U.S. House Votes to Keep Internet Tax-Free
| published July 16, 2014 |

By Thursday Review staff

Despite the fact that many states are struggling with revenue shortfalls from a paradigm shift in the way that Americans communicate and spend their money, the U.S. House—in a move generally applauded by those in favor of maximum freedom on the internet—voted this week to reaffirm a moratorium on state and local taxation of web activities.

The current law, first enacted in 1998, was set to expire on November 1 of this year, and in the run-up to that expiration there was a healthy debate about the consequences of allowing states and cities to impose taxes and fees on internet activity. The original law was designed to prevent taxation of internet usage, though those several states and municipalities which already had web-taxes on the books were allowed to keep them intact—at least from 1998 until now. Based on the language of the new law, beginning next year even those states will have to dismantle those taxes to come into compliance with all other states.

There are seven states which were already taxing online activity as of 1998: Texas, Hawaii, New Mexico, North Dakota, South Dakota, Ohio and Wisconsin. Representatives of some of those states spoke out forcefully against removing them from the grandfather clause, but in the end the majority in Congress agreed that it was unfair to allow only that handful of states to continue to impose a tax on web activity while most other states did not.

One major group opposed to retaining the tax moratorium was the National Governors Association, an organization whose chief executive members now face routine, sometimes critical shortfalls in budget planning and resource distribution. The NGA had lobbied hard to persuade Congress to allow states to tax the web.

“This federal prohibition,” the NGA said in a statement, “on state taxing authority is contrary to federalism and the sovereign authority of states to structure and manage their own fiscal systems.”

Lobbying in the opposite direction: Net Choice—a huge association of online businesses—web-based technology groups, and several consumer groups. In their view, which prevailed among members of the House, any tax on internet activity would limit innovation, restrict the growth of start-ups and new technologies, and hit most Americans with unexpected fees and taxes at a time when the economy’s growth out of recession has been sluggish and slow.

“This legislation prevents a surprise tax hike on American’s critical services,” said Rep. Bob Goodlatte (R-VA), “and it also maintains unfettered access to one of the most unique gateways to knowledge and engine of self-improvement in all of human history.” The bill will proceed to the U.S. Senate, where it is expected to pass without fanfare.

Some top Democrats were opposed to extending the moratorium, expressing concerns not only for the potential lost revenue for states who have never taxed the internet, but also for those seven states whose budget processes have come to expect a steady source of revenue from web activity.

Other House members, both Republicans and Democrats, wanted to at least hedge the bets and ask for another temporary arrangement—perhaps an extension of the moratorium for another five to eight years. But that did not seem to be an option. The House bill that passed this week extends the moratorium indefinitely. Wording in the Senate version may include the phrase “permanent,” a caveat which especially worries a few Democrats.

But the Senate bill, which already has more than 50 sponsors, is expected to pass without major opposition, and President Obama may have the ability to sign the bill later this summer: a rare case these days of nearly everyone in Washington being in general agreement on a critical issue.

President Bill Clinton signed the original legislation in 1998. The objective was to protect the still-developing, still-growing internet—and all of its related technologies—from taxes, fees and restrictions which might inhibit its growth. The bill was also crafted to prevent specially-targeted taxes on activities like email platforms, broadband internet access, bandwidth space, and downloadable software and knowledge-based applications.

The seven states which will be forced to remove their existing taxes are expected to face a difficult time closing the revenue gap. Some analysts say that those states stand to lose as much as half a billion in revenue within the first year.

Major technology and web-based companies like Google, eBay and Amazon had been in favor of extending the moratorium on internet taxes.


Related Thursday Review articles:

Net Neutrality: Is Some Web Access More Neutral Than Others?; Thursday Review; July 11, 2014.

U.S. Dept. of Commerce Cuts ICANN Loose; R. Alan Clanton; Thursday Review; March 31, 2014.