January 4, 2005

Internet Tax Moratorium Extended for Three Years

Holland & Knight Newsletter
Eddie Williams III

On December 3, 2004, President George W. Bush signed the Internet Tax Nondiscrimination Act (S. 150). The Act reinstates and extends until November 1, 2007, the moratorium on taxes on Internet access and multiple and discriminatory taxes on e-commerce imposed by the Internet Tax Freedom Act (ITFA). The ITFA was signed into law on October 21, 1998, imposing a three-year moratorium on state and local government taxes on Internet access, as well as on any multiple or discriminatory taxes on Internet-based transactions. In 2001, Congress approved the Internet Tax Nondiscrimination Act (H.R. 1552, 107th Congress), which amended the ITFA by extending the tax moratorium through November 1, 2003. S. 150 is retroactive to November 2003.

The moratorium applies to taxes on Internet access, regardless of whether the tax is imposed on a provider or buyer of Internet access, and regardless of the terminology used to describe the tax. However, taxes levied upon or measured by net income, capital stock, net worth, or property value are permissible. In addition, the moratorium does not apply to taxes on telecommunication services, except to the extent that such services are purchased, used or sold by a provider of Internet access to provide Internet access. The moratorium also contains an exception for the imposition of tax on a charge for voice or similar services utilizing Internet Protocol or any successor protocol. However, services that are incidental to Internet access, such as voice-capable e-mail or instant messaging, are covered by the moratorium.

Although the Act calls for a three-year moratorium going forward, a grandfather provision1 protects those Internet access taxes that were generally imposed and actually enforced prior to October 1, 1998, if, before that date:

(1) the tax was authorized by statute; and

(2) either:

(a) a provider of Internet access services had a reasonable opportunity to know, by virtue of a rule or other proclamation made by the appropriate administrative agency of the state or political subdivision thereof, that such agency had interpreted and applied such tax to Internet access services; or

(b) a state or political subdivision thereof generally collected such tax on charges for Internet access.

We expect Congress to continue debating this hotly contested issue during the 109th Congress as the November 2007 deadline approaches.


[1]  The grandfather provision expires after November 1, 2006 with respect to the State of Wisconsin.

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