Internet Tax Bites the Dust in the House - September 22, 2003 Vol. 4 No. 19

September 22, 2003 Vol. 4 No. 19:

Published: 09/22/2003

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Internet Tax Bites the Dust in the House

The moratorium on state taxation of Internet services is likely to be extended.

Last week, the House voted to continue a prohibition on taxing Internet services. On September 18, by voice vote, the House extended the current moratorium, scheduled to expire on November 1, on taxation of Internet services like e-mail, access, bandwidth, or digital transmissions by cities, states or counties.

In addition to extending the tax ban, the House bill also removed a "grandfather clause" included in past versions of the legislation that allowed ten states that had already enacted Internet taxes before 1998 to collect them. The 10 states are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin.

Under the House legislation, states are also prohibited from taxing Internet DSL services when it is bundled with regular telephone service. Several states have passed or are poised to pass taxes on those "bundled" services, since traditional voice telecommunications services have long been a source of tax revenue for states and localities.

States have been looking to Internet taxation for ways to generate revenue, especially in light of major budget cuts they are facing. The communications industry remains concerned that taxing Internet services could greatly harm the industry. A similar debate rages over whether a sales tax should apply to items sold through the Internet.