Majority Statement

• Daniel K. Inouye

  Senator
  Read statement

  Majority Statement

  Daniel K. Inouye

              Today's hearing, titled "Communications, Taxation, and Federalism," explores the sometimes difficult intersection between our desire to encourage online commerce and our constitutional responsibility to permit states and localities to manage their fiscal affairs.

  The most prominent issue before us is the pending expiration of the Internet access tax moratorium. 

   

              Absent Congressional action, this law will sunset on November 1, 2007.  However, as we consider legislation to extend this moratorium - either on a permanent or a temporary basis - it is essential that we carefully examine the ambiguities existing in current law, in the hope of avoiding unintended consequences. 

   

              Indeed, following our most recent extension in 2004, a report conducted by Governmental Accountability Office (GAO) reveals that fundamental differences of opinion remain as to the interpretation of key terms in the current moratorium.  Failing to address these ambiguities will only fuel, rather than resolve, ongoing confusion between industry and state and local governments as to the proper scope of services protected by the Internet access moratorium.    
  

              The significance of these disputes is magnified by rapid changes occurring in the nature of Internet access services and the ease with which providers of Internet access might bundle Internet access with goods and services otherwise available for purchase online. 

   

              In light of these potential developments, Congress should clarify its intent before permanently codifying such ambiguities, and similarly, should ensure that any extension deals fairly with those state and local tax laws that have been expressly allowed since the adoption of the initial moratorium in 1998.

   

              Finally, our actions must consider the substantial interest of states and localities in managing their fiscal affairs.

   

              As Americans increasingly turn to the Internet to conduct transactions online, Main Street businesses will increasingly be placed at a competitive disadvantage.  While many debate the size of the sales tax revenue currently lost from the growth in Internet commerce, most observers agree that the tax loss is significant and will grow robustly over time. 

   

              As pressures on state treasuries increase, the effects of such policies will increasingly be felt by teachers, firefighters, police, and others on the front lines of providing state services.  As a result, it is important that we encourage ongoing efforts to simplify state tax codes in the hope that such action may facilitate further congressional action that would permit states to treat online and offline sales transactions in a nondiscriminatory fashion.

   

              With that said, let me welcome the panel assembled here today.  We look forward to your testimony.

   

  ###

Minority Statement

• Ted Stevens

  Senator
  Read statement

  Minority Statement

  Ted Stevens

  Thanks to the Internet, more goods and services are sold in Alaska every day, and Alaskans are able to market their goods to customers in the lower 48.  This is beneficial for small businesses.  Access to the internet has provided Alaskans with a means to get lower rates for hotel and air travel when they are planning trips outside the state.  Additionally, broadband access has eliminated distance barriers for education and medicine.

   

  To ensure those benefits continue to reach as many Americans as possible, Congress should reduce any obstacles to Internet access.  One way to do that is to prevent federal, state and local taxes that drive up costs for Internet access.  During the period of the imposition of the Moratorium in 1998 and now, there has been tremendous investment, growth and innovation in broadband deployment and I hope this continues.

   

  I am pleased to see that this issue has bipartisan support in both the House and the Senate and look forward to the testimony today and working with my colleagues to extend the Moratorium which expires in November of this year.

Opening Remarks

• The Honorable Michael Enzi

  United States Senator

  Wyoming

• The Honorable Anna G. Eshoo

  United States Represenative

  California

• The Honorable Ron Wyden

  United States Senator

  Oregon

Testimony

• Dr. James White

  Director of Tax Policy and Administration

  Government Accountability Office
  Download Testimony (623.00 KB)

• Mr. David Quam

  Federal Relations

  National Governors Association
  Download Testimony (80.72 KB)

• Mr. Harley Duncan

  Executive Director

  Federation of Tax Administrators
  Read statement

  Testimony

  Mr. Harley Duncan

   

  Extension of the Internet Tax Nondiscrimination Act

  And

  State Sales Tax Streamlining

  Senate Committee on Commerce, Science and Transportation

  May 23, 2007

   

   

  My name is Harley Duncan.  I am the Executive Director of the Federation of Tax Administrators.  The Federation is an association of the tax administration agencies in each of the 50 states, the District of Columbia, Puerto Rico, and New York City.  We are headquartered in Washington, D.C.  I am please to testify on the current restrictions on states taxing Internet access and the efforts of the states to streamline their sales taxes in anticipation of a mandatory collection system that would require out-of-state sellers to collect state sales taxes.  First I will address the possible extension

   

  The Federation urges the Congress to refrain from enacting measures that abrogate, disrupt or otherwise restrict states from imposing taxes that are otherwise lawful under the U.S. Constitution.  The current prohibition on the imposition of taxes on charges for Internet access as contained in the Internet Tax Nondiscrimination Act (the moratorium) is the type of law that should be avoided, especially on a permanent basis. 

   

  Internet Taxation Moratorium

   

  The Federation urges Congress not to extend the Act because it is disruptive of and poses long-term dangers for state and local fiscal systems.  Moreover, the General Accountability Office and other researchers have found that the moratorium is not effective in achieving its purported purpose of expanding the availability of Internet access to the American public and bridging what has been termed as the “digital divide.”

   

  If, however, Congress believes the Act should be extended we believe there are three principles that should be followed:

   

  • The definition of “Internet access” in current law must be changed.  As currently written, we believe that an Internet service provider could bundle virtually all types of Internet services, content and information (some of which may be currently taxable) into a package of “Internet access” and claim that the state would be preempted from taxing any part of that package.  The danger to state and local fiscal systems over the long term from the current expansive definition is considerable.
  • Any extension of the Act should be temporary in nature.  The nature of the online world and the manner in which the public accesses and uses that world continues to change rapidly.  The long-term impact on state and local finances is still evolving.  Given what everyone acknowledges will be continuing rapid change, it seems only prudent that any extension be temporary and that Congress revisit the policy and its impact in a few years.
  • The provision of the Act preserving those taxes on Internet access that were “generally imposed and actually enforced” prior to 1998 should be continued if the Act is extended.  The intent when the original Internet Tax Freedom Act was passed in 1998 was not to disrupt existing practices and that commitment should be maintained.

   

  Impact of the Moratorium

  Congress was responding to several concerns when it originally passed the Internet Tax Freedom Act in 1998.  Among these was that the Internet and electronic commerce were “fledgling industries” that should be protected from state and local taxation for fear that the taxes would be burdensome and complex and somehow prevent the growth and survival of the industry.   In addition, there was a belief that preempting state and local taxation of charges for Internet access would provide a financial incentive to U.S. households to subscribe to Internet services and would encourage the Internet industry to deploy services to underserved areas.

   

  While the goals are laudable, the economic evidence is that state taxation of Internet access charges has little or nothing to do with the adoption of Internet services by consumers or the deployment of services by industry. The Government Accountability Office (GAO) was required to perform a study on the deployment of broadband service in the United States when the Moratorium was last extended. [1]  The key findings regarding taxes in their report reads as follows:

   

  • “Finally, using our econometric model, we found that imposition of taxes was not a statistically significant factor influencing the deployment of broadband.”
  • “Using our model, we found that the imposition of the tax was not a statistically significant factor influencing the adoption [by consumers] of broadband service at the 5 percent level.  It was statistically significant at the 10 percent level, perhaps suggesting that it was weakly significant factor.  However, giving the nature of our model, it is unclear whether this finding is related to the tax or other characteristics of the states in which the households resided.”

  GAO found that factors such as the education level of the head of a household and the income of the household influenced the purchase of broadband services.  A household headed by a college graduate was 12 percentage points more likely to purchase broadband than those headed by a person who did not graduate from college.  High-income households were 39 percent more likely to adopt broadband than lower-income households.

   

  A study by economists at the University of Tennessee likewise found that taxation of Internet access had “no empirical evidence that Internet access rates are lower in state that have levied a tax on Internet access, all else being equal.”[2]

   

  Concern about the moratorium and its extension should not be interpreted as suggesting that states and localities do not recognize the importance of the Internet industry and the benefits improved service and utilization can provide to the citizens.  The GAO report referenced earlier highlighted several examples of state and local programs aimed a providing assistance and incentives for the deployment of Internet technologies, including:

  • The Texas Telecommunication Infrastructure Fund begun in 1996 that committed to spend $1 billion on telecommunications infrastructure.

  • Connect Kentucky’s an alliance of technology-focused businesses, government entities, and universities that work together to accelerate broadband deployment.
  • Virginia Tobacco Indemnification and Community Revitalization Commission is designed to stimulate economic development opportunities by encouraging the creation of new technology-based business and industry.

   

  Definition of Internet Access

  The current definition of Internet access was devised in large part in 1998 with “dial-up Internet access” in mind.  It has not kept pace with the manner in which Internet technology and services and electronic commerce have evolved.  While changes enacted in 2004 did much to remove discrimination among various types of Internet access providers, they did nothing to avoid a potential unintended erosion of state tax bases.

   

  The current definition of “Internet access”[3] effectively allows a broad range of content, information and services to be bundled with Internet access and potentially be considered as protected under the prohibition on the imposition of taxes on Internet access.  This results because the term “access” can be interpreted to mean a “right to use,” meaning a “right to use” all the information, services and content on the Internet as part of a package of access.  The range of content and service that can be bundled with Internet access is virtually unlimited.  It includes all manner of electronic books, movies, music, photographs, services, databases, information services and the like.[4]

   

  The current definition allows a growing proportion of the state and local tax base to be effectively put “off limits” by federal legislation with such a broad definition of Internet access.  We do not believe this was the intent of Congress when it originally passed the Internet Tax Freedom Act nearly nine years ago.

   

  If the current moratorium with the current definition of Internet access is made permanent it would lead widespread tax avoidance and litigation that today does not occur because it is temporary.  The temporary nature of the moratorium deprives companies of the long-term financial inducements to “push the edge of the envelope” in interpreting the law to maximize their competitive advantage over “bricks and mortar” businesses.  If the current definition of Internet access were made permanent there would be a considerable opportunity to gain a long-term competitive advantage over traditional businesses that cannot be realistically denied.

   

  The current definition of Internet access poses an issue not only for state and local governments, but also for significant segments of the private sector.  Firms that are providing content, video, or other services that compete with those provided by Internet service providers will face a discriminatory and unfair competitive situation if those services when provided as part of Internet access are protected from state and local taxation, but services provided outside a bundle that includes access are subject to state and local taxes.  The convergence of technologies and the consolidation in the communications industry suggest that this discrimination will be a real issue “sooner rather than later.”

   

  The Federation has worked and continues to work to develop a definition of Internet access that is acceptable to all parties and that is consistent with what we believe all parties actually understand the “intent” of the original bill to be.  Our intent is to craft language that will allow Internet access packages consistent with those now offered to continue to be subject to the moratorium, but to avoid the bundling of other products and services into the package.

   

  We have worked with Committee staff and have reached out to the Internet industry to develop such language.  We look forward to continuing that effort if an extension of the moratorium moves forward.

   

  Temporary Extension

  If the Act is to be extended, it should be done on a temporary, short-term basis – even if the definition of Internet access is amended.  A short-term extension would insure that the Moratorium’s impact on state and local revenues is examined periodically and that unintended consequences are not occurring.  This is necessary because of the continuing expansion of Internet availability and the expanding array of activities conducted on the Internet, which make it very difficult to predict the impact of restrictions.  It is also desirable to insure that the industry has not changed in ways that somehow causes the moratorium to discriminate among Internet service providers.  It was this sort of discrimination among providers that was, in fact, among the most contentious issues when the Act was last considered in 2003-2004.  Finally, presuming a change in the definition of Internet access, it would be advisable to review the impact of that change in the near- to medium-term to insure that it is performing as intended.

   

  Preservation of Taxes on Internet Access Imposed Prior to 1998

  Any extension of the Act should preserve the ability of those states currently imposing a tax on charges for Internet access to continue to do so if they so choose. The stated intent when the original Internet Tax Freedom Act was passed in 1998 was not to disrupt existing practices.  Given the economic evidence that taxation of charges for Internet access has not impact on the availability or use of Internet access by households in these states, we see no reason that commitment should not be maintained.

   

  Nine states currently impose taxes that are protected – Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin.  The Congressional Budget Office estimated that in 2003, these states collected on the order of $120 million from their taxes on charges for Internet access.  Repealing the grandfathering protection would disrupt the revenue stream of these states – each of which must maintain a balanced budget.  Repealing the preemption would constitute an intergovernmental mandate under the Unfunded Mandate Reform Act.

   

  Preservation of the grandfather for pre-1998 taxes is an issue that is important not only to these states.  The grandfather also covers a variety of general business taxes that may be imposed on a wide range of businesses (e.g., state and local gross receipts taxes, unemployment taxes, taxes on machinery and equipment purchases, real estate transfer taxes, etc.) that are not generally considered “taxes on Internet access” but would be subject to challenge under the Act if the grandfather clause is repealed.

   

  Conclusion

  We submit that the “fledgling industry” argument for Internet services in the United States is no longer relevant.  Electronic commerce is a mature and important part of the U.S. and international economy.  The continued moratorium on taxing charges for Internet access should be evaluated.  In our estimation, there has been no showing that the purchase or supply of Internet access services in those states that tax the services has been adversely affected.  Neither has there been a showing of an undue compliance burden on Internet service providers that would justify the preemption.  Continuing the preemption simply provides a special position for this particular communications medium and unfairly shifts the burden of taxation on to other activities. 

   

  If the preferential treatment of Internet access continues, three matters should be addressed: 

  • The scope of the preferential tax treatment (definition of Internet access) needs to be limited to protect businesses that compete with Internet companies;
  • The Act should be made temporary to insure periodic review of the Act and its consequences; and
  • The original commitment to those states imposing taxes on Internet access should be continued. 

   

   

  State Sales Tax Simplification

   

  FTA supports the enactment of Federal legislation to authorize states to require remote sellers to collect sales and use taxes on goods and services sold into the state.  FTA believes that advancing this legislation should be the top state tax priority issue of the Commerce Committee.  The change to a service based from a manufacturing based economy along with the saturation of our sales system with Internet transactions make modernization of the sales tax collection system an essential step that states must take. 

   

  The first major achievement of the system has already occurred.  Late last year a voluntary system for remote seller collection of sales taxes began.  We have 1,200 companies participating and more that 30 percent of the U.S. population covered in the new system.  We expand a rapid expansion of the system once it becomes mandatory.

   

  Streamlining of state sales taxes has a long history.  The U.S. Supreme Court held (Quill Corp. v. North Dakota) that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.  The decision was based in part on the complexity of the sales tax system for remote sellers i.e. nonresident sellers without a physical presence in the state of purchase.  The Court also said clearly that Congress could authorize states to require remote sellers to collect tax. 

   

  States have worked for five years with the business community to simplify administration of sales and use taxes for fixed-base retailers as well as for remote sellers, to reduce the compliance burden.  Action began with the Streamlined Sales Tax Project (SSTP) and led to the creation of the Streamlined Sales and Use Tax Agreement. The Agreement substantially simplified sales tax collection. Congress should authorize member states to require remote sellers to collect sales taxes.

   

  Senate legislation from the 109^th Congress would have provided the basis for states to require the collection of sales taxes by remote sellers.  S. 2152 and S. 2153 were similar bills, differing only in the rules for exempting small businesses from the collection requirement.  A single bill resolving the differences is expected to be introduced by Senators Dorgan (D-ND) and Enzi (R-WY) before Memorial Day.

   

  • Key simplifications of SSTP include state-level administration of all local sales taxes, greater uniformity in tax bases, greater use of technology, due diligence safe harbors for sellers, and uniform definitions.

   

  • Erosion of state and local government tax bases will intensify without required collection.  It is estimated annual revenue loss to the state and local governments is now approximately $15 billion.

   

  • The absence of required remote seller tax collection places hometown sellers that are required to collect tax at an unfair competitive disadvantage.

   

  • The Streamlined Sales and Use Tax Agreement took effect on October 1, 2005, with 19 states, representing almost 30 percent of the population, participating.  Collection of sales and use taxes by remote sellers under the Agreement is voluntary. Federal legislation could require participation of remote vendors under the Agreement.

   

  FTA urges the Committee to take up Streamlining as a separate and distinct issue.  It should be advanced to conclusion this year.

   

   

   

   

  
  

  ---

  [1] 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). In the GAO study, the term “deployment” refers to the offering of broadband services by various types of providers and the term “adoption” refers to the use of broadband services by consumers.

  [2] See also Donald Bruce, John Deskins and William F. Fox, “Has Internet Access Taxation Affected Internet Use,” State Tax Notes, May 17, 2004, pp. 519-526.

   

  [3] Section 1105(5) of the original Internet Tax Freedom Act, at 47 U.S.C.A. §1105(5), provides:  “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.  The term ‘Internet access’ 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.” 

  [4] The Moratorium’s accounting rule for separating individual fees would not come into play because all of the bundled content would be considered “Internet access.”

• Ms. Annabelle Canning

  Vice President, State Tax Policy

  Verizon
  Read statement

  Testimony

  Ms. Annabelle Canning

  Testimony of Annabelle Canning, Esq.

  Vice President, State Tax Policy, Verizon Communications

   

  United States Senate Committee on Commerce, Science and Transportation

   

  Hearing on Communications, Taxation and Federalism

  May 23, 2007

   

   

  Chairman Inouye, Senator Stevens, and members of the Committee, thank you for this opportunity to testify on an issue of real importance to millions of consumers and businesses across the United States. 

   

  My name is Annabelle Canning and I am Vice President, State Tax Policy at Verizon Communications.  I am responsible for pursuing state legislative tax reform initiatives that ensure fair and nondiscriminatory taxation of our consumers and encourage increased broadband investment by communications providers in innovative, new technologies.  I appear today on behalf of a broader coalition of Internet service providers, Internet “backbone” providers, and Internet application and content providers -- the “Don’t Tax Our Web” coalition – to support a permanent extension of the Internet tax moratorium.

   

  Unless Congress acts, the Internet Tax Freedom Act will expire on November 1, 2007.  I will focus on three important reasons why Congress should make the Internet tax moratorium permanent:

   

  ·        First, at a time when state and local economic development experts are touting broadband as critical to economic competitiveness, new taxes on Internet access could have a chilling effect on broadband investment.

   

  ·        Second, now that competition between different types of Internet access providers is lowering prices for consumers and making high-speed Internet access more accessible and affordable to lower income households, regressive new taxes on Internet access would create a new obstacle in efforts to close the “digital divide.”

   

  ·        Finally, a number of states and localities are ignoring the will of Congress; therefore, Congress needs to make it clear once and for all that the transport underlying the provision of Internet access and high speed Internet access is covered by the moratorium on taxes on Internet access service.  Otherwise, the record is clear that states and localities will seek to avoid the moratorium on Internet access taxes by imposing taxes on the underlying transport and high speed Internet access.  Recent studies of the taxation of telecommunications services suggest that such taxes could be excessive and discriminatory.

   

  1)  Taxes on Internet access could have a chilling effect on investment in broadband networks.

   

  The Internet Tax Freedom Act was adopted by the Congress and signed into law by President Clinton in 1998 to promote the availability of Internet access services by preventing excessive and inconsistent taxation of these services.  Congress was rightly concerned that high taxes would impose undue burdens on consumers, and the administrative burdens of filing in thousands of taxing jurisdictions would impose a barrier to new competitors and innovation. 

   

  The moratorium, by preventing the imposition of excessive telecommunications and other taxes on Internet access, has been instrumental in promoting the rapid development of high-speed broadband networks and the web-based applications that use these networks.  Congress’ foresight in adopting the moratorium has benefited the entire US economy by improving the productivity of American businesses and lowering prices for consumers through competition.

   

  Economists strongly discourage policymakers from imposing taxes on investment.  However, in the case of investments in the communications networks that make up the backbone of the Internet, tax policies that discourage investment are especially problematic because of the network benefits of advanced investments in the telecommunications infrastructure.  Network benefits are the economic benefits provided by infrastructure investments – benefits that extend beyond the direct impact on the affected industry and enhance growth throughout the entire economy.

   

  Numerous studies support the premise that investments that increase the speed and reach of communications networks improve the productivity of the businesses that use these networks to conduct business every day.  For example, a recent study by the international technology consulting firm Ovum and Indepen found that as much as 80% of the productivity growth in the entire economy in 2003 and 2004 was due to just two sectors:  communications and information technology.[1]  For this reason, tax policies that have the effect of reducing investment in telecommunications networks have negative consequences that extend far beyond the firms directly hit with the new taxes. 

   

  The productivity benefits to the U.S. economy that flow from ensuring continued growth of the communications sector and increased investment in these networks highlight the importance of making the Internet tax moratorium permanent.  Failure to make the moratorium permanent will likely result in the excessive and discriminatory taxes currently imposed on other communications services being extended to Internet access, resulting in decreased productivity in the economy generally.

   

  New taxes on Internet access, or discriminatory taxes on electronic commerce, would impose significant new costs on purchasers of Internet access and purchasers of goods and services that are delivered over the Internet.  Higher prices for such services would reduce sales, reduce company revenues, and thus lower the rate of return on investments in communications networks and the applications provided over them.  In addition, new taxes would increase the cost of doing business for U.S. firms that increasingly rely on Internet-based applications and services as part of their operations.

   

  Much has been written in the last few years about the investments that our economic competitors in China, India, and other nations are making in their communications networks.  They recognize that broadband networks are crucial components of a successful strategy to compete in a global economy.  Here at home, the Congress, our governors, state legislators, and local officials also recognize the importance of broadband networks in an overall economic development strategy.

   

  Unfortunately, in many states, state economic development policy and tax policy are not aligned.  On the one hand, states subsidize broadband deployment while on the other hand they impose excessive property and sales taxes on the equipment necessary to provide broadband service.  A review of current state tax policy suggests that, notwithstanding the good intentions of state and local governments, economic development policy priorities alone have not been sufficient to prevent state and local governments from pursuing tax policies that are counterproductive to economic growth.

   

  Congressional approval of a permanent moratorium would send a clear signal to the markets that long-term investment decisions will not be undermined by the imposition of new taxes on Internet access or discriminatory taxes on electronic commerce.  Such a strong, pro-investment signal from the Congress would help ensure that these investments – which have had such an important role in US economic growth and productivity over the last decade – will continue to be encouraged and rewarded.  It will send a signal to the markets to invest here, not abroad.

   

  (2)  Regressive new taxes on Internet access would hurt efforts to close the “digital divide.”

   

  The “convergence” that many in the industry have been touting for years is finally here.  In more and more areas of the country, consumers have choices.  They can get high-speed Internet access from a cable provider, DSL from a telecommunications company, and/or WIFI or “3G” service from a wireless provider.  Other technologies on the horizon may provide even more competitive choices.  The key to this consumer choice is the availability of competing networks that reach the consumer.

   

  As a result of competition, the price of broadband Internet access service has fallen in many markets.  In those areas that still lack competition, the key to bringing down prices for consumers is to get competing networks built and operating.

   

  At the very time that the benefits of competition are coming to low- and moderate-income households, the imposition of new taxes on Internet access would increase prices and make broadband access less affordable to such households as well as small businesses that need broadband access to enhance their ability to compete.  New taxes on Internet access would be especially problematic if excessive state and local telecommunications taxes were simply extended to such services by tax authorities. 

   

  (3)  Congress should act to ensure that the moratorium is not undermined by state and local taxation. 

   

  The Internet Tax Freedom Act’s moratorium on state and local taxes covers the transport purchased, used, and sold by Internet access service providers to provide Internet access and high speed Internet access.  Nonetheless, some states and localities have persisted in imposing taxes on Internet transport and high speed Internet access.  If left unchecked, such activities will undermine the moratorium.  From an economic standpoint, taxes on the transport component of Internet access are indistinguishable from taxes on Internet access services.  Both put the same upward pressure on end user cost of service, deterring the growth of Internet access subscribership.

   

  A report released by GAO in 2006, on the Impact of the Internet Tax Nondiscrimination Act on State Tax Revenues[2], concluded that the Internet tax moratorium did not apply to Internet backbone services (described as “acquired services”).  However, the plain language of the statute, as well as the relevant legislative history, reflect a clear legislative intent to ban Internet access taxes at both the retail and wholesale level.  One of Congress’s primary purposes underlying the reenactment of ITNA was to address potential and existing inequities with respect to the states’ taxation of the various providers of Internet access.  Congress was concerned that those providers who are required to primarily purchase the transport backbone services from another entity would be placed at a competitive disadvantage compared to those who own backbone networks. 

  
  

  Congress sought to correct this potential inequity to ensure that all providers of Internet access would be subject to the same level of taxation with respect to their purchase of wholesale transport services and consumers would not be subject to additional costs through the imposition of “hidden taxes” on the transport.

   

  The willingness of states and localities to tax communications services at excessive and discriminatory rates highlights the risk to consumers of indiscriminate new taxes if the moratorium is not extended and its applicability to Internet transport is not clarified once and for all.  These excessive rates impact not only consumers but also the growth of the nation’s economy generally. 

   

  In 1999, the Committee on State Taxation released a comprehensive study of the state and local tax burden on telecommunications services.[3]  The study found that consumers of telecommunications services paid effective state/local tax rates that were more than twice those imposed on taxable goods sold by general business (13.74% vs. 6%). Including federal taxes, the tax burden was nearly three times higher than general business.  In addition, due to the sheer number of different state and local taxes imposed in many jurisdictions, the typical communications service provider was required to file seven to eight times as many tax returns compared to those filed by typical businesses (63,879 vs. 8,951 annually).

   

  Unfortunately, with the exception of Virginia, states with excessive and discriminatory taxes on telecommunications service have not reformed their taxes to reduce the level of taxation imposed on these services to the same level imposed on other competitive goods and services.  The Heartland Institute released a new report this month that found that consumers of cable TV, wireless and wireline phone service paid an average of 13.5% in taxes, more than two times the 6.6% average sales tax rate.  The study found that the average household would pay $125 less in taxes per year if excessive taxes on cable TV and telecommunications were lowered to the sales tax rate. 

   

  The failure of most State and local governments over the past decade to reduce excessive and discriminatory taxes on telecommunications services and the efforts by some states and localities to circumvent the moratorium by taxing telecommunications transport in blatant disregard of the moratorium heightens the risk that, absent the moratorium, these excessive and discriminatory could be extended to Internet access. The moratorium was enacted to prevent this from happening, and this threat is as real in 2007 as it was in 1998. It is time to make the moratorium permanent and to end the state grandfather clauses.

   

  There is widespread agreement that, given the critical importance of education in the global economy, broadband access is not a luxury but a necessity for American families.  Making the moratorium permanent and clarifying the scope of its applicability would ensure that regressive state and local taxes do not impose another obstacle on the ability of low-income families to prepare for and participate in the global economy, particularly since only 16 states specifically exempt Internet access from their sales or communications taxes.[4]

   

  To summarize, making the Internet tax moratorium permanent will provide important social and economic benefits for American consumers and businesses.  A permanent moratorium will send a strong, pro-investment signal to those entrepreneurs that are looking to improve communications and commerce over the Internet.  It will prevent the imposition of expensive new taxes and administrative burdens on businesses that conduct interstate commerce over the Internet.  It will ensure that regressive new tax burdens are not imposed on lower-income American families seeking to ensure that their kids are prepared for the global economy.

   

  Chairman and members of the Committee, thank you again for the opportunity to testify on this important subject, and I respectfully urge you to pass a permanent extension of the Internet tax moratorium.

  
  

  ---

  [1] Lewin, David and Roger Entner. “Impact of the US Wireless Telecom Industry on the US Economy ,” Ovum and Indepen, Boston, MA, September 2005.

  [2] Government Accountability Office, “Internet Access Tax Moratorium  Revenue Impacts Will Vary by State.” Washington, DC, January 2006, GAO-06-273.

  [3] Committee on State Taxation, “50-State Study and Report on Telecommunications Taxation.”  Washington, DC, 1999.

  [4] AL, AZ, CO, CT, DC, FL, IA, MD, MA, MI, MO, NY, NC, PA, UT, VA.

• Mr. Jeff Dircksen

  Director of Congressional Analysis

  National Taxpayer Union Foundation
  Download Testimony (179.38 KB)