CRS Report on Internet Taxation Bills

                       CRS REPORT FOR CONGRESS

[1] Several bills involving taxation of the Internet were introduced during the first session of the 106th Congress. Two measures expressing Congress's opposition to international taxes were approved. Still pending are three bills that would make permanent the current 3-year moratorium on state and local taxation of the Internet imposed by the Internet Tax Freedom Act in October 1998 (H.R. 3252, S. 328, and S. 1611). Two of those bills (H.R. 3252 and S. 1611) would expand the scope of the moratorium to ban any state and local sales or use taxes on electronic commerce. In contrast, S. 1433 would create a federal retail sales tax applicable to interstate Internet commerce and mail order sales and would return the revenue to the states to supplement state and local funding for teachers' salaries and benefits. This report will be updated to reflect further action on Internet tax bills in the second session of the 106th Congress.

SUMMARY

[2] Several bills involving taxation of the Internet were introduced in 1999. They address state-local, federal, and international taxation of the Internet. Two measures opposing international taxation passed during the first session of the 106th Congress.

[3] The bills were all introduced after the enactment of the Internet Tax Freedom Act on October 21, 1998. That Act placed a 3- year moratorium on the ability of state and local governments to impose new taxes on the Internet. The Act also created the Advisory Commission on Electronic Commerce to study the taxation of electronic commerce and telecommunications. The Commission is required to submit a report to Congress by April 21, 2000. One of the most contentious issues before the Commission is whether state and local "sales and use taxes" should be collected on electronic commerce.

[4] The annual report of the United Nations Development Programme issued in July 1999 suggested a global "bit tax" to help fund the "digital divide" between the Internet "haves and have nots." In response, companion sense-of-Congress resolutions specifically opposing the U.N.'s proposed bit tax were introduced but not voted upon (H.Con.Res. 172 and S.Con.Res.52). However, an amendment to the bill making FY2000 appropriations for the United Nations was approved (S.Amdt. 1317 to S. 1217, included in P.L. 106-113). This provision prohibits the U.N. from using any of the funds appropriated to it to promulgate or enforce measures to tax any aspect of the Internet.

[5] In October and November 1999, the House and Senate approved H.Con.Res. 190, a non-binding sense-of-Congress resolution encouraging the President to seek a permanent international ban on tariffs on electronic commerce and an international ban on bit, multiple, and discriminatory taxation of electronic commerce and the Internet. It urged negotiating these issues with the WTO (World Trade Organization) and OECD (Organization for Economic Cooperation and Development), respectively, both of which had meetings scheduled for the fall of 1999. It also urged the President to oppose any international bit tax proposal.

[6] Still awaiting further congressional action are three bills that would make the current 3-year moratorium on state and local taxation of the Internet permanent: S. 328 (Smith), S. 1611 (McCain), and H.R. 3252 (Kasich). Two of those bills would expand the scope of the moratorium to ban any state and local sales or use taxes on electronic commerce (S. 1611 and H.R. 3252).

[7] In contrast to the other bills which would restrict Internet taxation, S. 1433 (Hollings) would create a 5% federal retail sales tax applicable to Internet and mail order sales of merchandise not otherwise subject to state and local sales and use taxes. The revenue would be placed in a federal trust fund and returned to the states by formula to supplement state and local funding for elementary and secondary school teachers' salaries and benefits. This report will be updated as needed to reflect further action on Internet tax bills in the second session of the 106th Congress.

CONTENTS

INTRODUCTION

[8] This report describes the bills on taxation of the Internet that were introduced in 1999, during the first session of the 106th Congress. As background, the first section of the report provides a brief description of the main provisions of the Internet Tax Freedom Act, enacted October 21, 1998. The second section of the report provides an overview of the bills introduced. This includes a description of the role of the United National Development Programme report issued in July 1999 in provoking legislative activity opposing international taxation of the Internet.

[9] This report does not attempt to discuss the policy arguments for and against these legislative proposals. The report will be updated as needed to reflect further legislative action on Internet tax bills in the second session of the 106th Congress.

BACKGROUND: THE INTERNET TAX FREEDOM ACT

[10] The Internet Tax Freedom Act was enacted on October 21, 1998, as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999. /1/, ² The Act imposed a 3-year moratorium on the ability of state or local governments to impose new taxes on "Internet access services" or to impose "multiple or discriminatory taxes on electronic commerce." The moratorium is scheduled to expire October 21, 2001. The Act expressed Congress's opposition to imposing new federal taxes on the Internet and to international taxes, tariffs, and regulation of the Internet and telecommunications.

[11] The Act also created the Advisory Commission on Electronic Commerce to study a variety of issues related to the taxation of electronic commerce and telecommunications. The Commission is to submit a report to Congress by April 21, 2000. One of the most contentious issues before the Commission is whether state and local sales and use taxes should be collected on electronic commerce.

[12] Under the Act's definition of discriminatory taxes, sales transacted through electronic commerce are to be treated the same way as catalog or mail order sales. Under current law, for INTERSTATE SALES that means a seller in another state cannot be required to collect the tax and remit it to the buyer's home state -- and possibly local -- government. The legal obligation to pay the sales and use tax to one's home state remains with the consumer. (In practice, however, few individuals remit use taxes on their own.)

BILLS IN THE 106th CONGRESS

[13] This section offers an overview of the bills introduced in the first session of the 106th Congress regarding taxation of the Internet. It is organized into three sections, according to whether the bills primarily address issues of state and local, federal, or international taxation of the Internet. Each section begins with a summary discussion of all the bills in the group, followed by a separate listing for each piece of legislation. Companion bills are cross-referenced.

STATE AND LOCAL TAXES

[14] Three bills would make PERMANENT the current 3-year federal MORATORIUM on state and local taxes on the Internet enacted in 1998: S. 328 (Smith), S. 1611 (McCain), and H.R. 3252 (Kasich). Two of these bills, S. 1611 and H.R. 3252, would also expand the scope of the moratorium to BAN ANY SALES AND USE TAXES ON ELECTRONIC COMMERCE. This would ban existing state authority to have sales taxes collected by vendors on within-state sales and use taxes paid on interstate sales to businesses. H.R. 3252 would also REMOVE THE GRANDFATHERING PROTECTION provided in the Internet Tax Freedom Act FOR TAXES ON INTERNET ACCESS that were in place prior to October 1, 1998.

[15] H.R. 3252 and S. 1611 also include a sense of Congress (Senate) provision opposing national or local taxes, tariffs, or regulation of electronic commerce and the Internet on a WORLDWIDE basis.

[16] No congressional action has yet been taken on any of these bills addressing state and local taxation of the Internet.

Legislation

[17] H.R. 3252 (Kasich). Introduced Nov. 8, 1999. Referred to the Committee on the Judiciary and the Committee on Ways and Means. Internet Tax Elimination Act. Would expand the scope of the moratorium and make it permanent.

[18] Like S. 1611, H.R. 3252 would broaden the scope of the moratorium to explicitly ban "any sales or use tax on domestic or foreign goods or services acquired through electronic commerce." H.R. 3252 would remove the grandfathering protection provided under the Internet Tax Freedom Act for state and local taxes on Internet access that were imposed and enforced prior to October 1, 1998.

[19] H.R. 3252 contains a sense-of-Congress section which includes the detailed international tax recommendations made in H.Con.Res. 190, as well as the broader statement found in S. 1611 (McCain). ³ H.R. 3252 makes specific separate reference to electronic commerce, the Internet, and electronic transmissions. It expresses opposition to "bit" taxes in addition to the multiple and discriminatory taxation and tariffs enumerated in the original Internet Tax Freedom Act.

[20] S. 328 (Smith). Introduced January 28, 1999. Referred to the Committee on Commerce, Science, and Transportation. Would make the moratorium permanent. Makes no other changes to the Internet Tax Freedom Act.

[21] S. 1611 (McCain). Introduced September 22, 1999. Referred to the Committee on Commerce, Science, and Transportation. Would broaden the scope of the Internet Tax Freedom Act (to ban sales and use taxes on electronic commerce) and would make the moratorium permanent. It would encourage establishment of the Internet as a worldwide tax-free zone.

[22] Unlike H.R. 3252, S. 1611 would continue to grandfather taxes on Internet access that existed before October 1, 1998. Like H.R. 3252, S. 1611 would broaden the scope of the moratorium to explicitly ban ". . . sales or use taxes for domestic or foreign goods or services acquired through electronic commerce." S. 1611 includes a brief sense of the Senate resolution encouraging U.S. trade representatives to multilateral organizations to advocate that the Internet not be burdened by national or local regulation, taxation, or tariffs.

FEDERAL TAXES

[23] In contrast to the other bills listed which would restrict taxation of the Internet in some way, S. 1433 (Hollings), the Sales Tax Safety Net and Teacher Funding Act. S. 1433 would impose a NEW 5% FEDERAL RETAIL SALES TAX on the interstate sales of goods arranged over the Internet or by mail order, for which state and local taxes are not otherwise collected. The revenues collected would be placed in a federal trust fund and then distributed back to the states, on a formula basis, to help supplement teacher salaries.

[24] No congressional action has yet been taken in the 106th Congress on bills addressing federal taxation of the Internet.

Legislation

[25] S. 1433 (Hollings). Introduced July 26, 1999. Referred to the Committee on Finance. Sales Tax Safety Net and Teacher Funding Act. Would impose a 5% federal retail excise tax on merchandise sold over the Internet, through catalogs, or other than through local merchants. Would earmark the revenues to supplement [state and local] funding for salaries and benefits for elementary and secondary school teachers. The tax revenues would be deposited in a newly created federal trust fund and distributed to the states by formula.

[26] The proposed federal tax is intended to apply to sales transactions that escape the sales taxes otherwise collected by local merchants. This is likely to include all interstate transactions and possibly also intrastate transactions conducted by Internet or mail order. The tax would be collected by sellers. A credit would be allowed against the federal tax for state and local sales taxes actually paid by the buyer, so that the buyer would not be double- taxed. Taxpayers traditionally exempt from the state sales tax (like non-profit organizations) would continue to receive an exemption under the federal tax. The tax would be levied on merchandise, that is, tangible goods and not services or digitized information.

FOREIGN TAXES AND TARIFFS

[27] During the first session of the 106th Congress, Congress pass two measures opposing international taxation of the Internet.

[28] Congressional opposition to the U.N. proposal for a global bit tax. ⁴ The United Nations Development Programme's (UNDP) annual report was issued in July 1999. ⁵ It suggested a global "bit tax" as one possible way to raise funds to help bridge the "digital divide" between the world's economic "haves and have-nots," both within and between nations, by working to ensure that the Internet communications revolution is truly global. ⁶

[29] The report described the "bit tax" as "a very small tax on the amount of data transmitted over the Internet." ⁷ The UNDP proposal has been described in popular parlance as a tax levied at a rate of one cent per 100 emails. ⁸ The report estimated that globally, such a tax would have raised about $70 billion per year on a 1996 basis.

[30] In reaction, concurrent resolutions were introduced in both Houses of Congress in early August 1999 urging the Administration to aggressively oppose the global "bit tax" proposed in the U.N. Development Programme's report (H.Con.Res. 172, S.Con.Res. 52). ⁹ In his remarks to the Congress when introducing S.Con.Res. 52, Senator Ashcroft characterized a tax imposed by the U.N. (or any other international organization) as a violation of American sovereignty. ¹⁰ in response to this expression of opposition from Congress, the U.N. reportedly backed off on pursuing the proposal for the time being. ¹¹

[31] No votes were taken on those concurrent resolutions. However, a provision was included in the FY2000 appropriation for the Department of State stating that "None of the funds appropriated or otherwise made available in this Act for the United Nations may be used by the United Nations for the promulgation or enforcement of any treaty, resolution, or regulation authorizing the United Nations, or any of its specialized agencies or affiliated organizations, to tax any aspect of the Internet." (P.L. 106-113, Title IV, Sec. 406; originally S.Amdt. 1317 to S. 1217.)

[32] In addition, the U.N. bit tax proposal was opposed in H.Con.Res. 190, discussed below, as a threat to the U.S. policy position against special, multiple, and discriminatory taxation of the Internet. Opposition to the U.N. bit tax proposal is also mentioned among the international provisions included in H.R. 3252 (Kasich).

[33] Congressional opposition to foreign taxes and tariffs. In anticipation of multilateral trade talks scheduled for the World Trade Organization (WTO) in Seattle in November 1999 and the Organization for Economic Cooperation and Development (OECD) in Israel in October 1999, H.Con.Res. 190, a non-binding sense-of- Congress resolution, was introduced and approved in both Houses of Congress during the first session of the 106th Congress. ¹² The resolution specifically urged the President to ask the U.S. delegate to the WTO ministerial meeting to seek to make permanent and binding the one-year moratorium on tariffs on electronic transmissions that had been adopted by the WTO in May 1998. The resolution also urged the President to have the OECD adopt, and its 29 member countries implement, an international ban on bit, multiple, and discriminatory taxation of electronic commerce and the Internet. ¹³

[34] More generally, H.Con.Res. 190 encouraged the President to seek a global consensus supporting a permanent international ban on tariffs on electronic commerce and an international ban on bit, multiple, and discriminatory taxation of electronic commerce and the Internet. It also urged opposition to the U.N. bit tax proposal.

[35] H.Con.Res. 190 restates the international policy position expressed in the Internet Tax Freedom Act. ¹⁴ The sponsors viewed this resolution as the international extension of the policy that the Internet Tax Freedom Act imposed on state and local governments in the United States. ¹⁵

[36] H.R. 3252(Kasich) contains a sense-of-Congress section which includes the specific international tax recommendations made in H.Con.Res. 190 as well as the broader statement found in S. 1611(McCain) of the U.S. policy position that electronic commerce conducted via the Internet should not be burdened by national or local regulation, taxation, or tariffs.

Legislation

Congressional opposition to the U. N. proposal for a global bit tax

[37] H.Con.Res. 172 (Sessions). Companion to S.Con.Res. 52. Introduced August 4, 1999. Referred to the House Committee on International Relations. A concurrent resolution expressing the sense of Congress in opposition to a "bit tax" on data transmitted over the Internet proposed in the Human Development Report 1999 published by the United Nations Development Programme.

[38] S.Con.Res. 52 (Ashcroft). Companion to H.Con.Res. 172. Introduced August 5, 1999. Referred to the Committee on Foreign Relations. A concurrent resolution expressing the sense of Congress in opposition to a "bit tax" on data transmitted over the Internet proposed in the Human Development Report 1999 published by the United Nations Development Programme.

[39] S.AMDT.1317 to S.1217 (Gregg). Approved by the Senate, July 22, 1999. Included in the Consolidated Appropriations Act, 2000 (P.L. 106-113). ¹⁶ To provide that none of the funds appropriated or otherwise made available in this [appropriations] Act may be used by the United Nations for the promulgation or enforcement of any treaty, resolution, or regulation authorizing the United Nations, or any of its specialized agencies or affiliated organizations, to tax any aspect of the Internet.

Congressional opposition to foreign taxes and tariffs on the Internet

[40] H. Con. Res. 190 (Cox). Companion to S.Con.Res. 58 (Wyden). Introduced September 30, 1999. Referred to the Committee on Ways and Means. Passed House October 26, 1999, 423 to 1; passed Senate November 19, 1999, by unanimous consent. Urges the United States to seek a global consensus supporting a moratorium on tariffs and on special, multiple, and discriminatory taxation of electronic commerce.

[41] S. Con. Res. 58 (Wyden). Companion to H. Con. Res. 190, which passed (see above). Introduced September 30, 1999. Referred to the Committee on Finance. A concurrent resolution urging the United States to seek a global consensus supporting a moratorium on tariffs and on special, multiple, and discriminatory taxation of electronic commerce.

FOR ADDITIONAL INFORMATION

Advisory Commission on Electronic Commerce. Internet Home Page. [http://www.ecommercecommission.org]

Representative Christopher Cox's Office. Internet Tax Freedom Act Home Page. [http://www.house.gov.cox/nettax]

² For an account of the legislative evolution of the ITFA, see CRS Report 98-509 E, Internet Tax Bills in the 105th Congress, by Nonna A. Noto, final version, December 31, 1998.

³ Specifically, H.R. 3252, like H.Con.Res. 190, would have the President:

     1) seek a global consensus supporting a permanent international

⁴ For a fuller explanation, see CRS Report RS20288, United Nations and Global Taxation: An Update of Proposals in 1999, by Marjorie Ann Browne.

⁵ Human Development Report 1999. Published for the United Nations Development Programm by Oxford University Press, New York, 1999. p. 66. Available on the Internet at [http://www.undp.org/hdro].

⁶ For a brief summary of the report, see: "Reducing the Gap between the Knows and the Know-nots." Press release on Human Development Report 1999. United Nations Development Programme, New York, July 12, 1999. [http://www.undp.org/hdro/E3.html].

⁷ A "bit" tax refers to a tax on "binary digits." The Internet Tax Freedom Act (Sec. 1104(l)) defined a bit tax as ". . . any tax on electronic commerce expressly imposed on or measured by the volume of digital information transmitted electronically, or the volume of digital information per unit of time transmitted electronically, but does not include taxes imposed on the provision of telecommunications services."

⁸ Specifically, the report estimated that a user ". . . sending 100 emails [electronic messages] a day, each containing a 10- kilobyte document (a very long one) would raise a tax of just one [US] cent." Human Development Report 1999, p. 66.

⁹ The Human Development Report is written and published for the UNDP in conjunction with a group of outside experts. Immediately following the foreword to the report is a disclaimer stating that "The analysis and policy recommendations of the Report do not necessarily reflect the views of the United Nations Development Programme, its Executive Board or its Member States." The U.N. has no authority to levy taxes. Taxes would have to be approved by member nations.

¹⁰ Mr. Ashcroft. S.Con.Res. 52. Congressional Record (Daily ed.), Vol. 145, No. 114-Part II, August 5, 1999. p. S10497.

¹¹ "United Nations Proposes 'Bit Tax.'" Office of Representative Christopher Cox, The Internet Tax Freedom Act Homepage, [http://www.house.gov/cx/nettax/frmain.htm], update of August 9, 1999.

¹² H.Con.Res. 190(Cox) was approved by both Houses. S.Con.Res. 58(Wyden) was the companion bill introduced in the Senate.

¹³ See the first part of footnote 3 for the items contained in the resolution.

¹⁴ The Internet Tax Freedom Act (P.L. 105-277) stated: "Sec. 1203. Declaration that the Internet should be free of foreign tariffs, trade barriers, and other restrictions. (a) In General. -- It is the sense of Congress that the President should seek bilateral, regional, and multilateral agreements to remove barriers to global electronic commerce through the World Trade Organization, the Organization for Economic Cooperation and Development, the Trans- Atlantic Economic Partnership, the Asia Pacific Economic Cooperation forum, the Free Trade Area of the America [sic], the North American Free Trade Agreement, and other appropriate venues.

     (B) Negotiating Objectives. -- The negotiating objectives of the

¹⁶ S. 1217 was the original Senate FY2000 appropriations bill for the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies. The text of S.Amdt. 1317 was included in the Consolidated Appropriations Act, 2000 (H.R. 3194, P.L. 106-113), Division B, Section 1000(a)(1), under the cross-reference to H.R. 3421, Appropriations for the Departments of Commerce, Justice, State, the Judiciary, and Related Agencies for the fiscal year ending September 30, 2000. Title IV (General Provisions, Department of State and Related Agency), Section 406.

U.S. Congress. House of Representatives. Conference Report on the Consolidated Appropriations Act for FY2000. 106th Cong., 1st Sess., H.Rpt. 106-479, Nov. 17, 1999. Reprinted in: Congressional Record (Daily ed.), Vol. 145, No. 163 -- Part II, November 17, 1999. Text of bill, p. H12273. Explanatory statement, p. H12307.