Consumers and businesses could experience an increase in the price of online services if Congress fails to extend the Internet Tax Freedom Act (ITFA), a moratorium on Internet access taxes that expires days before the November midterm elections.
"I don't know of too many politicians who believe it is a good idea to impose a tax on consumers, businesses, and voters days before an election, but that is exactly what could happen if they do not act quickly," said Jot Carpenter, vice president for government affairs at CTIA-The Wireless Association, an industry trade group.
ITFA was passed by Congress in 1998 to prevent state and local governments from imposing taxes on access to the Internet, which was in the nascent stages of its growth.
The 1998 bill prevented states and localities from taxing services that are bundled as part of an Internet access package, including email, instant messaging, and DSL services.
Although the Internet has remained tax-free since 1998, other wireless services, such as cellphones, are subject to various rates of taxation depending on the state.
The national average tax on wireless service is 17 percent, and in some jurisdictions it is as high as 20 percent, according to CTIA
Democratic Sen. Ron Wyden of Oregon and Republican Sen. John Thune of South Dakota have introduced the Internet Tax Freedom Forever Act, which would make permanent the existing ban on Internet access taxes as well as other levies on e-commerce products.
"The Internet tax moratorium, first enacted in 1998, has been an important part of expanding access to the Internet and in promoting the growth of the Internet economy. Unfortunately, countless Americans who use the Internet could suddenly find themselves facing a tax hike if Congress fails to act before the current moratorium expires on Nov. 1," Thune told Newsmax.
"Protecting consumers from new taxes on their Internet access has broad bipartisan support, and Congress should act promptly in the coming months to get this done," Thune said.
CTIA is a member of the Internet Tax Freedom Act Coalition,
a group of telecom companies, trade groups, and consumer groups that supports making the moratorium permanent.
The coalition also includes Amazon, AT&T, Comcast, the National Cable and Telecommunications Association, Time Warner Cable, T-Mobile, U.S. Telecom, and Verizon Communications.
"The moratorium was critical to promoting the expansion of the Internet. It remains critical to ensuring it continues to grow," said Carpenter, who has been working both sides of the aisle to reach a compromise.
House Judiciary Chairman Bob Goodlatte,a Virginia Republican, and Rep. Anna Eshoo, a California Democrat, have introduced a similar bill, the Permanent Internet Tax Freedom Act (PITFA), in the House.
While many local and state governmental organizations support a temporary extension, they harbor concerns about making it permanent.
"We support a temporary extension as we did in 2007 when this issue last came up. The bottom line for us and for other local government organizations is that the permanent extension is a pre-emption of a state's authority to decide what they can and should tax," Michael Belarmino, associate legislative director for the National Association of Counties, told Newsmax.
"A permanent extension locks us out of at least one option to deal with our potential needs.
"There is a recognition on all sides that expiration is not the desired outcome, but we also have seen an exponential growth in the Internet since 1998. By making the extension temporary, we force Congress to come back in the future to re-evaluate the value of the moratorium. The permanent extension also could open the door to other industries to seek a similar blanket exemption," Belarmino said.
Congress, which has extended ITFA on a short-term basis three times since 1998, waited until the last minute on the last two occasions. In 2003, Congress failed to meet the deadline, but passed a four-year extension the following year. In 2007, Congress waited until the final days to act before passing a seven-year extension
by unanimous votes in both the House and Senate.
"With Congress it is dangerous to predict anything, and certainly no politician wants to raise taxes days before an election. However, Congress also has a tendency to wait until the very last minute, and to take things right to the water's edge. At the moment, the process is our biggest opponent," Carpenter told Newsmax.
That process has been complicated by efforts to couple any extension with the Marketplace Fairness Act (MFA)
, which passed in the Senate in 2013 by a 69-27 margin.
The MFA would give individual states the authority to compel online and "remote sellers" to collect sales tax
when a transaction is made, just as happens when a sale is made at a brick-and-mortar retailer. In exchange for this authority, states would be required to simplify their tax laws.
Democratic Rep. John Conyers of Michigan argues
that the revenue lost by not taxing online sales has a negative impact on local communities because "fewer purchases at local retailers translate to fewer local jobs and eventually the closing of stores," and that the "unfair advantage that remote sellers have by not collecting sales taxes hurts us all."
Conyers also opposes a permanent extension because he says it will deny states and localities potential revenue that would be lost as more businesses and services transition to the Internet.
Andrew Moylan of the R Street Institute
, an independent think tank, said that contrary to supporters' assertions, the MFA does not "level the playing field."
Moylan said it would impose a "different and unequivocally harsher set of rules than exist for brick-and-mortar" transactions.
"Passage of the MFA would mean states could strong-arm remote sellers into complying with the more than 9,600 separate sales-tax rates that exist across the country, not to mention the 46 states with sales taxes that can issue their own unique set of edicts and definitions," Moylan testified at a March Judiciary Committee hearing.
Grover Norquist of Americans for Tax Reform
favors a permanent ban on Internet access taxes and opposes the MFA, and also warns against coupling the two measures.
"Now, with the expiration of Internet access taxes on the horizon, the temptation to attach the vastly disputed Marketplace Fairness Act to PITFA may be on the mind of some members," he wrote in a May 29 letter to legislators. "PITFA would save consumers from taxation, while the MFA would incur out-of-state Internet sales tax on businesses. The attachment of MFA to PITFA would certainly be a killer amendment."