedom Act. This pertains to the exception to
the moratorium for making communications for commercial purposes that include material
harmful to minors, if access by minors is not restricted. The addition of the phrase keeps
the definition of Internet access service similar to the definition of Internet access in the
ITFA. However, in this section the phrase may be redundant, because under Section
1101(e)(2) both (A) a telecommunications carrier engaged in the provision of a
telecommunications service, and (B) a person engaged in the business of providing an
Internet access service, are not considered as making a communication of material for
commercial purposes.

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CRS-12
million to $120 million per year for the group of approximately 10 states and several
local governments in a few states that currently tax Internet access. This amount
alone exceeds the threshold of $59 million in 2003 (adjusted annually for inflation)
established by the Unfunded Mandates Reform Act (UMRA). In addition, amending
the definition of Internet access (with the Watt amendment) could free from tax some
telecommunications services used to provide Internet access that are otherwise
subject to state and local taxes under current ITFA law.21
The presence of an unfunded intergovernmental mandate in excess of the
threshold amount means that a point of order may be raised when the bill is
considered on the House or Senate floor.22
S. 150
On July 16, 2003, the Senate Committee on Commerce, Science, and
Transportation held a hearing on the Internet tax moratorium. Chairman John
McCain indicated that he preferred that the legislation to extend the moratorium be
independent from the sales tax simplification and collection issue. He said he
expected to hold a separate hearing on the interstate sales tax issue later this year.
On July 31, 2003, the Senate Commerce Committee marked up S. 150 (Allen).
An amendment in the nature of a substitute offered by Senator Allen and co-sponsor
Senator Wyden was approved by voice vote. The amended bill was ordered reported
favorably. However, Senators Allen and Wyden agreed to further refine the
definition of Internet access before the bill reaches the Senate floor.
The first two sections of S. 150 as amended are similar to H.R. 49 as reported
to the House by the Judiciary Committee. The first section is the name of the bill,
the Internet Tax Non-discrimination Act. The second section would permanently
extend the moratorium, remove the grandfathering protection for existing taxes on
Internet access, and make conforming amendments to remove the reference to
grandfathered taxes elsewhere in the ITFA. It would add to the definitions of Internet
access and Internet access services the phrase “...except to the extent such services
are used to provide Internet access” following “telecommunications services,” just
as was added to H.R. 49 by the Watt-Cannon amendment in the House Judiciary
Committee. Senators Allen and Wyden have agreed to refine the definition of
Internet access to better reflect their intentions that it is Internet access that is
protected from tax and not the underlying communications medium. They also
intend that the moratorium be neutral with respect to whatever technology is used to
provide Internet access.
21 Congressional Budget Office. Cost Estimate for H.R. 49, Internet Tax Nondiscrimination
Act, as ordered reported by the House Committee on the Judiciary on July 16, 2003.
Washington, July 21, 2003. Available on the Web at [http://www.cbo.gov] and on the LIS
for H.R. 49 under CBO Cost Estimates.
22 For an explanation of congressional procedures required under UMRA, see CRS Report
RS20058, Unfunded Mandates Reform Act Summarized, by Keith Bea and Richard S. Beth,
Washington, February 9, 1999, 4-5.

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CRS-13
In addition to the elements included in H.R. 49 as reported, S. 150 as ordered
reported includes a third section that would continue to grandfather existing taxes on
Internet access for three more years, until September 30, 2006. A fourth section of
the bill clarifies that the ITFA does not prevent the federal government or the states
from imposing or collecting the fees or charges on telecommunications that are used
to finance the universal service program authorized by Section 254 of the
Communications Act of 1934.
Internet Tax Bills Introduced
in the 108th Congress
Table 1 succinctly compares the bills introduced thus far in the House of
Representatives and Table 2, the bills introduced in the Senate. Each bill is
described in more detail in the subsequent text.
Table 1. Comparison of Internet Tax Bills in the House
Grandfathering of
Bill Number
Extension of
Existing Internet
Other Issues
(Sponsor)
Moratorium
Access Taxes
H.R. 49
Permanent
No
Extends exemption from
(Cox)
Internet access taxes to all
as reported by
forms of
the Judiciary
telecommunications
Committee
used to provide access.
H.R. 1481
5 years, until
Yes
—
(Lofgren)
Nov. 1, 2008

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CRS-14
Table 2. Comparison of Internet Tax Bills in the Senate
Grandfathering of
Bill Number
Extension of
Existing Internet
Other Issues
(Sponsor)
Moratorium
Access Taxes
S. 52
Permanent
No
—
(Wyden)
S. 150
Permanent
Until Sept. 30, 2006
Like H.R. 49, extends
(Allen)
exemption from Internet
as reported by
access taxes to all forms
the Commerce
of telecommunications
Committee
used to provide access.
Clarifies that the ITFA
moratorium does not
interfere with federal or
state fees or charges used
to finance the universal
service program.
House of Representatives
H.R. 49 (Cox). Internet Tax Nondiscrimination Act. H.R. 49 would
permanently extend the moratorium imposed by the Internet Tax Freedom Act.
Would remove the grandfathering protection for taxes on Internet access that were
generally imposed and actually enforced prior to October 1, 1998, by removing from
the ITFA the grandfather clause and the definition of generally imposed and actually
enforced taxes. Companion to S. 52 (Wyden). Introduced January 7, 2003. Referred
to the Committee on the Judiciary. Referred to the Subcommittee on Commercial
and Administrative Law on March 6, 2003. Hearing held on April 1, 2003.
Subcommittee consideration and markup session held on May 22, 2003. A technical
amendment in the nature of a substitute approved by voice vote. Three other
amendments proposed but withdrawn in the subcommittee. H.R. 49 (amended)
forwarded to the full committee by voice vote.
Full Judiciary Committee markup on July 16, 2003. Bipartisan amendment
introduced by Representatives Watt and Cannon approved; amended the definition
of Internet access intending to make the tax exemption technologically neutral;
provided that all forms of telecommunications services used to provide Internet
access would be exempt from Internet access taxes. Two amendments defeated, one
to preserve the grandfathering and another to phase out the grandfathering in two
stages. H.R. 49 (as amended in the nature of a substitute) ordered reported favorably
by voice vote. Reported to the House on July 24, 2003, H.Rept. 108-234. (See
description of S. 150.)
In its cost estimate of July 21, 2003, the Congressional Budget Office
determined that H.R. 49 as ordered reported by the House Judiciary Committee
would impose an intergovernmental mandate. This means that a point of order could
be raised when the bill is considered on the House or Senate floor.

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H.R. 1481 (Lofgren). Internet Growth and Freedom Act of 2003. H.R. 1481
would temporarily extend the moratorium imposed by the Internet Tax Freedom Act
by five years, until November 1, 2008. Would continue the grandfather protection
for pre-existing Internet access taxes. Introduced March 27, 2003. Referred to the
Committee on the Judiciary.
Senate
S. 52 (Wyden). Internet Tax Nondiscrimination Act. S. 52 would
permanently extend the moratorium imposed by the Internet Tax Freedom Act.
Would remove the grandfathering protection for taxes on Internet access that were
generally imposed and actually enforced prior to October 1, 1998, by removing from
the ITFA the grandfather clause and the definition of generally imposed and actually
enforced taxes. Companion to H.R. 49 (Cox). Introduced January 7, 2003. Referred
to the Committee on Commerce, Science, and Transportation.
S. 150 (Allen). Internet Tax Non-discrimination Act of 2003. S. 150 would
permanently extend the moratorium imposed by the Internet Tax Freedom Act.
Would remove the grandfathering protection for taxes on Internet access that were
generally imposed and actually enforced prior to October 1, 1998. Would remove
the reference in the ITFA to the moratorium beginning on October 1, 1998. Would
remove from the ITFA the definition of Internet access (which includes the
grandfather clause) but would retain the definition of generally imposed and actually
enforced taxes. Introduced January 13, 2003. Referred to the Committee on
Commerce, Science, and Transportation.
Committee markup held July 31, 2003. Amendment in the nature of a substitute
offered by Senators Allen and Wyden approved by voice vote. Amended bill ordered
reported favorably. First two sections of S. 150 (as ordered reported) similar to H.R.
49 as reported by the House Judiciary Committee. First section names the bill the
Internet Tax Non-Discrimination Act. Second section would permanently extend the
moratorium, remove the grandfathering protection for existing taxes on Internet
access, and make conforming amendments to remove the reference to grandfathered
taxes elsewhere in the ITFA. Would add to the definitions of Internet access and
Internet access services the phrase “...except to the extent such services are used to
provide Internet access” following “telecommunications services.”
In addition to the elements included in H.R. 49 (reported), S. 150 (as ordered
reported) includes a third section that would continue to grandfather existing taxes
on Internet access until September 30, 2006. A fourth section clarifies that the ITFA
does not prevent the federal government or the states from imposing or collecting the
fees or charges on telecommunications that are used to finance the universal service
program authorized (in 1996) by Section 254 of the Communications Act of 1934.
Senators Allen and Wyden agreed to refine the definition of Internet access to
better reflect their intentions that it is Internet access that is protected from tax and
not the underlying communications medium. They also intend that the moratorium
be neutral with respect to whatever technology is used to provide Internet access.

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For Additional Information
Hearings in the 108th Congress
U.S. Congress. House. Committee on the Judiciary. Subcommittee on Commercial
and Administrative Law. Internet Tax Nondiscrimination Act. Hearing on H.R.
49. Serial No. 13. 108th Cong., 1st sess., April 1, 2003. Washington: GPO,
2003. 102 p. Available at [http://www.house.gov/judiciary].
U.S. Congress. Senate. Committee on Commerce, Science, and Transportation.
Internet Tax Moratorium. Hearing. 108th Cong., 1st sess., July 16, 2003. Not
yet published. Written testimony available at [http://commerce.senate.gov].
CRS Reports
CRS Electronic Briefing Book, Taxation, Internet Taxation, “Taxing Internet
Transactions,” available at [http://www.congress.gov/brbk/html/ebtxr70.html].
CRS Report RL31177, Extending the Internet Tax Moratorium and Related Issues,
January 17, 2002, by Nonna A. Noto. (Addresses issues raised in the 107th
Congress.)
CRS Report RL31252, Internet Commerce and State Sales and Use Taxes, by Steven
Maguire.
CRS Report RL31158, Internet Tax Bills in the 107th Congress: A Brief Comparison,
December 6, 2001, by Nonna A. Noto.

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