Congress to Decide Whether to Tax Your Internet

Uncle Sam may start charging you for the right to access the Internet.

Or you might soon find yourself paying a sales tax on purchases made at online retailers like Amazon and eBay.

Depending on whom you ask, the two issues are either completely unrelated or close cousins. The first is a sort of doomsday scenario that would come to pass if a long-standing federal ban on charging a tax for Internet access isn't renewed by Congress. The second will become reality if an online-sales-tax bill, supported by brick-and-mortar retailers, gets passed as a piggyback measure to the ban.

Before Congress flees Washington later this week to begin its final burst of election-season campaigning, it must address the ban on federal, state, and local taxes on Internet access due to expire on Nov. 1.

This ban prevents localities and all but seven states from charging you a sales tax for your Internet hookup in your monthly bill. Few in Congress want that ban to expire, but in the face of the looming deadline, lawmakers have decided to do what they do best: Punt.

House Republicans have added a short-term extension to the ban to a continuing resolution, a legislative package that will keep the government from shutting down until Congress can negotiate its next budget deal. But that patchwork extension, which the Senate appears likely to consent to, only keeps the ban in place until Dec. 11.

That very brief pushback is setting up a holiday-season fight in a Congress where nothing is a sure bet. Complicating matters is an effort brewing in the Senate to pair the ban extension with a far more contentious plan that would give states more power to exact sales taxes on online purchases of things like books and movies.

HOW WE GOT HERE

A ban on collecting taxes on Internet access has been in place since President Clinton signed it into law in 1998 as a means to protect the then-nascent technology powering a booming Internet bubble. Lawmakers have re-upped the measure three times, with the most recent renewal in 2007. The law also prohibits levies on discriminatory Internet-specific tolls on things like email or bandwidth.

In July, the House passed by voice vote a bill that would have banned Internet-access taxes forever. In addition, the Permanent Internet Freedom Act would end the access taxes that are collected in seven states—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. Those states already had begun collecting taxes prior to the 1998 law, which grandfathered them into its language.

The measure briefly looked like it had a chance to sail through the Senate and land on the president's desk before the end of the year, which would have represented one of only a handful of substantive bills to pass an otherwise do-nothing Congress this year.

But just hours after the House passed its bill, a group of bipartisan senators, led by Sens. Dick Durbin of Illinois and Mike Enzi of Wyoming, introduced a new bill combining a 10-year tax ban with a more controversial effort that would boost the authority of states to tax online purchases from retailers like Amazon and eBay. It would also keep the bans in those seven grandfathered states intact.

The package deal amounts to a last-ditch effort to revive online-sales-tax legislation, which passed the Senate last year but fizzled in the House. That stalled measure, known as the Marketplace Fairness Act, would let states collect sales tax on merchandise purchased online from out-of-state retailers. Current law allows states to collect sales tax only on retailers that maintain a physical presence, such as a store or warehouse, within that same state.

The push to expand states' taxing authority over online sales has been bandied about in Congress for years. It has earned influential support from a number of states trying to close budget shortfalls and traditional retailers, who say online vendors have an unfair, tax-free advantage because they can offer consumers a lower price. Antitax groups and a number of online retailers such as eBay oppose the plan.

Amazon, once resistant to online sales tax, has more recently been supportive, in part because the online juggernaut is already subject to sales tax in 21 states where it has a physical location.

WHAT WILL CONGRESS DO?

Antitax and open-Internet advocates remain optimistic that Congress will figure out a way to keep the Internet-access tax ban in place after the election, though if Republicans are due to retake the Senate, it could mean inaction until next year.

"We're going to win either way," said Katie McAuliffe, federal affairs manager at Americans for Tax Reform. "If it passes now, if it passes later, we're going to win either way."

Still, the moratorium has lapsed twice before—once for a month in 2001 and for 13 months beginning in 2003. Neither expiration prompted an open season from states rushing to start taxing consumers, but backers of a permanent ban say things might be different this time around. The Internet is far more ubiquitous, for one, and some states might automatically start collecting taxes. In Montana, for example, state law would mandate that Internet access be taxed at 3.75 percent should the ban lapse, according to a report from the House Judiciary Committee.

Opponents of the ban disagree that states are clamoring to start charging.

"They view it as must-pass legislation; it's being characterized that way, but it's not like there is huge support for state and local officials for taxing Internet access," said Michael Mazarov, a policy analyst with the Center on Budget and Policy Priorities, which has called the permanent tax-ban proposal "harmful" legislation.

A report from the group earlier this year calculated that an Internet tax ban costs states up to $7 billion in potential annual revenue, and that the seven states that currently have such taxes would collectively lose an estimated $500 million a year.

What's less clear is whether Congress will opt for a permanent extension of the ban or a temporary one, likely lasting 10 years. Even murkier is the fate of the push by some senators to combine a ban extension with online-sales-tax legislation.

Senate Finance Committee Chairman Ron Wyden has been a vocal opponent of the Marketplace Fairness Act, as well as a critical booster of a bill that would permanently ban access taxes. When the House passed the Permanent Internet Tax Freedom Act this summer, Wyden used it to take a shot at any effort to pair it with an online-sales-tax measure.

"It is so important to reject approaches like the Marketplace Fairness Act that passed the Senate last year, which would fundamentally discriminate against states that do not levy a sales tax and against U.S. companies versus their foreign competitors," the Oregon Democrat said. "It would amount to a body blow to online retailers and services across the country."

House leaders on the issue don't appear willing to budge anytime soon, either. Without directly condemning the online-sales-tax push, House Judiciary Committee Chairman Bob Goodlatte has indicated he wants a clean, permanent ban extension passed this year.

"While I am pleased that there is a plan in place to temporarily extend the moratorium beyond the November 1, 2014, deadline, what we really need is a permanent ban on Internet access taxes," Goodlatte said in a statement to National Journal. "The last thing Americans need is a tax on their Internet access. I am continuing to work toward a permanent ban on these burdensome taxes."

But retailers and other backers of online-sales taxes see a way forward, and readily concede that the looming lame-duck debate offers their "best shot" yet at punching the long-stalled Marketplace Fairness Act—which President Obama has thrown his support behind—through the Senate.

"We're close now. We've never had a bill this close in Congress," said David French, senior vice president of government affairs at the National Retail Federation. "It's reckless for Congress to not patch this hole ... [which] could be done pretty quickly in December."

(Image via OtnaYdur/Shutterstock.com)