CRS Reports on Internet Tax Bills in the 107th Congress

                       CRS REPORT FOR CONGRESS

[2] The major differences among the bills with regard to extending the current moratorium are:

     o whether to extend both parts of the current moratorium

     o if, and under what conditions, Congress would authorize the

[5] For further discussion of the underlying issues, see CRS Report RL30667, Internet Tax Legislation: Distinguishing Issues, by Nonna A. Noto.

CONTENTS

OVERVIEW

[6] The Internet Tax Freedom Act, enacted in 1998, placed a 3-year moratorium on the ability of state and local governments to 1) impose new taxes on Internet access or 2) impose any multiple or discriminatory taxes on electronic commerce. The Act grandfathered the state and local taxes on Internet access that were in place in 10 states as of October 1, 1998. The Internet tax moratorium is scheduled to expire on October 21, 2001. Several bills have been introduced in the 107th Congress to extend the moratorium. Some bills address other issues related to state and local taxation of the Internet and interstate commerce.

[7] The major differences among the bills with regard to extending the current moratorium are:

     o whether to extend both parts of the current moratorium

     o if, and under what conditions, Congress would authorize the

[9] Table 1 presents a side-by-side comparison of the bills introduced in the House and Table 2, the Senate. (Following the tables, the last section of this report presents a brief description of each bill.) In both tables, Column 1 lists the bill number, sponsor's name, and any congressional action.

[10] Column 2 indicates the bill's position on the extension of the current federal moratorium, which has two components. The first prohibits state or local governments from imposing new taxes on "Internet access." The second prohibits them from imposing any "multiple or discriminatory taxes on electronic commerce." Some bills would extend both parts of the moratorium temporarily, by 8 months (S. 1504), or by 2 years (H.R. 1552 and S. 1481), 4 years (H.R. 1410/512) or 5 years (S. 246 and S. 1525). One bill would extend the moratorium on multiple and discriminatory taxes temporarily, by 5 years, but would make the moratorium on Internet access taxes permanent (S. 288). Still others would make both parts of the moratorium permanent (H.R. 1675/S. 777, H.R. 2526 and S. 589).

[11] Column 3 indicates whether the bill would extend the grandfathering provision in current law which exempts from the ban those state and local taxes on Internet access that were in place (in 10 states) as of October 1, 1998 (existing Internet access taxes). Removing the grandfathering protection would ban all state and local taxes on Internet access. With one exception, the bills that propose a permanent ban on Internet access taxes would eliminate the grandfathering protection for existing taxes (H.R. 1675/S. 777, H.R. 2526, and S. 288). The exception is S. 589 which would implicitly extend the grandfathering by simply extending the current moratorium permanently. In contrast, all of the bills to temporarily extend both parts of the current moratorium would implicitly extend the grandfathering provisions (H.R. 1410/S. 512, H.R. 1552, S. 246, S. 1481, S. 1504, and S. 1525).

[12] Column 4 describes other Internet and interstate tax issues addressed by the bills. Three bills address granting states authority to require sellers to collect sales and use taxes on interstate sales: S. 288 (Wyden) and H.R. 1410 (Istook)/S. 512 (Dorgan). Under S. 288, Congress would have to approve the simplified sales tax system before granting states collection authority (a "positive trigger"). In contrast, under H.R. 1410/S. 512, authority to require remote sellers to collect use taxes would automatically be granted to states that signed an interstate compact on simplified taxes, unless Congress disapproved (a "negative trigger"). As a condition of simplification, S. 288 would require one sales and use tax rate per state, on in-state as well as interstate sales. In contrast, H.R. 1410/S. 512 would permit local-option tax rates.

[13] Two bills contain a sense of Congress provision encouraging state governments and interested business organizations to expedite efforts pursuing a simplified tax system that would not impose an undue burden on interstate commerce. S. 1481 (Wyden) refers to developing ". . . a streamlined simplified plan for protecting State revenues affected by Internet use. . . . S. 1504 (Dorgan) refers more specifically to developing ". . . a streamlined sales and use tax system that, once approved by Congress, would allow sellers to collect and remit sales and use taxes. . . . .

[14] H.R. 2421 (Stearns) would prohibit state or local taxation of commercial transactions conducted entirely in digital form through the Internet. Two bills would codify "substantial physical presence" as the new standard for determining interstate nexus: H.R. 2526 (Goodlatte and Boucher) and S. 664 (Gregg and Kohl). S. 664 lists eight, and H.R. 2526 lists ten, business activities that would not constitute nexus. S. 664 would apply the new nexus standard to imposing both state business activity taxes and the duty to collect and remit sales or use taxes on interstate commerce. In contrast, S. 664 would apply it to business activity taxes only. S. 288 (Wyden) includes business activity tax nexus standards among the criteria for a simplified tax system listed in a sense of Congress provision.

[15] In summary, six bills deal solely with the extension of the federal moratorium on state and local taxes: H.R. 1552 (Cox), identical bills H.R. 1675 (Cox)/S. 777 (Allen), S. 246 (Smith, B.), S. 589 (Smith, B.), and S. 1525 (Allen).

[16] Three bills would both extend the moratorium and address the issue of providing states with collection authority for sales and use taxes on interstate sales: S. 288 (Wyden) and H.R. 1410 (Istook)/S. 512 (Dorgan). Two bills would extend the moratorium and include a sense of Congress provision encouraging states and interested business organizations to pursue tax simplification: S. 1481 (Wyden) and S. 1504 (Dorgan).

[17] One bill, H.R. 2526 (Goodlatte and Boucher), would both make the moratorium permanent and codify new nexus standards for state and local business activity taxes.

[18] Two bills do not address the extension of the moratorium: H.R. 2421 (Steams) and S. 664 (Gregg and Kohl).

        TABLE 1. COMPARISON OF INTERNET TAX BILLS IN THE HOUSE

HOUSE OF REPRESENTATIVES

[19] H.R. 1410 (ISTOOK). Internet Tax Moratorium and Equity Act. Identical to S. 512 (Dorgan). Would extend the current moratorium by 4 years and some months, until December 31, 2005. Enumerates the conditions under which Congress would automatically grant a state the authority to require out-of-state sellers (without nexus) to collect the use tax from the customer and remit it to the state, unless the Congress took action within 120 days to disapprove the Interstate Sales and Use Tax Compact, which is to be drafted and adopted by the states. Would preserve the option to have sellers collect actual local use tax rates, rather than requiring a statewide average tax rate. Introduced April 4, 2001. Referred to the Committee on the Judiciary.

[20] H.R. 1552 (COX). Internet Tax Nondiscrimination Act. As amended in the full committee, H.R. 1552 would extend the current moratorium by 2 years, until November 1, 2003. (As originally introduced and reported by the subcommittee, H.R. 1552 would have made the moratorium on Internet access taxes permanent and removed the grandfathering protection for existing Internet access taxes. Would have extended the current moratorium on multiple or discriminatory taxes on electronic commerce by 5 years and some months, until December 3l, 2006.) Introduced April 24, 2001. Referred to the Committee on the Judiciary. Reported by the Subcommittee on Commercial and Administrative Law on August 2, 2001. Amended and reported by the Committee on the Judiciary on October 10, 2001.

[21] H.R. 1675 (COX). Internet Tax Nondiscrimination Act. Identical to S. 777 (Allen). Would make the moratorium permanent on both Internet access taxes and multiple or discriminatory taxes on electronic commerce. Would remove the grandfathering protection for existing Internet access taxes. Introduced May 2, 2001. Referred to the Committee on the Judiciary.

[22] H.R. 2421 (STEARNS). Jurisdictional Certainty Over Digital Commerce Act. Would reserve to the federal government the authority to regulate digital commercial transactions and prohibit any state or local government regulation. In effect, this would prohibit state or local taxation of commercial transactions conducted entirely in digital form through the Internet. Digital commerce is defined to include both digital goods and digital services, and to exclude telecommunications services and the business of insurance. Introduced June 28, 2001. Referred to the Committee on Energy and Commerce and the Committee on the Judiciary.

[23] H.R. 2526 (GOODLATTE AND BOUCHER). Internet Tax Fairness Act of 2001. Would make permanent the current moratorium on both Internet access taxes and multiple and discriminatory taxes on electronic commerce. Would remove the grandfathering protection for existing Internet access taxes. In addition, H.R. 2526 would set jurisdictional standards for the imposition of state and local business activity taxes on interstate commerce. The bill enumerates 10 business activities that would not establish "substantial physical presence" (a new term) for determining nexus, including two not listed in S. 664 (Gregg and Kohl). A few of these business practices involve use of the Internet, but most involve other more traditional types of business relationships. Under H.R. 2526 the new nexus standards would apply only to business activity taxes, unlike S. 664 which would apply the new nexus standards to sales and uses taxes as well as business activity taxes. Introduced July 17, 2001. Referred to the Committee on the Judiciary.

SENATE

[24] S. 246 (SMITH, B.). Would extend the current moratorium by 5 years, until October 21, 2006. Introduced February 6, 2001. Referred to the Committee on Commerce Science, and Transportation.

[25] S. 288 (WYDEN). Internet Tax Nondiscrimination Act. Would make permanent the moratorium on Internet access taxes and remove the grandfathering protection for existing Internet access taxes. Would extend the current moratorium against multiple and discriminatory taxes on electronic commerce by 5 years and some months, until December 31, 2006. Would encourage states to simplify their sales and use taxes. Would provide fast-track authority for Congress to consider passing a joint resolution permitting states to require vendors to collect use taxes, if the states met tax-simplification criteria enumerated in the bill (called a "positive trigger"). Calls for one tax rate per state, for all sales, both within-state and interstate (no local-option taxes permitted). Calls for clear standards limiting business activity tax nexus to sellers that have "continuous and systematic contacts" with the state. Introduced February 8, 2001. Referred to the Committee on Commerce, Science, and Transportation.

[26] S. 512 (DORGAN). Internet Tax Moratorium and Equity Act. Identical to H.R. 1410 (Istook). Would extend the current moratorium by 4 years and some months, until December 31, 2005. Enumerates the conditions under which Congress would automatically grant a state the authority to require out-of-state sellers (without nexus) to collect the use tax from the customer and remit it to the state, unless Congress took action within 120 days to disapprove the Interstate Sales and Use Tax Compact (called a "negative trigger"). The compact is to be drafted and adopted by the states. Would preserve the option to have sellers collect actual local use tax rates, rather than requiring a statewide average tax rate. Introduced March 9, 2001. Referred to the Committee on Finance.

[27] S. 589 (SMITH, B.). Would make the current moratorium permanent, including the grandfathering protection for existing Internet access taxes. Introduced March 21, 2001. Referred to the Committee on Commerce, Science, and Transportation.

[28] S. 664 (GREGG AND KOHL). New Economy Tax Fairness (NET FAIR) Act. Would establish "substantial physical presence" as the nexus standard for imposing both state business activity taxes and the duty to collect and remit sales or use taxes on interstate commerce. Enumerates eight business activities that would not constitute substantial physical presence. (These eight activities are included among the 10 listed in H.R.2526, which applies to business activity taxes only.) Introduced March 29, 2001. Referred to the Committee on Finance.

[29] S. 777 (ALLEN). Internet Tax Nondiscrimination Act. Identical to H.R. 1675 (Cox). Would make permanent the current moratorium on both Internet access taxes and multiple or discriminatory taxes on electronic commerce. Would remove the grandfathering protection for existing Internet access taxes. Introduced April 25, 2001. Referred to the Committee on Commerce, Science, and Transportation.

[30] S. 1481 (WYDEN). Internet Tax Moratorium Extension Act. Would extend the current moratorium for 2 years, until October 21, 2003. Expresses the sense of Congress that "State governments and interested business organizations should expedite efforts to develop a streamlined simplified plan for protecting state revenues affected by Internet use without unnecessarily burdening interstate commerce." Introduced October 2, 2001. Referred to the Committee on Commerce, Science, and Transportation.

[31] S. 1504 (DORGAN). Internet Tax Moratorium Extension Act. Would extend the current moratorium for 8 months, until June 30, 2002. Expresses the sense of Congress that "State governments and interested business organizations should expedite efforts to develop a streamlined sales and use tax system that, once approved by Congress, would allow sellers to collect and remit sales and use taxes without imposing an undue burden on interstate commerce." Introduced October 4, 2001. Referred to the Committee on Commerce, Science, and Transportation.

[32] S. 1525 (ALLEN). Defense of Internet Tax Freedom Act. Would extend the current moratorium for 5 years, until October 21, 2006. Introduced October 10, 2001. Referred to the Committee on Commerce, Science, and Transportation.

² For further discussion of the underlying issues, see CRS Report RL30667, Internet Tax Legislation: Distinguishing Issues, by Nonna A. Noto.