The Internet Tax Freedom Act: In Brief
Jeffrey M. Stupak
Research Assistant
October 5, 2015
Congressional Research Service
7-5700
www.crs.gov
R43772


The Internet Tax Freedom Act: In Brief

Summary
The Internet Tax Freedom Act (ITFA; P.L. 105-277), enacted in 1998, implemented a three-year
moratorium preventing state and local governments from taxing Internet access, or imposing
multiple or discriminatory taxes on electronic commerce. The act included a grandfather clause
allowing state and local governments to continue taxing Internet access, provided the tax had
been imposed and enforced before October 1, 1998. Under the moratorium, state and local
governments cannot impose their sales tax on the monthly payments that consumers make to their
Internet service provider in exchange for access to the Internet.
The 113th Congress passed multiple extensions of ITFA. The Internet tax moratorium and
grandfather clause were first set to expire on November 1, 2014, but were extended through
December 11, 2014 as part of the continuing resolutions appropriations bill (P.L. 113-46). These
provisions were extended further as part of the Consolidated and Further Continuing
Appropriations Act of 2015 (P.L. 113-235) through October 1, 2015.
In the 114th Congress, ITFA was extended through December 11, 2015, as part of the 2016
Continuing Appropriations Act (P.L. 114-53). In addition to the temporary extension, legislative
proposals to permanently extend parts of ITFA have been introduced in both houses of Congress.
The Permanent Internet Tax Freedom Act (H.R. 235), which would permanently extend the
moratorium on Internet access taxes while allowing the grandfather clause to expire, was passed
by the House on June 9, 2015. Companion legislation has been introduced in the Senate (S. 431).
The original three-year moratorium has been extended five times. As the original moratorium was
extended, changes were made to the definition of Internet access to include or exclude different
services and technology. Notable changes include the inclusion of digital subscriber lines under
the moratorium and the exclusion of Voice over Internet Protocol services.
Through time, the grandfather clause has protected a decreasing number of states’ abilities to tax
Internet access, as changes to the grandfather clause have been implemented. While 13 states
previously taxed Internet access and were protected under the grandfather clause, 7 states now tax
Internet access. In addition, changes made to ITFA in 2007 rendered the grandfather provision
inapplicable for states that repealed or nullified their tax laws on Internet access before the
enactment of these changes.
Policy options, including allowing the moratorium to expire, extending the moratorium either
permanently or temporarily, and eliminating the grandfather clause, have been continually
debated. Proponents of the moratorium argue that it provides a subsidy to consumers increasing
the number of individuals that have access to the Internet. Additionally, proponents cite the
reduced administrative burden for businesses under the moratorium. Opponents of the
moratorium cite unequal tax treatment of similar services, impacts on state revenues, and an
encroachment on states’ autonomy over their tax laws as reasons to allow the moratorium to
expire.
The Internet Tax Freedom Act and its subsequent extensions are often conflated with issues
related to the taxation of electronic commerce across state borders. ITFA is largely unrelated to
these issues. For a discussion of interstate electronic commerce and taxation issues, refer to CRS
Report R41853, State Taxation of Internet Transactions, by Steven Maguire, and CRS Report
R42629, “Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis, by Erika K.
Lunder and Carol A. Pettit.
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The Internet Tax Freedom Act: In Brief

Contents
Legislative Status and Background ................................................................................................. 1
Moratorium on Taxing Internet Access ........................................................................................... 2
The Grandfather Clause ................................................................................................................... 3
Moratorium on Multiple or Discriminatory Taxes .......................................................................... 3
Use Taxes and Interstate E-Commerce ............................................................................................ 4
Economic and Policy Considerations .............................................................................................. 4
Allow the Moratorium to Expire ............................................................................................... 5
Extending the Moratorium ........................................................................................................ 6
Permanent vs. Temporary ................................................................................................... 8
Elimination of the Grandfather Clause ............................................................................... 8

Contacts
Author Contact Information ............................................................................................................ 9

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The Internet Tax Freedom Act: In Brief

he moratorium on Internet access taxes prohibits states or their political subdivisions from
imposing new taxes on Internet access services. The moratorium was most recently
T extended through December 11, 2015, as part of the 2016 Continuing Appropriations Act
(P.L. 114-53). Whether to continue extending the moratorium is an issue of debate. Extending the
moratorium could increase individual access to the Internet, which could reduce the inequitable
distribution of Internet access across income levels and increase economic efficiency. Allowing
the moratorium to expire could allow states to apply taxes to Internet and non-Internet services
equally and increase state and local revenues.
Legislative Status and Background
The Internet Tax Freedom Act of 1998 (ITFA; P.L. 105-277) imposed on state and local
governments a three-year moratorium, from October 1, 1998, to October 1, 2001, on (1) new
taxes on Internet access, and (2) multiple or discriminatory taxes on electronic commerce. It also
established the Advisory Commission on Electronic Commerce. The moratorium includes a
grandfather clause allowing states that already had “imposed and enforced” a tax on Internet
access to continue enforcing those taxes. The evolution of the Internet, its interaction with
telecommunication services, and disputes over state autonomy have led to a number of changes in
the law with its successive extensions.
The Internet Tax Nondiscrimination Act (P.L. 107-75), enacted in 2001, was the first extension of
ITFA. It extended the Internet tax moratorium and the grandfather clause protections through
November 1, 2003, but made no additional changes to the law.
In 2004, the Internet Tax Nondiscrimination Act (ITNA; P.L. 108-435) extended the Internet tax
moratorium through November 1, 2007. Before the passage of ITNA, some states had
implemented taxes on digital subscriber line (DSL) Internet connections claiming they were a
telecommunication service and therefore exempt from the ITFA moratorium. ITNA changed the
definition of Internet access to include DSL connections under the moratorium. Taxes on DSL
service were given grandfather protection through November 1, 2005, and grandfather protection
for other Internet access taxes in place before October 1, 1998, was extended through November
1, 2007. Changes in ITNA also excluded Voice over Internet Protocol (VoIP) services from the
moratorium, allowing state and local governments to tax this service. Lastly, ITNA directed the
Government Accountability Office (GAO) to investigate the impact of the Internet tax
moratorium on state and local government revenues and the adoption of broadband technologies.1
The Internet Tax Freedom Act Amendments Act of 2007 (P.L. 110-108) extended the Internet tax
moratorium and the original grandfather clause through November 1, 2014. Additionally, the law
revoked grandfather protections if states had voluntarily repealed their Internet access taxes since
the passage of ITFA in 1998.
As part of a continuing appropriations resolution (P.L. 113-164) enacted in 2014, the Internet tax
moratorium and the grandfather clause protections were extended through December 11, 2014,
but no additional changes to the law were made.

1 The results of the GAO investigation were published in two reports in 2006. U.S. Government Accountability Office,
Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, GAO-06-273, January 2006,
http://www.gao.gov/new.items/d06273.pdf, and U.S. Government Accountability Office, Telecommunications:
Broadband Deployment is Extensive Throughout the United States, but it is Difficult to Assess the Extent of Deployment
Gaps in Rural Areas
, GAO-06-426, May 2006, http://www.gao.gov/new.items/d06426.pdf.
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The most recent extension of ITFA was included in the Consolidated and Further Continuing
Appropriations Act of 2015 (P.L. 113-235), which extended the Internet tax moratorium and the
grandfather clause protections through October 1, 2015. With this extension, ITFA has been
extended five times.
In the 114th Congress, ITFA was extended through December 11, 2015, as part of the 2016
Continuing Appropriation Act (P.L. 114-53). In addition to the temporary extension, legislative
proposals to permanently extend parts of ITFA have been introduced in both houses of Congress.
The Permanent Internet Tax Freedom Act (H.R. 235) was passed in the House on June 9, 2015,
which would permanently extend the moratorium on taxing Internet access while allowing the
grandfather clause to expire. Companion legislation (S. 431) has been introduced in the Senate,
but has yet to receive a vote.
Moratorium on Taxing Internet Access
The moratorium on Internet access taxes established by ITFA and its subsequent extensions
prohibits states or their political subdivisions from imposing any new taxes on Internet access
services. Internet access service is 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.”2 The sale and purchase of Internet access services is exempt from taxation
under ITFA; however, costs related to acquired services, such as an Internet service provider
(ISP) leasing capacity over fiber, are not covered by the moratorium and thus potentially subject
to taxation.3 Internet access is often bundled with other services such as voice or video service. In
these situations, if the ISP can reasonably separate the charges related to Internet access from the
other service charges, the Internet access charges remain exempt from taxation; otherwise the
Internet access charges can be taxed.4
The moratorium on taxing Internet access affects consumers of the Internet, ISPs, and state and
local governments. One of the most significant effects of ITFA is that state and local governments
cannot impose their sales taxes on the monthly payments that consumers make to their ISP, such
as Comcast or AT&T, in exchange for access to the Internet. The moratorium prohibits taxes on
Internet access services regardless of whether the tax is imposed on the consumer or the provider.
The moratorium affects state and local governments by limiting the activities that can be taxed,
reducing their potential tax base, which may reduce state and local revenues. One estimate
suggests that the moratorium on Internet access taxes could reduce potential state and local
revenues by as much as $6.5 billion each year.5 It should be noted that this estimate assumes that
all states and local governments would impose their sales tax on Internet access services. This
revenue estimate is further discussed below in the “State Revenues and Autonomy” section.

2 47 U.S.C. § 151, note.
3 U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts Will Vary by State,
GAO-06-273, January 2006, pp. 10-11.
4 47 U.S.C. § 151, note.
5 Michael Mazerov, Congress Should End - Not Extend - the Ban on State and Local Taxation of Internet Access
Subscriptions
, Center on Budget and Policy Priorities, Washington, DC, July 10, 2014, Table 2, http://www.cbpp.org/
cms/?fa=view&id=4161.
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The Grandfather Clause
ITFA contained a grandfather clause to allow state and local governments to continue taxing
Internet access if they already had a tax on Internet access that was generally imposed and
actually enforced before October 1, 1998. Initially 13 states were included under the grandfather
clause, but a number of states have voluntarily eliminated their Internet access taxes since the
passage of ITFA.6 Currently seven states claim to collect tax revenue from Internet access:
Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin.7 According to a
recent survey, these seven states collect a combined $563 million per year from their taxes on
Internet access.8 The grandfather clause protecting taxes on Internet access implemented before
October 1, 1998, is set to expire alongside the tax moratorium on October 1, 2015.
In addition to the original grandfather clause established in ITFA (P.L. 105-277), an additional
grandfather clause was established as part of the Internet Tax Nondiscrimination Act (ITNA; P.L.
108-435) for certain taxes on Internet access imposed and enforced before November 1, 2003.
The grandfather clause established under ITNA expired on November 1, 2005, which largely
applied to state and local taxes on DSL Internet access services.
Moratorium on Multiple or Discriminatory Taxes
ITFA also prohibits state and local governments from imposing multiple or discriminatory taxes
on electronic commerce. 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 city), from
imposing a tax on the same transaction, unless a credit is offered for taxes paid to the other
jurisdiction. However, the state, county, and city in which an electronic commerce transaction
takes place could all levy their own sales (or use) taxes on the transaction.
The ban on discriminatory taxes prohibits additional taxes or an alternative tax rate on a good,
service, or information delivered electronically that would differ from the tax or rate applied to
the same, or similar, good, service, or information if it were purchased through traditional
commerce (e.g., brick and mortar stores, catalog sales). In other words, under the moratorium the
same tax rate must be applied to similar items regardless of how they were purchased. For
example, purchasing a book through a local book store’s website cannot be taxed at a higher rate
than purchasing it at the local book store’s physical location.
ITFA also lists conditions under which a remote seller’s use of a computer server, an Internet
access service, or online services does not establish a minimal connection to a state for taxation
purposes. These circumstances include the sole ability 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 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

6 Ibid, p. 18.
7 Henry Reske, “Ending Internet Law’s Grandfather Clause Could Cost States $500 Million,” Tax Analysts, 2014-
15565, June 24, 2014.
8 Ibid.
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requirements. Critics object that these methods of business organization are an abuse of the
definition of discriminatory tax.9
Use Taxes and Interstate E-Commerce
The collection of use taxes has become a larger issue in public debates recently; however, this
issue is largely unrelated to ITFA and its moratorium on Internet taxes. ITFA deals specifically
with taxes on Internet access, and multiple or discriminatory taxes on electronic commerce, while
the issues related to taxing interstate electronic commerce center largely on the Supreme Court’s
decision in Quill Corp. v. North Dakota and the Commerce and Due Process Clauses of the
Constitution.10 Both clauses require that an entity have some type of connection, or nexus, with a
state before the state can impose a tax on it. Quill established that, under the Commerce Clause, a
retailer must have a “physical presence” in the state before the state can require the retailer to
collect use taxes, while due process imposes a lesser standard.11 A great deal of electronic
commerce involves firms that have a physical presence in a single state where they house their
servers or warehouse their goods but sell goods to individuals in the other 49 states. Due to the
definition of nexus established in Quill, firms cannot be compelled to collect use taxes from
individuals at the point of sale when engaged in transactions in states where they have no physical
presence. Instead, individuals making the purchase are supposed to remit a use tax to their own
state governments; compliance with this requirement is low.12
For further discussion of interstate electronic commerce issues see CRS Report R41853, State
Taxation of Internet Transactions
, by Steven Maguire, and CRS Report R42629, “Amazon Laws”
and Taxation of Internet Sales: Constitutional Analysis
, by Erika K. Lunder and Carol A. Pettit.
Economic and Policy Considerations
The largest policy consideration with respect to ITFA centers on whether to extend the
moratorium on Internet access taxes. The 113th Congress passed two temporary extensions of
ITFA, however, multiple legislative proposals in the 114th Congress have called for a permanent
extension of the moratorium as well as eliminating the grandfather clause protections (H.R. 235
and S. 431). Those calling for an extension of the moratorium cite the benefits of increased access
to the Internet, which may be achieved through tax-free Internet access. Others calling for the
expiration of the moratorium cite the unfair tax advantage given to services delivered via the
Internet
The alternative policy proposals surrounding the Internet tax moratorium can be evaluated based
upon their implications for economic efficiency and equity in the tax code. Additional factors
related to the traditional autonomy states have over their own tax laws, and congressional intent
related to the Internet Tax Freedom Act of 1998, also come to bear when analyzing the alternative
policy options.

9 See CRS Report RL33261, Internet Taxation: Issues and Legislation, by Steven Maguire and Nonna A. Noto.
10 CRS Report R42629, “Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis, by Erika K. Lunder
and Carol A. Pettit.
11 Ibid. pp. 2-5.
12 Linda O’Brien, “Tax Trends: States Address Declining Tax Revenues,” The Tax Magazine, April 1, 2005, p. 9.
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Allow the Moratorium to Expire
The Internet tax moratorium is set to expire on October 1, 2015. Proponents of allowing the
moratorium to expire focus their arguments on the inequitable treatment of similar services under
the tax laws due to the moratorium.13 Services provided through the Internet avoid taxation, while
similar offline services can face multiple taxes. Additionally, issues of federalism and state
autonomy over their own tax codes, as well as the original congressional intent when ITFA was
passed in 1998, are cited by the National Governors Association when discussing policy options
related to the ITFA.
Technology-Neutral Tax Laws
The Internet provides numerous services that are similar to services that are provided through
more traditional means and are subject to taxation by state and local governments. The
moratorium on taxing Internet access therefore provides a relative tax advantage to services
offered through the Internet. For example, an individual who would like phone service can obtain
similar service either by purchasing plain old telephone service (POTS), which is often subject to
state and local sales taxes, or they can purchase Internet access and use a free service, like Skype,
to make phone calls and avoid paying any sales or use taxes. Opponents of the Internet tax
moratorium cite this inequitable treatment under the act as a principal reason to allow it to
expire.14
The inequitable tax treatment under the moratorium violates the principle of horizontal equity.
The principle of horizontal equity suggests that like-situated individuals should be taxed in a
similar manner. With the current Internet tax moratorium, two firms that provide almost identical
services can be subject to different tax rates based on how the service is provided, either over the
Internet or by a brick-and-mortar business.
State Revenues and Autonomy
As the Internet has grown in size and popularity, states have forgone a source of potential
revenues because of the federal moratorium. As mentioned previously, one estimate suggests that
states could collect as much as $6.5 billion in revenue each year from taxing Internet access.15
This estimate assumes that all states and local jurisdictions would impose their sales taxes on
Internet access. This is unlikely to occur when considering that multiple grandfathered states
eliminated their Internet access taxes voluntarily, and California even implemented a similar
state-level moratorium on Internet taxes in 1999. Estimating the lost revenue from the Internet tax
moratorium is difficult because it is necessary to speculate how states would have acted in the
absence of the moratorium. The seven states that currently collect sales tax on Internet access
raise an estimated $563 million per year.16
States have historically been allowed the freedom to determine how they want to raise their own
revenues. ITFA is one example of a departure from this relationship in that the federal
government restricted state and local governments from taxing certain activities. The National
Governors Association has voiced concerns about the federal government encroaching on state

13 Michael Mazerov, 2014.
14 Ibid.
15 Ibid.
16 Henry Reske, 2014.
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autonomy, and hopes to revise parts of ITFA to shrink the definition of Internet access to allow
taxation of more activities related to the provision of Internet access.17
Original Congressional Intent
Multiple reports accompanying ITFA suggest that the Internet tax moratorium was meant to be a
temporary solution and legislators expected the moratorium to be replaced with some alternative
tax structure. A report from the Senate Committee on Finance states, “the Committee determined
that a limited moratorium, accompanied by a review of appropriate tax and trade issues, will give
Congress the opportunity to evaluate proper State and local government interstate taxation.”18
Additionally, the Senate Committee on Finance stated that, “fair and administrable rules for
taxing and regulating the use of the Internet ... should be developed.”19 The House Committee on
Commerce referred to the Internet tax moratorium as a “time-out” and called for the commission
created in ITFA to generate legislative proposals addressing taxation of the Internet.20
The commission established in ITFA was expected to develop legislative proposals for fair and
administrable tax rules for the Internet. The commission did not implement any policy proposals,
and efforts to develop federal legislation to govern the taxation of the Internet have stalled.
Extending the Moratorium
The moratorium on Internet access taxes was most recently extended through October 1, 2015, by
P.L. 113-235. Proponents of the Internet tax moratorium cite the benefits of increasing the number
of people accessing the Internet, by keeping Internet access costs lower through its tax-free status
under the moratorium. Proponents cite, as discussed below, numerous benefits from increasing
the number of people on the Internet, including increased economic efficiency from network
externalities and reducing the inequitable distribution of Internet access across income levels,
often referred to as the digital divide. Additionally, some have argued that the moratorium
prevents an undue administrative burden from being placed on ISPs, who would have to comply
with upwards of 10,000 taxing jurisdictions across the country.21
Researchers have attempted to estimate how a change in the price of Internet access affects
consumer decisions to purchase Internet access. Early estimates using data from 1998 suggested
that a 10% increase in the price of Internet access could have reduced Internet service demanded
by 27.5%.22 More recent estimates suggest that a 10% increase in the price of Internet access
could have reduced Internet service demanded by about 6% to 7%.23 These lower estimates were

17 David Quam, Testimony - Communications, Taxation, and Federalism, National Governors Association, May 23,
2007, http://www.nga.org/cms/home/federal-relations/nga-testimony/page_2007/col2-content/main-content-list/may-
23-2008-testimony—communic.html.
18 U.S. Congress, Senate Committee on Finance, Internet Tax Freedom Act, Report to accompany S. 442, 105th Cong.,
2nd sess., July 30, 1998, S.Rept. 105-276 (Washington: GPO, 1998), pp. 4-5.
19 Ibid.
20 U.S. Congress, House Committee on Commerce, Internet Tax Freedom Act, Report to accompany H.R. 3849, 105th
Cong., 2nd sess., June 5, 1998, H.Rept. 105-570 (Washington: GPO, 1998), p. 12.
21 Internet Tax Freedom Act Coalition, “The Issue: Keep Access to the Internet Free From Taxation,” Accessed
October 30, 2014, http://itfacoalition.org/the-issue/.
22 Austan Goolsbee, “The Value of Broadband and the Deadweight Loss of Taxing New Technology,” The B.E.
Journal of Economic Analysis & Policy
, vol. 5, no. 1 (April 2006), pp. 1-31.
23 Mark A. Dutz, Jonathan M. Orszag, and Robert D. Wilig, “The Liftoff of Consumer Benefits from the Broadband
Revolution,” Review of Network Economics, vol. 11, no. 4 (December 2012); Rajeev K. Goel, Edward T. Hsieh, and
Michael A. Nelson, et al., “Demand Elasticities for Internet Services,” Applied Economics, vol. 38, no. 9 (2006), pp.
(continued...)
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derived using data from 2000 and 2008, and likely reflect the growing importance of Internet
access as the technology has matured.
Network Externalities
Due to the nature of the Internet, having additional businesses and individuals connecting to the
Internet provides benefits both for those new Internet users but also for those who were already
accessing the Internet. Or in economic terms, when an individual purchases Internet access they
receive personal benefits, in the form of increased access to goods, services, and information, but
they also generate external benefits for other individuals already using the Internet, in that they
now have another Internet user to interact with or engage in commercial transactions.24 When an
individual is making a decision about whether to purchase Internet access, this reasoning holds,
they will consider only their personal benefits from accessing the Internet and may not consider
the external benefits they will create by purchasing Internet access. This results in fewer
individuals accessing the Internet than is socially optimal. Increasing the number of individuals
on the Internet could improve economic efficiency, by bringing the number of people on the
Internet closer to the socially optimal level.
The Internet tax moratorium can be thought of as a subsidy to individuals, helping to internalize
the external benefits they produce when purchasing Internet access. An optimally crafted policy
would provide a subsidy exactly equal to the external benefits produced by an additional
individual joining the Internet. Some have argued that the subsidy provided by the Internet access
tax moratorium is too large in comparison to the external benefits generated by an individual
joining the Internet.25 Additionally, scholars argue that as the Internet has grown the external
benefits associated with an additional user have decreased, and at a certain point negative external
consequences may arise from congestion.26
Digital Divide
The Internet has grown to a point where access is almost a necessity for individuals to fully
participate in the economy. For example, the Internet has now become a crucial tool for finding
and securing employment. Subsidizing Internet access could make the Internet more accessible
for lower-income individuals, allowing them to participate more fully in the economy.27 As of
May 2013, 24% of adults making less than $30,000 per year did not use the Internet, while 4% of
adults making more than $75,000 did not use the Internet. This disparity in access to the Internet
between high- and low-income individuals is often referred to as the digital divide. However,
when adults who did not use the Internet were asked why, about 9% cited the cost of Internet
access as the reason they do not use the Internet.28

(...continued)
975-980.
24 George R. Zodrow, “Network Externalities and Indirect Tax Preferences for Electronic Commerce,” International
Tax and Public Finance
, vol. 10 (2003), pp. 83-84.
25 Ibid. p. 85.
26 Austan Goolsbee and Jonathan Zittrain, “Evaluating the Costs and Benefits of Taxing Internet Commerce,” National
Tax Journal,
vol. 52 (September, 1999), pp. 413-428.
27 Letter from 60 Plus Association, ASPIRA, and Consumer Action, et al. to Harry Reid and Mitch McConnell,
September 17, 2014, http://itfacoalition.org/wp-content/uploads/2014/09/ITFA-Minority-Letter_Senate_Final.pdf.
28 Kathryn Zickuhr, Who’s Not Online and Why, Pew Research Center, Washington, DC, September 25, 2013, p. 6,
http://pewInternet.org/reports/2013/non-Internet-users.aspx.
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Extending the Internet tax moratorium provides a subsidy to all individuals, lowering the price of
accessing the Internet. Lower prices could allow more low-income individuals to afford Internet
access, potentially reducing the digital divide, and allowing lower-income individuals to
participate more fully in the economy.
Offering a subsidy through maintaining the Internet tax moratorium is an inefficient policy
solution to extend Internet access to lower-income individuals. The subsidy offered through the
tax moratorium helps low-income individuals afford Internet access, but it also provides a subsidy
for upper- and middle-income individuals who would have likely purchased Internet access
regardless of the subsidy. Offering a more targeted subsidy exclusively to lower-income
individuals would help ensure they have access to the Internet, while avoiding the inefficiencies
generated by subsidizing individuals who would have purchased Internet access regardless of the
tax moratorium.
Burdensome Tax Laws
It has been argued that allowing the tax moratorium to expire would put an undue burden on ISPs,
by forcing them to comply with numerous different state and local tax jurisdictions.29 Estimates
made for the number of local sales tax jurisdictions in the United States range from 7,600 to
14,500.30 Increasing the administrative burden of complying with the tax laws of multiple
jurisdictions reduces economic efficiency by diverting resources from more productive uses. By
exempting ISPs from state and local sales tax this administrative burden is avoided.
Permanent vs. Temporary
As discussed earlier, some argue that the tax moratorium was meant to be a temporary fix until
more technologically relevant tax laws could be put in place. Additionally, it has been argued that
preserving the temporary nature of the tax moratorium forces Congress to re-evaluate the policy
every few years to ensure its effectiveness.
Others have argued for a permanent extension suggesting it would provide certainty for
consumers, innovators, and investors.31 In the 114th Congress, the House passed H.R. 235 and the
Senate introduced S. 431, both of which would permanently extended the moratorium.
Elimination of the Grandfather Clause
In addition to extending the Internet tax moratorium, some have argued that the grandfather
clause, permitting states to keep their taxes on Internet access if they were on the books prior to
October 1, 1998, should be eliminated. A report by the House Committee on the Judiciary in the
113th Congress claims that the grandfather clause originally included in ITFA was meant to give
states time to change their tax codes. It has now been 16 years and the committee believes this
has been enough time for states to change their tax codes, and therefore the grandfather clause
should be eliminated.32

29 Internet Tax Freedom Act Coalition, 2014.
30 Glen Kessler, “McConnell’s Claim that There Are ‘Nearly 10,000’ Tax Codes Nationwide,” The Washington Post,
April 29, 2013.
31 U.S. Congress, House Committee on the Judiciary, Permanent Internet Tax Freedom Act, Report to accompany H.R.
3086, 113th Cong., 2nd sess., July 3, 2014, H.Rept. 113-510 (Washington: GPO, 2014).
32 Ibid.
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In the 114th Congress, the House passed H.R. 235 and the Senate introduced S. 431, both of
which would eliminate the grandfather clause from the ITFA moratorium.

Author Contact Information

Jeffrey M. Stupak

Research Assistant
jstupak@crs.loc.gov, 7-2344

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