Internet Taxation: Issues and Legislation

Internet Taxation: Issues and Legislation

Order Code RL31929
CRS Report for Congress
Received through the CRS Web
Internet Taxation: Issues and Legislation
Updated February 3, 2005
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Internet Taxation: Issues and Legislation
Summary
The Internet Tax Freedom Act (ITFA), enacted in October 1998 and extended
for two years in November 2001, expired on November 1, 2003. The federal
moratorium prohibited 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 before October 1, 1998, were protected
by a grandfather clause.
The House approved a permanent moratorium, H.R. 49, on September 17, 2003.
H.R. 49 as passed would have (1) permanently extended the moratorium; (2)
eliminated the grandfathering protections, and (3) exempted from state and local
taxes any form of telecommunications used to provide Internet access. The
Congressional Budget Office (CBO) found that H.R. 49 would have imposed an
intergovernmental mandate because existing taxes would not be granted
grandfathering protection. The Bush Administration supported permanent extension
of the moratorium.
The Senate approved a temporary extension of the moratorium, S. 150, on April
29, 2004. S. 150 (1) extended the moratorium for four years, from November 1,
2003, through November 1, 2007; (2) expanded the definition of Internet access to
include both providers and buyers of Internet access; (3) grandfathered through
November 1, 2007, Internet access taxes enforced before October 1, 1998; (4) grand-
fathered through November 1, 2005, Internet access taxes enforced before November
1, 2003 (primarily taxes on DSL Internet access service); and (5) excluded from the
moratorium taxes on voice or similar service utilizing Internet Protocol (VoIP). In
the final days of the 108th Congress, the Senate on November 17, 2004, approved
S.Con.Res. 146, which made two modifications to S. 150. It restricted the
grandfathering protection for Internet access taxes in Wisconsin to two years instead
of four and explicitly protected Texas municipal access line fees. On November 19,
the House approved both S. 150 and S. Cons. Res. 146. President George W. Bush
signed S. 150 into P.L. 108-435 on December 3, 2004.
An issue previously raised in connection with the Internet tax moratorium is
streamlining sales taxes for remote tax collection authority. Companion bills
introduced in the 108th, H.R. 3184 and S. 1736, would have granted states that
comply with the Streamlined Sales and Use Tax Agreement (a multistate compact)
the authority to require remote sellers to collect state and local taxes on interstate
sales. A related issue is whether and how to have Congress set the nexus standards
under which a state is entitled to impose a business activity tax (BAT, e.g., corporate
net income tax, franchise tax, business and occupation tax, gross receipts tax) on a
company located outside the state but with some business activities in the state. H.R.
3220 would have established a physical presence standard for business activity taxes.
This report will be updated as legislative events warrant.

Contents
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Internet Tax Nondiscrimination Act, P.L. 108-435 . . . . . . . . . . . . . . . . . . . . . . . . 2
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Moratorium: Permanent vs. Temporary Extension, or Sunset? . . . . . . . 4
Grandfathering of Existing Access Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Taxation of Internet Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Multiple Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Discriminatory Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Streamlined Sales Taxes and Remote Collection Authority . . . . . . . . . . . . 10
Business Activity Tax (BAT) Nexus Standards . . . . . . . . . . . . . . . . . . . . . 12
Action in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Moratorium Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
H.R. 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
H.R. 1481 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
H.R. 4129 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
S. 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
S. 150 (2003 actions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
S. 150 (2004 actions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
S. 2084 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
S. 2281 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
S. 2348 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Internet Commerce Related Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
H.R. 3184 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
H.R. 3220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
S. 1736 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Summary Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
For Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Hearings in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CRS Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Table 1. Comparison of Internet Tax Bills in the House and Senate . . . . . . . . . 20
Table 2. Bills on Internet Related Tax Issues in the House and Senate . . . . . . . 20

Internet Taxation: Issues and Legislation
History
The Internet Tax Freedom Act (ITFA) was enacted on October 21, 1998, as
Title XI of Division C of P.L. 105-277, the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999.1 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 ....”
This initial 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.
In the 108th Congress, the House passed H.R. 49 on September 17, 2003. H.R.
49 would have made the moratorium permanent, significantly broadened the
definition of Internet access, and eliminated all grandfathering protections.
The Senate approved S. 150 (93-3) on April 29, 2004. S. 150 extended the
moratorium for four years from November 1, 2003, until November 1, 2007;
grandfathered pre-October 1, 1998 taxes on Internet access through November 1,
2007; grandfathered pre-November 1, 2003 taxes (mostly on digital subscriber line
or DSL services) through November 1, 2005; and excluded from the moratorium
taxes on voice or similar service utilizing voice over Internet protocol (VoIP). On
November 17, 2004, the Senate approved S.Con.Res. 146, which made two
modifications to S. 150. It restricted the grandfathering protection for Internet access
taxes in Wisconsin to three years (through November 1, 2006) instead of four and
protected the ability of Texas municipalities to collect franchise fees from
telecommunications providers that use public lands. On November 19 the House
approved both S. 150 and S. Cons. Res. 146. President George W. Bush signed S.
150 into P.L. 108-435 on December 3, 2004.
1 Title XII was also part of S. 442, 105th Congress, the underlying ITFA legislation. Titles
XI and XII, 112 Stat. 2681-719 through 728 (1998). Title XI is codified as the ITFA in 47
U.S.C. 151 note. Title XII is codified as 19 U.S.C. 2241 note.

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Internet Tax Nondiscrimination Act, P.L. 108-435
The Internet Tax Nondiscrimination Act, S. 150, enacted as P.L. 108-435 on
December 3, 2004, amended the Internet Tax Freedom Act (47 U.S.C. 151 note)
effective November 1, 2003. The act:
! Extended the Internet tax moratorium for four years, retroactively
one year to November 1, 2003, and forward three years until
November 1, 2007. The moratorium bars state and local
governments from imposing any new taxes on Internet access or
imposing any multiple or discriminatory taxes on electronic
commerce.
! Clarified that the term “tax on Internet access” applies regardless of
whether the tax is imposed on a provider or buyer of Internet access.
! Made explicit that a “tax on Internet access” does not include a tax
levied on net income, capital stock, net worth, or property value.
! Provided that the terms “Internet access” and “Internet access
service” do “not include telecommunications services, except to the
extent such services are purchased, used, or sold by a provider of
Internet access to provide Internet access.” (This permits some
portion of telecommunications services to be included under the tax
moratorium.)
! Extended the grandfather protection from November 1, 2003, until
November 1, 2007, to state and local governments that taxed Internet
access prior to October 1, 1998. An exception was made for a state
telecommunications service tax in Wisconsin, for which protection
was extended only until November 1, 2006. Protection was
extended only until November 1, 2005, for taxes on Internet access
that were generally imposed and actually enforced as of November
1, 2003, which reportedly refers mainly to taxes on digital subscriber
line (DSL) services.
! Explicitly protected the Texas municipal access line fee. This
provision is intended to protect the ability of Texas municipalities to
collect franchise fees from telecommunications providers that use
public lands.
! Included a new accounting rule that charges for Internet access may
be subject to taxation in cases where charges for Internet access are
aggregated with charges for telecommunications services or other
charges that are subject to taxation — unless the Internet access
provider can reasonably identify the charges for Internet access.
! Stated that nothing in the act prevents the collection of any charges
for federal or state universal service programs (for telephone

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service), or for state or local 911 and E-911 (emergency call)
services, nor does it affect any federal or state regulatory non-tax
proceeding (such as FCC regulatory proceedings).
! Clarified that the moratorium does not apply to taxes on Voice over
Internet Protocol (VoIP) services. This section does not apply to
services that are incidental to Internet access, such as voice capable
e-mail or instant messaging.
! Provided for the GAO (Government Accountability Office) to study
the effects of the Internet tax moratorium on the revenues of state
and local governments and on the deployment and adoption of
broadband technologies for Internet access throughout the United
States, including rural underserved areas. The study is to compare
deployment in states that tax broadband Internet access service with
states that do not. The Comptroller General is to report the findings,
conclusions, and any recommendations from the study to the Senate
Committee on Commerce, Science, and Transportation and the
House Committee on Energy and Commerce by November 1, 2005.
Issues
The five main issues surrounding Internet taxation and e-commerce in the 108th
Congress were as follows:
! whether to extend the moratorium on Internet access taxes
temporarily or permanently or allow it to sunset;
! whether to grandfather protection for states that imposed taxes on
Internet access before the original moratorium was enacted;
! to define Internet access and discriminatory taxes to the satisfaction
of all stakeholders;
! whether to grant states the authority to require remote sellers to
collect use taxes if the states adopted a streamlined sales tax system;
and
! Congressional codification of guidelines for establishing whether or
not a business engaged in interstate commerce has nexus in a
jurisdiction for purposes of business activity tax (BAT, e.g.,
corporate income tax, franchise tax, business license tax) liability.2
2 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 —
(continued...)

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The Moratorium: Permanent vs. Temporary Extension,
or Sunset?
The intent of the Internet Tax Freedom Act enacted in 1998 was to prevent state
taxes on Internet access, to ensure that multiple jurisdictions could not tax the same
electronic commerce transaction, and to ensure that commerce over the Internet
would not be singled out for discriminatory tax treatment. Supporters of the
moratorium felt that the Internet should be protected from the administrative and
financial burdens of taxation to encourage the advance of Internet technology and
associated economic activity. Opponents contended that a federal moratorium
infringed on the states’ independent authority to levy taxes and that Internet
transactions and services should not be afforded preferential tax treatment.
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 could also provide both the
producers and consumers of Internet services greater certainty about state and local
taxation of the Internet. Opponents contended, however, that a permanent extension
would not address the underlying issue of federal restrictions on state taxation and
the clarification of the definition of Internet access.
In contrast, a temporary extension of the moratorium allows Congress to
periodically review the conditions of the moratorium and the effect of the
moratorium on the states. 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 time for the
states to further simplify their sales and use taxes. (See the discussion below on
Streamlined Sales Taxes and Remote Collection Authority.)
Allowing the moratorium to sunset would permit the states to tax Internet
access, although, in practice, the trend has been for states to repeal their Internet
access taxes. As Internet technology continues to change the telecommunications
industry, however, state and local governments will likely modify how the industry
is taxed. A sunset of the moratorium could induce states to address the taxation of
telecommunications more broadly.
H.R. 49 provided for a permanent extension of the moratorium. The Bush
Administration supported a permanent extension. S. 150 (P.L. 108-435) provided for
a four-year extension of the moratorium retroactively from November 1, 2003, until
November 1, 2007.
2 (...continued)
see CRS Report RL31177, Extending the Internet Tax Moratorium and Related Issues, by
Nonna A. Noto.

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Grandfathering of Existing Access Taxes
The Internet Tax Freedom Act exempted 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 already applying their sales tax to Internet
access services.3 Subsequently, Connecticut, Iowa, Tennessee, 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 six states
imposing a sales tax (or equivalent tax) on Internet access as of November 2004:
New Mexico, North Dakota, Ohio (on businesses only, not consumers), South
Dakota, 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 Congressional Budget Office believes that several local jurisdictions in
Colorado, Ohio, South Dakota, Texas, Washington, and Wisconsin also are
collecting taxes on Internet access.5
The grandfathering protection was continued when the ITFA moratorium was
extended for two years in 2001 (through November 1, 2003). The issue before the
108th Congress was whether the grandfathering of existing Internet access taxes
would be continued if the moratorium was renewed, either temporarily or
permanently. H.R. 49, as passed by the House, would have eliminated the
grandfathering protections. S. 150 (P.L. 108-435) extended the grandfathering
protection for pre-October 1998 taxes through November 1, 2007. A second
grandfathering issue had arisen as states began to tax Internet access provided
through digital subscriber lines (DSL), a high-speed telephone service. DSL is
considered a telecommunication service and was exempt from the original
moratorium and thus taxable. P.L 108-435 grandfathered pre-November 2003 taxes
(mostly taxes on DSL service) only through November 1, 2005.
In its cost estimates for H.R. 49 and S. 150, the Congressional Budget Office
(CBO) determined that eliminating the grandfathering protection for Internet access
taxes would impose an intergovernmental mandate as defined in the Unfunded
Mandates Reform Act (UMRA, P.L. 104-4, 2 U.S.C. 1501-1571).6 According to
3 National Conference of State Legislatures, “Which States Tax Internet Access?” March
25, 1998. Available at [http://www.ncsl.org/programs/fiscal/intertax.htm].
4 Vertex, Inc., Tax Cybrary. Available at [http://www.vertexinc.com].
5 Congressional Budget Office, “Cost Estimate for S. 150, the Internet Tax
Nondiscrimination Act,” Sept. 9, 2003. Contained in U.S. Congress, Senate, Committee on
Commerce, Science, and Transportation, Internet Tax Non-discrimination Act of 2003,
Report on S. 150, 108th Cong., 1st Sess., Report 108-155, Sept. 29, 2003 (Washington: GPO,
2003), p. 7. Cost estimate also available at [http://www.cbo.gov].
6 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,
(continued...)

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CBO, the prohibition of taxes on Internet access that were then collected in up to 10
states and a few local jurisdictions in six states, would cost these jurisdictions
approximately $80 million to $120 million per year. This estimate alone exceeded
the UMRA threshold of $59 million in 2003, in the case of H.R. 49, and $64 million
in 2007 (adjusted annually for inflation), in the case of S. 150. CBO noted that
additional state and local revenues could be lost if more telecommunications services
and information content were redefined as Internet access.
In addition, in a report released in October 2003, the Center on Budget and
Policy Priorities estimated that as many as 27 states could lose approximately $70
million per year if they could not tax DSL Internet access services.7 CBO estimated
the revenues that would be lost from prohibiting taxes on DSL at $40 million in 2003
and a projected $80 million per year by 2008.
Definitions
The ITFA tax moratorium prohibits new taxes on Internet access and multiple
or discriminatory taxes on electronic commerce. The act’s definitions 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
charges that retail subscribers pay for access to the Internet. These payments may go
to traditional dial-up Internet service providers (ISPs) such as America Online (AOL)
and EarthLink, or to the local telephone or cable TV company. According to the
Federation of Tax Administrators, the tax may also take the form of a sales and use
tax or excise tax levied specifically on telecommunications, communication,
information services or data processing services, the definition of which encompasses
“charges for Internet access.” S. 150 (P.L. 108-435) clarified that a “tax on Internet
access” applies regardless of whether the tax is imposed on a provider or buyer of
Internet access.
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 DSL (digital subscriber line) service costing $35 per month, the tax would be
6 (...continued)
Washington, July 21, 2003; and “Cost Estimate for S. 150, the Internet Tax
Nondiscrimination Act.” Both available at [http://www.cbo.gov].
7 Michael Mazerov, “Making the Internet Tax Freedom Act Permanent in the Form
Currently Proposed Would Lead to a Substantial Loss for States and Localities,” Center on
Budget and Policy Priorities, Oct. 20, 2003. Available at [http://www.cbpp.org].

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$2.45 per month or $29.40 per year. On a cable modem service costing $45 per
month, the tax would be $3.15 per month or $37.80 per year.8
Telecommunications Industry Concerns. Telecommunications carriers
were concerned that Internet access offered through some primarily
telecommunications technologies, such as DSL or wireless services, might not be
treated as exempt from tax, while access offered over other technologies, such as
cable modem, would be exempt. In an attempt to address these concerns, both H.R.
49 and S. 150 provided that all forms of telecommunications services used to provide
Internet access would be exempt from state and local taxes under the moratorium.9
S. 150 (P.L. 108-435) added the phrase shown below in italics to the definition
of Internet access and Internet access service. According to Section 1105(5) (new
numbering) 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 except to the extent such services are purchased,
used, or sold by a provider of Internet access to provide Internet access.
[Emphasis added.]
As a result, some portion of telecommunications services may be included under the
tax moratorium.
State and Local Government Concerns. State and local governments
were concerned, however, that the revised language would broaden the current tax
exemption far beyond retail Internet access. The expanded definition could also
exempt not only the services that connect the consumer to the Internet, but also all
of the telecommunications services that compose the Internet backbone.10 While not
quantifying the likely cost, CBO indicated that this interpretation of S. 150 could
reduce state and local revenues from taxes on telecommunications.11
8 Monthly prices from Matt Richtel, “In a Fast-Moving Web World, Some Prefer the Dial-
Up Lane,” The New York Times, April 19, 2004, and Jim Hu, “Study: Price gives DSL an
edge in broadband, CNET news.com, March 23, 2004 available at [http://news.com.com].
Common state-local sales tax rate selected from Federation of Tax Administrators,
Comparison of State and Local Retail Sales Taxes, Jan. 2004. Available at
[http://www.taxadmin.org/fta/rate/sl_sales.html]. Calculation of sample tax bills by CRS.
9 For more information, see U.S. Congress, Senate Committee on Commerce, Science, and
Transportation, Internet Tax Non-discrimination Act of 2003, Report on S. 150,108th Cong.,
1st sess., S.Rept. 108-155, Sept. 29, 2003 (Washington: GPO, 2003).
10 Harley Duncan and Mattt Tomalis, “On the ITFA: Telecom’s Trojan Horse,” State Tax
Notes, Jan.12, 2004, pp. 129-132.
11 Congressional Budget Office, “Cost Estimate for S. 150, Internet Tax Nondiscrimination
Act,” Sept. 9, 2003. Available at [http://www.cbo.gov] and included in Senate Commerce
Committee, Report on S. 150, S.Rept. 108-155, p.8.

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A report issued in September 2003 by the Multistate Tax Commission (MTC)
estimated that H.R. 49 would cost state and local governments from $4 billion to
$8.75 billion annually by 2006. This estimate did not include potential losses from
bundling of services. It did include the reduction of sales, excise, income, property,
and other business taxes on Internet access and telecommunications. In contrast, if
the moratorium were limited to sales taxes solely on Internet access to customers (the
so-called last mile of service), including broadband, and removing the
grandfathering, the cost would be limited to approximately $500 million in 2006.12
S. 150 (P.L. 108-435) made explicit that the term “tax on Internet access” does
not include a tax levied on net income, capital stock, net worth, or property value.
It extended the grandfather protection for existing Internet access taxes until
November 1, 2007, with the exception of Wisconsin where protection ends on
November 1, 2006. It explicitly protected the Texas municipal access line fee; this
protects the ability of Texas municipalities to collect franchise fees from
telecommunications providers that use public lands.
In addition, state and local governments were concerned that with the growth
of Internet telephony (Voice over Internet Protocol, VoIP), there would be less
traditional telephone service (POTS) remaining in the tax base. Currently, state and
local taxes on voice telephone services produce $12 billion in annual revenues.13 S.
150 (P.L. 108-435) clarified that the tax moratorium does not apply to VoIP services,
which may be taxed. H.R. 4129 and S. 2281 as introduced would have prohibited
state and local taxation of VoIP applications.14
Bundling of Services. The breadth of coverage in the first sentence of the
definition of Internet access shown above 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. These could include data and information services, cable television,
books, magazines, games, music, and video on demand, for example. These types
of products and services can be offered online and sold as part of an Internet access
service.15
12 Dan Bucks, Elliott Dubin, and Ken Beier, “Revenue Impact on State and Local
Governments of Permanent Extension of the Internet Tax Freedom Act” (Washington:
Multistate Tax Commission), Sept. 24, 2003. Available at [http://www.mtc.gov].
13 Michael Mazerov, “A Permanent Ban on Internet Access Taxation Risks Serious Erosion
of State and Local Telephone Tax Revenue as Phone Calls Migrate to the Internet,” Center
on Budget and Policy Priorities, Washington, DC, Feb. 11, 2004, p. 1. Available at
[http://www.cbpp.org].
14 For objections to a tax prohibition on VoIP, see Michael Mazerov, “Proposed ‘Voice over
Internet Protocol Regulatory Freedom Act’ Threatens to Strip States and Localities of
Billions of Dollars in Annual Tax Revenues,” Center on Budget and Policy Priorities,
Washington, DC, July 20, 2004. Available at [http://www.cbpp.org].
15 Harley Duncan and Matt Tomalis, “On the Internet Tax Freedom Act: The Forgotten First
Sentence,” State Tax Notes, March 29, 2004, pp. 1105-1108.

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S. 150 (P.L. 108-435) included a new accounting rule that addressed the
bundling issue. Under this rule, Internet access service may be taxable if access fees
are aggregated with fees for otherwise taxable telecommunications services. If the
Internet access provider can reasonably identify the charges for Internet access, then
the Internet access is not taxable.
Funding Universal Service. Some members of Congress were concerned
about protecting the financing source for the Universal Service Fund (USF).16 The
USF is administered by the Universal Service Administrative Company, an
independent not-for-profit organization operating under the auspices of the Federal
Communications Commission (FCC). The USF is financed by mandatory
contributions from interstate telecommunications carriers.17 A company’s USF
contribution is a percentage of its interstate and international end-user revenues.18
Some states also levy charges on the intrastate retail revenues of telecommunications
carriers for their state’s universal service fund.19
Supporters of the universal service programs were concerned that efforts to
protect Internet access and associated telecommunications services should not reduce
the funding base for universal service. S. 150 (P.L. 108-435) 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. Nor does
it prevent states or local governments from collecting fees or charges to support 911
or E-911 (emergency) services. Nor does it affect any federal or state regulatory
proceeding that is not related to taxation.
Multiple Taxes. 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
16 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 also 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.
17 All telecommunications providers 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.
18 The percentage, known as the contribution factor, is set quarterly, and varies depending
on the financing needs of the universal service programs. The federal universal service
contribution factor for the third quarter of 2003 was 0.095 or 9.5%. The proposed
contribution factor for the fourth quarter of 2004 was 0.089 or 8.9%. Federal
Communications Commission, Contribution Factors and Quarterly Filings, available at
[http://www.fcc.gov/wcb/universal_service/quarter.html].
19 State charges are typically levied on the intrastate retail revenues of wireline carriers and,
in some states, wireless carriers as well.

CRS-10
which an electronic commerce transaction takes place could all levy their sales taxes
on the transaction.
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.20 (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
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, the debate surrounding legislation to extend
the Internet tax moratorium was linked to the states’ quest for sales and use tax
collection authority. The issue is whether Congress is willing to grant states the
authority to require remote (out-of-state) sellers to collect use taxes on interstate sales
conditioned on a simplification of state and local sales and use tax systems. 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.
In contrast, in the 108th Congress, the sales tax issue was pursued separately
from the moratorium. Companion bills H.R. 3184 (Istook and Delahunt) and S. 1736
(Enzi) would have granted states that comply with the Streamlined Sales and Use
Tax Agreement the authority to require remote sellers to collect state and local use
taxes on interstate sales.
20 For additional discussion, see CRS Report RS21537, State Sales Taxation of Internet
Transactions, by John R. Luckey.

CRS-11
The chairmen of the committees of jurisdiction in both the House and Senate
indicated that they wanted 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, each indicated that his committee would hold a hearing on the sales
tax issue, in addition to the hearing held on the moratorium extension. The House
Subcommittee on Commercial and Administrative Law held an oversight hearing on
October 1, 2003.21
Under current law, a vendor with substantial nexus (usually defined as physical
presence) in its customer’s state collects the state (and local) sales tax on sales
arranged over the Internet (or by telephone, mail order, or other means). In contrast,
an out-of-state vendor without substantial nexus in the customer’s state is not
required to collect the sales tax.22 Technically, the customer is required to remit a
“use” tax to his or her state of residence.23 In practice, however, use tax compliance
by non-business purchasers is low. Because of this low compliance, many states
have long wanted to require out-of-state vendors without physical presence in the
respective states (referred to as remote sellers) to collect the use tax from the
customer. This would apply to all interstate sales, whether arranged over the Internet
or by catalog, telephone, or other means.
Acknowledging administrative complexity as a major obstacle to remote
collection, the states began a concerted effort to simplify state and local sales and use
tax 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. As of November 12, 2002, the SSTP reported that 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 and requires
that a participating state and local government have only one statewide tax rate for
each type of product by 2006. Each state would retain the power to define taxable
products and establish the tax rate. The agreement provides for streamlined tax
administration and audit requirements for sellers.
21 U.S. Congress, House, Committee on the Judiciary, Subcommittee on Commercial and
Administrative Law, Streamlined Sales and Use Tax Agreement: States’ Efforts to
Facilitate Sales Tax Collection from Remote Vendors, oversight hearing, 108th Cong., 1st
sess., serial no. 57, Oct. 1, 2003 (Washington: GPO, 2003). Available at
[http://judiciary.house.gov/].
22 In 1967 and again in 1992, the Supreme Court concluded that the complexity of the state
and local sales tax systems imposed an undue burden on interstate commerce. The Court
invited the Congress to take action on this issue. See the following decisions: National
Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967) and Quill Corp.
v. North Dakota, 504 U.S. 298 (1992).
23 The use tax is the companion tax to the sales tax and was created to ensure that cross
border transactions are not favored in the state tax code.

CRS-12
During their 2003 sessions, many 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 state sales taxes 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 systems to conform with the agreement.)
As of April 2004, 20 states had enacted legislation conforming with all or part of the
agreement.24 The combined population of these 20 states represents approximately
30% of the population of states with sales taxes. The states have yet to petition for
membership in the compact. October 1, 2005, is the target date for making the
compact’s governing board operational. Collection by sellers of sales and use taxes
on remote sales is to remain voluntary under the agreement until either Congress or
the Supreme Court acts to make collection mandatory.
Separately, a coalition of a few nationwide sellers reached agreements with 38
states and the District of Columbia to begin collecting their use taxes 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.
Business Activity Tax (BAT) Nexus Standards
The possibility that states could be authorized to require remote vendors to
collect sales and use taxes on interstate sales raised concerns that states would then
attempt to impose income and other business taxes on those vendors. In response,
some multistate businesses asked Congress to clarify nexus standards for state and
local business activity taxes (BATs).25 Past court decisions and the landmark P.L.
86-272 enacted in 1959 (15 U.S.C. 381 et seq.) established physical presence as the
standard for sufficient nexus, but only for the sale of tangible goods, and only for
taxes on net income.
Congress clarified nexus in P.L. 86-272 by identifying those activities which
would not establish nexus. Generally, soliciting the sale of tangible goods in a state
for shipment by common carrier from locations outside the state would not be
sufficient to trigger nexus. Thus, for products shipped across state lines, state
corporate income taxes are levied at the source, not the destination, of the product.
24 Streamlined Sales Tax Project, State Legislative Status of Streamlined Sales and Use Tax
Agreement (as of July 1, 2004). Available at [http://www.streamlinedsalestax.org] under
St. Legislative Status.
25 Business activity taxes are commonly thought of as corporate income taxes, but may also
include franchise taxes, business license taxes, business and occupation taxes, a tax on gross
receipts, gross income or gross profits, value-added taxes, single business taxes, and capital
stock taxes. They do not include taxes on transactions, like sales and use taxes or excise
taxes.

CRS-13
Proponents of federally defined nexus standards contend that current federal law
does not sufficiently define substantial nexus. The issue before Congress is whether
to codify nexus rules for intangible property and services, not just tangible goods.
Currently, each state independently implements rules that establish nexus for
economic activities that are not covered by P.L. 86-272. Although state rules are
very similar for many services and activities, there is still significant variation among
states on the threshold for establishing nexus. In theory, Congress could establish
uniform federal standards for imposing state business activity taxes on out-of-state
businesses.
Some representatives of state and local governments, however, are concerned
that enacting federal nexus guidelines could restrict their ability to levy corporate
income taxes or other BATs on business activities conducted in their state. For
example, if Congress implemented thresholds at the midpoint level of all existing
state nexus rules, by definition, many states would lose taxpayers that did not meet
the new standard for substantial nexus. The states with the lowest nexus thresholds
would fare the worst under such a scenario.
The remote collection authority bills offered in earlier Congresses typically
provided that out-of-state vendors that collected sales and use taxes would not then
be subject to business activity taxes by virtue of their tax collection for the state.26
In the 108th Congress, as in the past, the BAT nexus issue was kept separate from
both the extension of the Internet tax moratorium and the sales tax simplification
issue. H.R. 3220 (Goodlatte and Boucher) would have established physical presence
as the nexus standard for levying state and local business activity taxes on interstate
commerce. It would have extended the protections of P.L. 86-272 to all sales
(including services and intangible property, not just tangible personal property) and
to other state and local business activity taxes, not just net income taxes.27
Action in the 108th Congress
Moratorium Legislation
Several bills to extend the Internet tax moratorium were introduced in the 108th
Congress. H.R. 49 was amended and reported by the House Judiciary Committee on
July 16, 2003, and approved by the House on September 17, 2003. S. 150 was
amended and approved by the Senate on April 29, 2004. S.Con.Res. 146, which
made two modifications to S. 150, was approved by the Senate on November 17,
2004. The House approved both S. 150 and S.Con.Res. 146 on November 19.
26 For more on state BATs, see CRS Report RL32297, State Corporate Income Taxes: A
Description and Analysis, by Steven Maguire.
27 For a critique of H.R. 3220 from the vantage point of states, see Michael Mazerov,
“Proposed ‘Business Activity Tax Nexus’ Legislation Would Seriously Undermine State
Taxes on Corporate Profits and Harm the Economy,” Council on Budget and Policy
Priorities, Washington, DC, revised Oct. 4, 2004. Available at [http://www.cbpp.org].

CRS-14
President George W. Bush signed S. 150 into law, P.L. 108-435, on December 3,
2004.
Both H.R. 49 and S. 150 expanded the definition of Internet access to ensure
technological neutrality. The two bills differed on the treatment of existing Internet
access taxes and the length of the moratorium. H.R. 49 would have imposed a
permanent moratorium and would have immediately removed the grandfathering
protection provided to states with Internet access taxes in place prior to October 1,
1998. S. 150 (P.L. 108-435), in contrast, extended the moratorium for four years,
extended the grandfathering for pre-1998 taxes for the life of the moratorium, and
grandfathered pre-2003 taxes (on DSL services) for two years. Following is a
summary of selected Internet-related legislation beginning with legislation
originating in the House.
H.R. 49. The Internet Tax Nondiscrimination Act was introduced by
Representative Cox on January 7, 2003, and was referred to the House Committee
on the Judiciary. A hearing on H.R. 49 was held by the Subcommittee on
Commercial and Administrative Law on April 1, 2003. Subcommittee consideration
and markup occurred on May 22, 2003. A technical amendment in the nature of a
substitute was approved by voice vote. The amended bill was forwarded to the full
committee.
On July 16, 2003, the House Judiciary Committee held a markup of H.R. 49,
approved one amendment, and reported the amended H.R. 49 to the full House
(H.Rept. 108-234). The approved amendment was introduced on a bipartisan basis
by Representative Watt (D) and Subcommittee Chairman Cannon (R).28 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 added to the definition of Internet access (in Section 1104(5) of the
original Internet Tax Freedom Act) the phrase shown below in italic 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.29 [Emphasis added.]
28 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.
29 The highlighted phrase was also added to the definition of “Internet access service” 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) neither (A) a telecommunications carrier engaged in the provision of a
telecommunications service, nor (B) a person engaged in the business of providing an
(continued...)

CRS-15
The amendment intended to treat all Internet access services — including DSL,
wireless services (WiFi), or satellite — the same as Internet access service delivered
via dial-up connections. However, the language of the amendment could also have
exempted underlying telephone and cable services used to provide Internet access.
These underlying telecommunications services are often taxed by state and local
governments. Furthermore, with the removal of the grandfather clause that protects
taxes on Internet access that were generally imposed and actually enforced prior to
October 1, 1998, the moratorium might also have been interpreted to include other
taxes on Internet access providers, such as income and property taxes.
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 have imposed an intergovernmental mandate. CBO estimated that repealing
the grandfather clause would lead to revenue losses (on Internet access) totaling $80
million to $120 million per year for the group of approximately 10 states and several
local governments that were then taxing Internet access. This amount alone exceeded
the threshold of $59 million in 2003 established by the Unfunded Mandates Reform
Act (UMRA). In addition, amending the definition of Internet access (with the Watt-
Cannon amendment) could have exempted some telecommunications services used
to provide Internet access that were otherwise subject to state and local taxes under
current ITFA law.30 The presence of an unfunded intergovernmental mandate in
excess of the threshold amount means that a point of order may be raised when a bill
is considered on the House or Senate floor.31
H.R. 49 was brought to the House floor on September 17, 2003, under a
suspension of the rules. This procedure, designed for noncontroversial bills, provides
for an up-or-down vote with no floor amendments and requires a two-thirds majority
vote. Despite objections from representatives of states with grandfathered Internet
access taxes, the House passed H.R. 49, as reported by the Judiciary Committee, by
voice vote.
H.R. 1481. Internet Growth and Freedom Act of 2003. H.R. 1481 would have
temporarily extended the moratorium imposed by the Internet Tax Freedom Act for
five years, until November 1, 2008. The bill would have continued the grandfather
protection for pre-existing Internet access taxes. H.R. 1481 was introduced by
Representative Lofgren on March 27, 2003, and referred to the Committee on the
Judiciary.
H.R. 4129. VoIP Regulatory Freedom Act of 2004. The bill was similar to S.
2281 as introduced. It would have reserved to the federal government the
responsibility and authority to regulate the offering or provision of a voice-over-
29 (...continued)
Internet access service, is considered as making a communication of material for commercial
purposes.
30 Congressional Budget Office, “Cost Estimate for H.R. 49, Internet Tax Nondiscrimination
Act.” Available at [http://www.cbo.gov].
31 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.

CRS-16
Internet-protocol (VoIP) application. It would have enumerated several
responsibilities for the Federal Communications Commission. It would have
prohibited state regulation of VoIP. The bill would have prohibited state or local
governments from imposing a tax or other charge for the purpose of generating
revenues for governmental purposes on the offering or provision of a VoIP
application. An exemption was provided for fees imposed for a specific privilege,
service, or benefit conferred. H.R. 4129 was introduced by Representative Pickering
on April 2, 2004. It was referred to the Committee on Energy and Commerce and
subsequently the Subcommittee on Telecommunications and the Internet, and to the
Committee on the Judiciary.
S. 52. Internet Tax Nondiscrimination Act. S. 52 would have permanently
extended the moratorium imposed by the Internet Tax Freedom Act. This bill would
have removed 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. This bill was the companion to H.R. 49. S. 52 was introduced on
January 7, 2003, by Senator Wyden. It was referred to the Committee on Commerce,
Science, and Transportation.
S. 150 (2003 actions). Internet Tax Non-discrimination Act of 2003. S. 150
was introduced on January 13, 2003, by Senator Allen and was referred to the
Committee on Commerce, Science, and Transportation. The Committee held a
hearing on S. 150 on July 16, 2003. It marked up the bill on July 31, 2003. An
amendment in the nature of a substitute offered by Senator Allen and co-sponsor of
S. 150, Senator Wyden, was approved by voice vote and the amended bill was
ordered reported favorably. On September 29, 2003, S. 150 was reported by the
Commerce Committee (S.Rept. 108-155) and sequentially referred to the Finance
Committee for a period of up to 30 days. The bill was discharged from the Finance
Committee with no changes on October 29, 2003.
The first two sections of S. 150 as amended by the Commerce Committee were
similar to H.R. 49 as passed by the House. The first section named the bill the
Internet Tax Non-discrimination Act. The second section would have permanently
extended the moratorium, removed the grandfathering protection for existing taxes
on Internet access, and made conforming amendments to remove the reference to
grandfathered taxes elsewhere in the ITFA. It would have added 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 agreed to refine the definition of
Internet access to better reflect their intentions to protect Internet access from
taxation and not the underlying communications medium. They also intended that
the moratorium be neutral with respect to whatever technology is used to provide
Internet access. The Commerce Committee report on S. 150 (S.Rept. 108-155)

CRS-17
spelled out the committee’s intentions with regard to the amended definition of
Internet access.32
In addition, S. 150 as ordered reported, included a third section that would have
continued to grandfather existing taxes on Internet access for three more years, until
September 30, 2006. A fourth section of the bill clarified 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.
For reasons similar to those given above with respect to H.R. 49, in its cost
estimate for S. 150, the Congressional Budget Office determined that the bill as
ordered reported by the Senate Committee on Commerce, Science, and
Transportation would have imposed an intergovernmental mandate beginning in
2007, once the grandfathering protection was removed.33 This meant that a point of
order could be raised when the bill was considered on the Senate floor. The Senate
began consideration of S. 150 on November 6, 2003. The bill was pulled on
November 7, 2003, for further negotiation on the definition of Internet access.
S. 150 (2004 actions). Internet Tax Nondiscrimination Act. On April 27,
2004, Senator McCain offered a compromise amendment to S. 150, S.Amdt. 3048,
which became the version of S. 150 approved by the Senate (93-3) on April 29, 2004.
S. 150, as amended, would (1) extend the moratorium four years, through November
1, 2007; (2) expand the definition of Internet access to include both providers and
buyers of Internet access; (3) grandfather Internet access taxes enforced before
October 1, 1998, through November 1, 2007; (4) grandfather Internet access taxes
enforced before November 1, 2003 (primarily taxes on DSL Internet access service)
through November 1, 2005; and (5) exclude from the moratorium taxes on voice or
similar service utilizing Internet Protocol (VoIP).
After bicameral negotiations, still more modifications to S. 150 were needed to
gain House approval. On November 17, 2004, the Senate approved S.Con.Res. 146
by voice vote, making two modifications to S. 150. It restricted the grandfathering
protection for Internet access taxes in Wisconsin to three years instead of four (until
32 The modified definition of Internet access is meant to clarify that, under the ITFA, neither
Internet access nor the transmission component of Internet access is subject to taxation.
(Neither the access nor transmission component of DSL would be taxable.) This definition
is not meant to affect state and local taxation of traditional telecommunications and other
services not used to provide Internet access. It is not meant to exempt from state or local
taxation otherwise taxable products or services bundled with Internet access. The lapse of
grandfathering protection is not meant to affect the authority of state and local governments
to assess and collect traditional sales and use taxes, excise taxes, property taxes, corporate
income taxes, gross receipts taxes, business and occupation taxes, and other such taxes
generally applied and not enumerated in section 1101(a) of the ITFA. U.S. Congress, Senate
Committee on Commerce, Science, and Transportation, Internet Tax Non-discrimination Act
of 2003, Report on S. 150, 108th Cong., 1st Sess., S.Rept. 108-155, Sept. 29, 2003
(Washington: GPO, 2003), pp. 2-4.
33 Congressional Budget Office, “Cost Estimate for S. 150, Internet Tax Nondiscrimination
Act.” Available at [http://www.cbo.gov].

CRS-18
November 1, 2006). It protected the Texas municipal access line fee, preserving the
ability of Texas municipalities to collect franchise fees from telecommunications
providers that use public lands. On November 19 the House approved both S. 150
and S.Con.Res. 146 by voice vote. President George W. Bush signed S. 150 into
law, P.L. 108-435, on December 3, 2004.
S. 2084. Internet Tax Ban Extension and Improvement Act. S. 2084 would
have (1) extended the Internet tax moratorium for two years (through October 31,
2005); (2) included in the moratorium taxes on Internet access delivered through
DSL; (3) grandfathered all Internet access taxes that were imposed before November
1, 2003; (4) clarified the definition of Internet access services; and (5) implemented
an accounting rule that would allow the taxation of Internet access if access were
offered as part of a bundled package and the access provider did not separate Internet
access charges from the other services. The inclusion of DSL in the definition of
Internet access services addressed the concern that the moratorium should be neutral
with respect to technology. However, the grandfather clause would have allowed
states that were already levying taxes on DSL Internet access to continue to collect
the tax. S 2084 was introduced by Senators Alexander and Carper on February 12,
2004, and referred to the Committee on Commerce, Science, and Transportation.
Elements of S. 2084 were included in S. 150 as enacted.
S. 2281. VoIP Regulatory Freedom Act of 2004. A similar bill, H.R. 4129,
was introduced in the House. S. 2281 focused on the taxation and regulation of
Voice over Internet Protocol technology. It would have prohibited state taxation and
regulation of VoIP-related technology. The legislation would have mandated that
“...responsibility and authority to regulate the offering or provision of a voice-over-
Internet-protocol application is reserved solely to the Federal Government.” S. 2281
was introduced by Senator Sununu on April 5, 2004, and was referred to the
Committee on Commerce, Science, and Transportation. Hearings were held on June
16. On July 22 the bill was ordered reported favorably with an amendment in the
nature of a substitute. On November 19, 2004, S. 2281 was reported (without a
written report) by Senator McCain with an amendment in the nature of a substitute.
Among other substantial changes to the bill, the amended version dropped the
provision that would have prevented state or local governments from imposing any
tax, fee, surcharge, or other charge for the purpose of generating revenues for
governmental purposes on the offering or provision of a VoIP application.
S. 2348. S. 2348 would have extended the moratorium through June 1, 2005,
without other modifications to the original ITFA. The bill was introduced by
Senators Enzi, Feinstein, and Hutchison on April 26, 2004, and placed on the Senate
legislative calendar.
Internet Commerce Related Legislation
H.R. 3184. Streamlined Sales and Use Tax Act. H.R. 3184 was the
companion to S. 1736. H.R. 3184 would have granted states that are parties to the
Streamlined Sales and Use Tax Agreement (a multistate compact approved
November 12, 2002) the authority to require remote sellers to collect and remit state
and local sales and use taxes, even if the seller does not have a physical presence in
the taxing state. This bill enumerated 18 minimum simplification requirements that

CRS-19
the agreement must meet. H.R. 3184 was introduced September 25, 2003. It was
referred to the Committee on the Judiciary, Subcommittee on Commercial and
Administrative Law.
H.R. 3220. Business Activity Tax Simplification Act of 2003. H.R. 3220
would have (1) amended P.L. 86-272 to extend to all sales (not just tangible personal
property) and to other state and local business activity taxes (not just net income
taxes) the protection from taxation on interstate commerce if the only activity within
a state was soliciting orders for sales; (2) established physical presence as the nexus
standard for levying state and local business activity taxes on interstate commerce;
(3) generally required use of employees or property in a state for more than 21 days
per calendar year to establish nexus; (4) enumerated exempt business activities; and
(5) set the minimum time limit at one day, instead of more than 21 days, for a live
performance or live sporting event before more than 100 spectators, for the sale
within a state of tangible personal property where delivery of the property originates
and is completed within the state, and for the performance of services to real property
within a state. The bill was introduced on a bipartisan basis by Representatives
Goodlatte (R) and Boucher (D) on October 1, 2003, and was referred to Committee
on the Judiciary. The Subcommittee on Commercial and Administrative Law held
hearings on the bill on May 13, 2004. No Senate counterpart to H.R. 3220 was
introduced.
S. 1736. The Streamlined Sales and Use Tax Act. S. 1736 was the companion
to H.R. 3184 (see the description of H.R. 3184 above). The bill was introduced by
Senator Enzi on October 15, 2003, and referred to the Committee on Finance.
Summary Tables
Table 1 succinctly compares the Internet tax moratorium bills introduced in the
House of Representatives and the Senate. Table 2 lists bills on related e-commerce
issues introduced in the House and the Senate. The bills are described in more detail
in the text immediately above.

CRS-20
Table 1. Comparison of Internet Tax Bills
in the House and Senate
Extension of
Grandfathering
Bill Number
Other Issues
Moratorium
Provisions
H.R. 49
Permanent
No
Extended the exemption from
passed by the
Internet access taxes to all forms of
House
telecommunications
used to provide access.
H.R. 1481
5 years, until
Yes
—
Nov. 1, 2008
H.R. 4129
n/a
n/a
Banned state and local taxation of
VoIP applications and prohibited
state regulation of VoIP services.
S. 52
Permanent
No
—
S. 150
4 years, until
Yes, for pre-1998
Extended the exemption from
as enacted ,
Nov. 1, 2007
taxes through Nov. Internet access taxes to all forms of
P.L. 108-435
1, 2007, and for
telecommunications used to provide
pre-2003 taxes (on
access. Clarified that the ITFA
DSL) through
moratorium does not prevent
Nov. 1, 2005
collection of federal or state fees or
charges used to finance the USF
program. VoIP is not included in the
moratorium.
S. 2084
2 years, until
Yes
Modified the definition of Internet
Nov. 1, 2005
access services to include DSL.
S. 2281 as
n/a
n/a
Dropped provision to ban state and
amended
local taxation of VoIP applications.
S. 2348
18 months,
Yes
—
until June 1,
2005
Table 2. Bills on Internet Related Tax Issues
in the House and Senate
Bill Number
Issue
H.R. 3184
Would have granted states that comply with the Streamlined Sales and Use
Tax Agreement the authority to require remote sellers to collect state and
local use taxes on interstate sales, subject to minimum simplification
requirements for the agreement. Companion to S. 1736.
S. 1736
Companion to H.R. 3184.
H.R. 3220
Would have established physical presence as the nexus standard for levying
state and local business activity taxes on interstate commerce.

CRS-21
For Additional Information
Hearings in the 108th Congress
U.S. Congress. House. Committee on the Judiciary. Subcommittee on Commercial
and Administrative Law. Business Activity Tax Simplification Act of 2003.
Hearing on H.R. 3220. 108th Cong., 2nd Sess., serial No. 84, May 13, 2004.
Washington: GPO, 2004. Available at [http://www.house.gov/judiciary].
____. Internet Tax Nondiscrimination Act. Hearing on H.R. 49. 108th Cong., 1st
sess., serial no. 13, April 1, 2003. Washington: GPO, 2003. Available at
[http://www.house.gov/judiciary/].
____. Streamlined Sales and Use Tax Agreement: States’ Efforts to Facilitate Sales
Tax Collection from Remote Vendors. Hearing. 108th Cong., 1st sess., serial no.
57, October 1, 2003. Washington: GPO, 2003. 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 Report RL31177, Extending the Internet Tax Moratorium and Related Issues,
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,
by Nonna A. Noto