House Passes Internet Tax Freedom Act

(June 24, 1998)  The House of Representatives passed a compromise version of the Internet Tax Freedom Act (ITFA) without opposition late Tuesday.  The Senate has yet to pass any version of the bill, which would impose a three year moratorium on new multiple or discriminatory taxes on the Internet.  President Clinton has endorsed it.   (See, HTML Copy of HR 4105, the version of ITFA  passed by the House.)

	Rep. Cox

Rep. Christopher Cox (R-CA) is the lead sponsor of the original ITFA in the House (HR 1054 IH), as well as the bill which just passed the House (HR 4105).  The bill has gone through many versions as Rep. Cox and others negotiated compromise language to overcome various objections.  However, the bill is still opposed by many state and local government officials who fear that it will deprive them of a source of future tax revenue.

Earlier versions of the bill passed the House Commerce Committee by a vote of 41-0 (HR 3849), and the House Judiciary Committee by a voice vote, without objection (HR 3529 sub).  The bill passed by the Housed merges the provisions of these two versions.

Rep. Cox's Press Secretary, Paul Wilkinson, stated after the vote that "We expect Senate approval in the coming weeks."

For a period of three years, the ITFA guarantees:

• Tax-Free Internet Access. Prohibits state and local governments from imposing taxes on Internet access charges-the monthly fee millions of Americans pay to our nation's 4,000 Internet service providers (including services like Erol's and America Online).
• No multiple or discriminatory taxes on the Internet.  Protects against new Internet tax liability for consumers and vendors alike-whether on phone bills, Internet services, or business transactions. Preserves sales tax-free treatment of remote purchases to full extent this exists today.
• Global Free Trade on the Internet. Authorizes the United States to work in international bodies for the establishment of the Internet as a global free trade zone.
• Study and Report to Congress.  Creates a commission to study U.S. taxation of Internet commerce, and to make recommendations to Congress.

The ITFA is endorsed by numerous state and local officials, including Governors Pete Wilson (CA), George Bush (TX), George Pataki (NY), Paul Cellucci (MA), and Jim Gilmore (VA). Gov. Gilmore, one of the bill's earliest supporters, said today: "I applaud the forwarding-thinking leadership that Rep. Cox and Sen. Wyden have provided on the Internet taxation issue. I am pleased that a strong nation-wide consensus has been developed on a pro-growth, pro-consumer, and pro-taxpayer Internet tax policy."

"The U.S. Commerce Department recently told us that the number of Internet users and the number of web pages are doubling every 100 days.  Protecting Internet users from discriminatory and multiple taxation on a national and international basis will insure the continued vitality and growth of this dynamic new medium," Rep. Cox said.

"Read my e-mail," Rep. Cox said.  "No new Net taxes!"

The bill passed without opposition.  Sixteen Members of Congress spoke in favor of the bill during floor debate.  None spoke against.  Those who spoke on the House floor were: Tom Bliley (R-VA), Steve Chabot (R-OH), John Conyers (D-MI), Chris Cox (R-CA), Tom Davis (D-VA), William Delahunt (D-MA), Lloyd Doggett (D-TX), Anna Eshoo (D-CA), George Gekas (R-PA), Zoe Lofgren (D-CA), Sheila Lee (D-TX), Edward Markey (D-MA), Jerrold Nadler (D-NY), Billy Tauzin (R-LA), and Bill Thomas (D-CA).

Excerpts from the floor debate are reprinted below.

Excerpts from Floor Statements on ITFA

Rick White.  Mr. Speaker, we have a short window of opportunity on almost all the issues associated with the Internet to do the right thing. The Internet is so new. It is not yet subject to all the special interests who want to twist our policy one way or another. And so we have a short period of time to establish some good, clear, fundamental principles that will help us guide the development of the Internet for a long period of time. We have got a short period because it is not too long, even in the case of the Internet, until the special interests take over.

I would have to say, Mr. Speaker, that in this particular case, we almost missed that window, because if we let this process go on too much longer, our bill would be watered down more, there will be more exceptions, and the next thing we know, the 30,000 local taxing jurisdictions around this country will be able to do whatever they want to with the Internet. We want them to get tax revenue from the Internet but we want them to do it in the right way. That is why it is high time for us to pass this legislation.

Mr. Speaker, this is a good bill. We should pass it. But it is not a perfect bill. I certainly have some reservations about parts of it. We started off with a 6 or 7-year moratorium. We have shortened that substantially. We now have a commission that in addition to looking at just Internet specific issues is going to be looking at all the remote commerce issues. I frankly think that is a little bit of a troubling concept. But by and large it is high time for us to get this done. If we do not take advantage of this window, the window will close and we will never be able to do anything. I urge my colleagues to support this bill.

Tom Bliley.  Mr. Speaker, I rise in support of H.R. 4105, the Internet Tax Freedom Act. The Committee on Commerce is engaged in an extensive review of all electronic commerce issues. We have been gathering information from Federal and State agencies, holding hearings and moving legislative proposals that stimulate the development of an electronic market place for the next century. Consideration of H.R. 4105 today is consistent with our overall electronic commerce agenda, and the legislation will set an invaluable precedent on how Internet-related activities should be addressed in the future.

At a recent hearing we were told that electronic commerce is predicted to grow at an incredible pace in the near future, doubling every year. Estimates of the total value of economic activity conducted electronically for the year 2002 ranged from $200 billion to more than $500 billion. Compare these figures with a mere $2.6 billion of economic activity in 1996. Clearly this level of economic activity will have significant impact on job growth in the United States.

As the Committee on Commerce explores ways to promote electronic commerce, we must also identify potential burdens. H.R. 4105 addresses two of them, unnecessary regulations and excessive taxation.

As a result of the Federal Government largely staying out of the way, we are seeing the development and growth of new markets for Internet access and on-line services. These markets are fully competitive today, and consumers have more choice than ever in selecting access providers and in selecting providers of general or proprietary information. The last thing we need right now is for Federal and State governments to interfere with the development of these markets. H.R. 4105 makes a preemptive strike against such government interference with the Internet.

The other potentially burdensome situation for electronic commerce is State and local taxation. Many States have found ways to tax Internet-related activities, and they do so in an inconsistent manner. For example, some States tax Internet access as computer and data processing services. Other States tax it as either a telecommunications service or information service.

These classification differences are only part of the problem. Given the way data is transmitted over the Internet, some States have challenged fundamental constitutional doctrines in order to assert substantial nexus over out-of-state vendors. Because of these problems, many executives have argued that the taxation of Internet-related activities is the single most significant impediment to the development of electronic commerce in the United States.

H.R. 4105 presents a balanced approach between regulation and taxation of Internet access, on-line services and electronic commerce. It prohibits the FCC and States from regulating the prices of Internet access and on-line services. It also calls for a time out on taxing the Internet and asks for a group of experts to be assembled to study long-term solutions on Internet taxation issues.

I would like to thank the chairman, the gentleman from Illinois (Mr. Hyde), for his leadership on this matter and for sustaining the bill's momentum. I would also like to thank the gentleman from Louisiana (Mr. Tauzin) and the gentleman from California (Mr. Cox) and the gentleman from Washington (Mr. White) for their dedication, and I look forward to working with the other Members as we continue to move the bill through the legislative process.

Chabot. There are still some issues of contention that remain. For example, I am not completely comfortable with the grandfather clause. I am concerned because if this provision remains, it will reward a handful of State tax administrators who rushed to tax the Internet access, placing the cost of Internet access out of reach of many American families.

We took a step in the right direction in the Committee on the Judiciary by stripping out the grandfather exception for cities, but more work needs to be done. I hope that our colleagues in the other body act to further restrict the ability of States to re-enact these taxes. Mr. Speaker, hard-working Ohioans currently pay roughly $30 million in taxes annually for the privilege of signing on to the Internet, and I would like to see those taxes cut, not codified.

Edward Markey.  During the Committee on Commerce consideration of this legislation I expressed support for a moratorium on new Internet-specific taxes, but at the time I believed that the bill needed to be clearer in its scope and its definitions to ensure that no unintended harm was done in the process to any Federal or State regulatory authority to fully implement the provisions of the Telecommunications Act of 1996. All the regulatory fees, tax provisions and, in particular, the universal service provisions of the Telecommunications Act that were painstakingly deliberated upon and subsequently enacted are fully protected by this savings clause contained in the pending bill before us today.

In addition we have attempted to ensure that this tax bill does not do unintended harm to telecommunications policy. I think that this goal is also achieved in the current version of the bill.

This legislation before us this afternoon has been extensively changed since it was introduced and since our initial markup in the Subcommittee on Telecommunications, Trade, and Consumer Protection. The new legislation correctly limits the tax moratorium to Internet access, and the language in the bill more carefully defines such terms so that it is clear for the purposes of this legislation that it does not encompass other activities or services such as telecommunications or telecommunication services.

Moreover, the legislation merely limits FCC and State authority to regulate prices charged directly to subscribers for Internet access or on-line services, but preserves FCC and State authority over any telecommunications carrier which bundles Internet access or on-line services in combination with telephone service.

The legislation offered this evening also fully protects universal service support mechanisms by adding the savings clause that nothing in this legislation shall limit or otherwise affect the implementation of the Telecommunications Act. The legislation makes clear that Section 254 of the Telecommunications Act, which was added by the act of 1996, is fully protected. The Telecommunications Act for the first time specifically codified the principle of universal service and delineated Federal and State responsibilities, rights and obligations for universal service support.

On the tax front the legislation now has a 3-year moratorium on taxes and Internet access.

I think we now begin the dialogue with States and municipalities and governors as this process moves forward. I want to congratulate everyone here as we move this hurry-up offense right before the Fourth of July break, but I think we have tremendous potential if the Senate acts.

Anna Eshoo.  States and localities have targeted the Internet as a new resource for funds, given the tremendous growth in electronic commerce over the past few years, but it is time for the activity really to come to a stop, at least until we all have a better understanding of the ramifications that taxation will have on the future of the global information infrastructure.

Chris Cox.  This is now a consensus bill. It is a balanced approach between our national interest in preventing parochial taxation of the Internet and Federal regulation of the Internet, and the concern of State and local governments who want to make sure that they retain their prerogatives.

As we enter the Information Age, the digital age, we are establishing in law a very important principle; that information should be made available as freely and widely as possible throughout the world; it should not be taxed and it should not be regulated. This bill addresses itself to both problems.

It says not only that we will not have new special discriminatory and multiple taxes on the Internet, but also that the FCC, now the Federal Communications Commission, shall not become the `Federal Computer Commission.' We will not give the FCC, and we expressly state this in the legislation, the power to regulate the Internet.

Some long time ago, Michael Faraday, the very, very famous inventor, a century-and-a-half ago, had become sufficiently well-known in his own day that he won an audience with the king, King William IV. He had invented the dynamo, the first electric motor, by rotating a current-bearing wire around a magnet, and the king wanted to see him. The king was fascinated with his invention, the dynamo, but he addressed himself to Michael Faraday and said, `But, after all, of what use is it?' Faraday replied, `Sir, I do not know, but of this I am certain: One day you will tax it.'

We are a long way further down the road in the revolution wrought by that wonderful revolution of electricity that Faraday helped to perfect, but, without question, the 30,000 State and local tax jurisdictions that could tax the Internet are just as anxious to, so as was the tax collector back in the days of King William IV. We are preventing that today. We might just say tonight, `Read our e-mail; no new taxes.'

Mr. Speaker, may I just say that there is one other person that deserves thanks, who is an alumnus of this body. He is now a Senator, Ron Wyden. This is my legislation in the House, but he and I teamed up together to do this, and it is as much his idea as it is my own. I am anxious that the other body move this bill after we give it strong bipartisan if not overwhelming support here tonight and tomorrow, and I think he should be recognized for his efforts as well; an alumnus not only of the House, but of our Committee on Commerce.