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108th Congress                                                   Report
 1st Session                     SENATE                         108-155
_______________________________________________________________________

              INTERNET TAX NON-DISCRIMINATION ACT OF 2003

                               __________

                              R E P O R T

                                 OF THE

           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                                   on

                                 S. 150



                                     

               September 29, 2003.--Ordered to be printed






       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
                      one hundred eighth congress
                             first session

                     JOHN MCCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
                                     FRANK LAUTENBERG, New Jersey
           Jeanne Bumpus, Staff Director and General Counsel
                   Ann Begeman, Deputy Staff Director
                  Robert W. Chamberlin, Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel







108th Congress                                                   Report
                                 SENATE
 1st Session                                                    108-155
======================================================================
 
              INTERNET TAX NON-DISCRIMINATION ACT OF 2003

                                _______
                                

               September 29, 2003.--Ordered to be printed

                                _______
                                

       Mr. McCain, from the Committee on Commerce, Science, and 
                Transportation, submitted the following

                              R E P O R T

                         [To accompany S. 150]

    The Committee on Commerce, Science, and Transportation, to 
which was referred the bill (S. 150) to make permanent the 
moratorium on taxes on Internet access and multiple and 
discriminatory taxes on electronic commerce imposed by the 
Internet Tax Freedom Act, having considered the same, reports 
favorably thereon with an amendment (in the nature of a 
substitute) and recommends that the bill (as amended) do pass.

                          Purpose of the Bill

  The primary purpose of S. 150, as amended, is to extend 
permanently the current Federal moratorium on State and local 
taxation of Internet access under the Internet Tax Freedom Act 
of 1998 (ITFA or the Act) and to ensure that the moratorium is 
applied in a technology neutral fashion.

                          Background and Needs

  In 1998, the ITFA was enacted to impose a temporary 
moratorium on certain taxes that could have a detrimental 
effect on the continued expansion of Internet use in the United 
States. A grandfathering provision was included in the ITFA to 
allow States that were imposing such a tax as of October 1, 
1998, to continue to do so. At the time, 26.2 percent of United 
States households had Internet access, according to the 
Department of Commerce (DOC). The DOC reports that by September 
2001, prior to the renewal of the ITFA for a two-year period, 
50.5 percent of United States households had Internet access. 
Forrester Research, a technology industry research firm, 
estimates that in 2002, 64 percent of United States households 
had Internet access, more than twice the number of households 
with Internet access at the time the ITFA was enacted.
  Despite the significant growth rate of Internet use in the 
United States since 1998, the penetration rate of Internet 
access still lags behind other basic technologies. For example, 
and in contrast to the Internet access rates cited above, 95.3 
percent of American households have telephone service, 
according to the Federal Communications Commission (FCC). In 
addition, many of the households with Internet access have only 
basic dial-up access, and have not migrated to broadband access 
services, which offer higher bandwidth connections that permit 
faster data transmission and thus facilitate and enhance 
services such as streaming audio and video. The Yankee Group, a 
technology industry research firm, estimates that in 2002 only 
15 percent of American households had broadband access, while 
most users connected through dial-up modem access. Accordingly, 
there remains a need to ensure that taxes on Internet access 
will not pose a hurdle to the continued adoption of basic dial-
up access or to the migration from basic Internet access to 
broadband Internet access.
  Since the enactment of the ITFA, e-commerce also has grown 
significantly. For example, in the fourth quarter of 1999, e-
commerce retail sales totaled $5.39 billion, according to the 
DOC. By contrast, in the first quarter of 2003, the DOC 
estimates that e-commerce retail sales totaled $11.92 billion. 
Nevertheless, e-commerce remains a small fraction of overall 
economic activity in the United States. According to the DOC, 
in the fourth quarter of 1999, e-commerce accounted for 0.7 
percent of total retail sales in the United States. By the 
first quarter of 2003, this percentage had more than doubled to 
1.5 percent of the United States' total retail sales. However, 
e-commerce still remains an emerging component of the economy. 
As such, it merits the guarantee of fair and equal tax 
treatment that the ITFA provides through its provisions 
regarding multiple and discriminatory taxes on e-commerce.
  To avoid impeding the growth of Internet use and of e-
commerce in the United States, the Senate Committee on 
Commerce, Science, and Transportation (the Committee) believes 
that the ITFA's Internet tax moratorium should be made 
permanent. However, the extension of the ITFA moratorium is 
intended to prohibit only taxes on Internet access, as well as 
multiple and discriminatory taxes on e-commerce. The permanent 
extension of the ITFA would not affect States' and localities' 
current right and ability to collect sales taxes on e-commerce 
transactions or any other taxes not prohibited by the United 
States Constitution, the ITFA, or any other Federal law.
  In addition, the Committee believes that the current 
definition of Internet access under the Act requires 
clarification to ensure that States and localities do not 
attempt to circumvent the moratorium on Internet access taxes 
by taxing individual components of access such as 
telecommunications services used to provide Internet access. To 
date, some States have interpreted narrowly the definition of 
Internet access under the ITFA in order to impose taxes on 
certain types of Internet access or components thereof. For 
example, certain States tax the transmission component of 
digital subscriber line (DSL) Internet access.
  S. 150, as amended, would update the language of the ITFA in 
recognition of the significant technological developments in 
the methods used to access the Internet since 1998. The bill 
would ensure that all such methods, whether in the form of 
dial-up, DSL, cable, satellite, wireless, or any other 
technology platform, as well as components used to provide 
Internet access, would be covered by the Internet access tax 
moratorium and, therefore, would be exempt from State and local 
taxation. Specifically, section 2(c) of S. 150, as amended, 
would modify the definition of ``Internet access'' to include 
only telecommunications services that are used to provide 
Internet access within the scope of the tax exemption provided 
by the ITFA.
  The Committee does not intend for the removal of section 
1101(d) of the ITFA and the modification to the definition of 
Internet access as set forth in section 2 of S. 150, as 
amended, to affect the State and local governments' authority 
to assess and collect taxes that do not fall within the tax 
categories set forth in section 1101(a) of the ITFA, such as 
traditional sales and use taxes, excise taxes, property taxes, 
corporate income taxes, gross receipts taxes, business and 
occupational taxes, and other such taxes that are generally 
applied and not enumerated in section 1101(a) of the Act.
  The Committee intends for the tax exemption for 
telecommunications services to apply whenever the ultimate use 
of those telecommunications services is to provide Internet 
access. Thus, if a telecommunications carrier sells wholesale 
telecommunications services to an Internet service provider 
that intends to use those telecommunications services to 
provide Internet access, then the exemption would apply.
  The modified definition of Internet access would clarify that 
all transmission components of Internet access, regardless of 
the regulatory treatment of the underlying platform, are 
covered under the ITFA's Internet tax moratorium only when the 
transmission component is used to provide Internet access. For 
example, the FCC has determined that the transmission component 
of cable modem service constitutes ``telecommunications'' (as 
defined in the Communications Act of 1934, as amended (1934 
Act)) not offered separately from the Internet access and is 
thus not a ``telecommunications service'' (as defined in the 
1934 Act). By contrast, the FCC currently classifies the 
transmission component of Internet access via DSL as a 
``telecommunications service'' (as defined in the 1934 Act). By 
modifying the definition of Internet access, the Committee 
seeks to clarify that, under the ITFA, neither Internet access 
nor the transmission component of Internet access is subject to 
taxation.
  By approving S. 150, the Committee neither condones nor 
rejects the FCC's decisions regarding the regulatory 
classification of any services. The revised definition of 
``Internet access'' would apply only to the term as used in S. 
150. It is not intended to affect in any way existing laws, 
regulations, policies, or regulatory decisions by the FCC or 
any other agency. Specifically, the revised definition of 
Internet access does not reflect any intention on the part of 
the Committee to influence any regulatory decisions made by the 
FCC or any other agency regarding the classification of 
Internet access as ``information services'' (as defined in the 
1934 Act), ``telecommunications services'' (as defined in the 
1934 Act), or otherwise.
  Further, the modified definition of Internet access is not 
meant to affect State and local taxation of traditional 
telecommunications services and other services that are not 
used to provide Internet access. For example, the moratorium 
does not allow an Internet access provider to claim or to seek 
immunity from State or local taxes for the provision of other 
services--such as cable television programming--that are 
separate from Internet access. Nor does the moratorium exempt 
telecommunications services provided over the same facilities 
that are not used to provide Internet access.
  Likewise, the modified definition of Internet access does not 
exempt from State or local taxation otherwise taxable products 
or services that are bundled with Internet access. The 
Committee intends that this clarification will be narrowly 
construed to include only those telecommunications services 
that are actually being used to provide Internet access. The 
Committee does not intend to include telecommunications 
services that are being used to provide services other than 
Internet access, regardless of whether those other services are 
offered separately or as part of a package that includes 
Internet access. In addition, the Committee intends for the 
words ``to the extent that'' to constitute words of limitation 
that clarify that a particular medium can deliver services 
other than Internet access. The language makes clear that when 
a particular medium is used to provide services other than 
Internet access, neither that medium nor those services fall 
under the ITFA's tax exemption. For example, a package of 
services that includes local voice, long distance voice, and 
Internet access would be covered under the Internet tax 
moratorium only with respect to the portion of the package that 
actually constitutes Internet access. In addition, the modified 
definition would not affect the taxability of voice telephony 
over the public switched telephone network (so-called ``plain 
old telephone service'' or ``POTS'').
  Finally, the Committee does not intend for the lapse of the 
grandfathering protection to affect the authority of State and 
local taxing authorities to assess and collect traditional 
sales and use taxes, excise taxes, property taxes, corporate 
income taxes, gross receipts taxes, business and occupational 
taxes, and other such taxes that are generally applied and are 
not enumerated in section 1101(a) of the ITFA.

                         Summary of Provisions

  As reported, S. 150 would:
           Extend permanently the current Federal 
        moratorium on State and local taxation of Internet 
        access under the ITFA.
           Make permanent the current Federal 
        prohibition under the Act on multiple and 
        discriminatory State and local taxes relating to e-
        commerce transactions.
           Extend by three years, from October 1, 2003, 
        the current grandfathering provision in the ITFA that 
        permits States that imposed or enforced a tax on 
        Internet access prior to the passage of the legislation 
        in 1998 to continue doing so.
           Supplement the definition of Internet access 
        to ensure that all Internet access is free from State 
        and local taxes regardless of the technology used to 
        provide such access.
           Ensure the FCC's and the States' ability to 
        collect and remit Universal Service funds as authorized 
        by section 254 of the Communications Act of 1934 would 
        not be affected.

                          Legislative History

  The ITFA was signed into law on October 21, 1998 (P.L. 105-
277; included as titles XI and XII of the Omnibus 
Appropriations Act of 1998). It imposed a three-year moratorium 
on State and local government taxes on Internet access, as well 
as on any multiple or discriminatory State and local taxes on 
Internet-based transactions. In 2001, Congress voted to amend 
the ITFA by extending the tax moratorium through November 1, 
2003, under the Internet Tax Nondiscrimation Act (H.R. 1552). 
The extension was enacted on November 28, 2001 (P.L. 107-075).
  The House of Representatives Judiciary Committee reported 
H.R. 49, the Internet Tax Nondiscrimination Act, to the full 
House of Representatives on July 17, 2003. H.R. 49 would extend 
permanently the moratorium on Internet access taxes and on 
discriminatory and multiple taxes on e-commerce transactions. 
The only amendment to H.R. 49 that was approved by the House of 
Representatives Judiciary Committee clarifies that States and 
localities cannot tax any form of Internet access, including 
certain telecommunications services under particular 
circumstances. Specifically, the amendment would insert ``, 
except to the extent such services are used to provide Internet 
access'' to the language in the ITFA that permits States and 
localities to continue taxing telecommunications services. On 
September 17, 2003, by voice vote, the full House of 
Representatives approved H.R. 49 as reported by the House of 
Representatives Judiciary Committee.
  Senator Wyden introduced a companion bill to H.R. 49, S. 52, 
the Internet Tax Nondiscrimination Act of 2003, on January 7, 
2003. Senator Allen introduced S. 150 shortly thereafter on 
January 13, 2003. Both S. 52 and S. 150 would amend the ITFA to 
establish a permanent Internet tax moratorium and eliminate, 
after three years, the grandfathering protection for States 
that imposed Internet access taxes prior to the passage of the 
ITFA.
  On July 16, 2003, the Committee held a full Committee hearing 
on S. 150 and S. 52. The following individuals testified at the 
hearing: Joseph Ripp, Vice Chairman, America Online, Inc.; Paul 
Misener, Vice President for Global Public Policy, Amazon.com, 
Inc.; Billy Hamilton, Deputy Comptroller, Texas Comptroller of 
Public Accounts; and Mark Beshears, Assistant Vice President of 
State and Local Tax, Sprint Corporation.
  On July 31, 2003, the Committee held an executive session at 
which it considered S. 150. The bill was ordered reported by a 
voice vote with an amendment in the nature of a substitute co-
sponsored by Senators Allen, Brownback, Stevens, Sununu, and 
Wyden.

                            Estimated Costs

  In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 403 of the 
Congressional Budget Act of 1974, the Committee provides the 
following cost estimate, prepared by the Congressional Budget 
Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, September 9, 2003.
Hon. John McCain,
Chairman, Committee on Commerce, Science, and Transportation, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 150, the Internet 
Tax Nondiscrimination Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro.
            Sincerely,
                                       Douglas Holtz-Eakin,
                                                          Director.
    Enclosure.
S. 150--Internet Tax Nondiscrimination Act
    Summary: S. 150 would permanently extend a moratorium on 
certain state and local taxation of online services and 
electronic commerce, and after October 1, 2006, would eliminate 
an exception to that prohibition for certain states. Under 
current law, the moratorium is set to expire on November 1, 
2003. CBO estimates that enacting S. 150 would have no impact 
on the federal budget, but beginning in 2007, it would impose 
significant annual costs on some state and local governments.
    By extending and expanding the moratorium on certain types 
of state and local taxes, S. 150 would impose an 
intergovernmental mandate as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the mandate would cause 
state and local governments to lose revenue beginning in 
October 2006; those losses would exceed the threshold 
established in UMRA ($64 million in 2007, adjusted annually for 
inflation) by 2007. While there is some uncertainty about the 
number of states affected, CBO estimates that the direct costs 
to states and local governments would probably total between 
$80 million and $120 million annually, beginning in 2007. The 
bill contains no new private-sector mandates as defined in 
UMRA.
    Estimated cost to the Federal Government: CBO estimates 
that enacting S. 150 would have no impact on the federal 
budget.
    Intergovernmental mandates contained in the bill: The 
Internet Tax Freedom Act (ITFA) currently prohibits state and 
local governments from imposing taxes on Internet access until 
November 1, 2003. The ITFA, enacted as Public Law 105-277 on 
October 21, 1998, also contains an exception to this 
moratorium, sometimes referred to as the ``grandfather 
clause,'' which allows certain state and local governments to 
tax Internet access if such tax was generally imposed and 
actually enforced prior to October 1, 1998.
    S. 150 would make the moratorium permanent and, after 
October 1, 2006, would eliminate the grandfather clause. The 
bill also would state that the term ``Internet access'' or 
``Internet access services'' as defined in ITFA would not 
include telecommunications services except to the extent that 
such services are used to provide Internet access (known as 
``aggregating'' or ``bundling'' of services). These extensions 
and expansions of the moratorium constitute intergovernmental 
mandates as defined in UMRA because they would prohibit states 
from collecting taxes that they otherwise could collect.
    Estimated direct costs of mandates to state and local 
governments: CBO estimates that repealing the grandfather 
clause would result in revenue losses for as many as 10 states 
and for several local governments totaling between $80 million 
and $120 million annually, beginning in 2007. We also estimate 
that the change in the definition of Internet access could 
affect tax revenues for many states and local governments, but 
we cannot estimate the magnitude or the timing of any such 
additional impacts at this time.
    UMRA includes in its definition of the direct costs of a 
mandate the amounts that state and local governments would be 
prohibited from raising in revenues to comply with the mandate. 
The direct costs of eliminating the grandfather clause would be 
the tax revenues that state and local governments are currently 
collecting but would be precluded from collecting under S. 150. 
States also could lose revenues that they currently collect on 
certain services, if those services are redefined as Internet 
access under the bill.
    Over the next five years there will likely be changes in 
the technology and the market for Internet access. Such changes 
are likely to affect, at minimum, the price for access to the 
Internet as well as the demand for and the methods of such 
access. How these technological and market changes will 
ultimately affect state and local tax revenues is unclear, but 
for the purposes of this estimate, CBO assumes that over the 
next five years, these effects will largely offset each other, 
keeping revenues from taxes on Internet access within the 
current range.

The grandfather clause

    The primary budget impact of this bill would be the revenue 
losses--starting in October 2006--resulting from eliminating 
the grandfather clause that currently allows some state and 
local governments to collect taxes on Internet access. While 
there is some uncertainty about the number of jurisdictions 
currently collecting such taxes--and the precise amount of 
those collections--CBO believes that as many as 10 states 
(Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South 
Dakota, Tennessee, Texas, Washington, Wisconsin) and several 
local jurisdictions in Colorado, Ohio, South Dakota, Texas, 
Washington, and Wisconsin are currently collecting such taxes 
and that these taxes total between $80 million and $120 million 
annually. This estimate is based on information from the states 
involved, from industry sources, and from the Department of 
Commerce. In arriving at this estimate, CBO took into account 
the fact that some companies are challenging the applicability 
of the tax to the service they provide and thus may not be 
collecting or remitting the taxes even though the states feel 
they are obligated to do so. Such potential liabilities are not 
included in the estimate.
    It is possible that if the moratorium were allowed to 
expire as scheduled under current law, some state and local 
governments would enact new taxes or decide to apply existing 
taxes to Internet access during the next five years. It is also 
possible that some governments would repeal existing taxes or 
preclude their application to these services. Because such 
changes are difficult to predict, for the purposes of 
estimating the direct costs of the mandate, CBO considered only 
the revenues from taxes that are currently in place and 
actually being collected.

Definition of Internet access

    Depending on how the language altering the definition of 
what telecommunications services are taxable is interpreted, 
that language also could result in substantial revenue losses 
for states and local governments. It is possible that states 
could lose revenue if services that are currently taxed are 
redefined as Internet ``access'' under the definition in S. 
150. Revenues could also be lost if Internet access providers 
choose to bundle products and call the product Internet access. 
Such changes would reduce state and local revenues from 
telecommunications taxes and possibly revenues from content 
currently subject to sales and use taxes. However, CBO cannot 
estimate the magnitude of these losses.
    Estimated impact on the private sector: This bill would 
impose no new private-sector mandates as defined in UMRA.
    Previous CBO estimate: On July 21, 2003, CBO transmitted a 
cost estimate for H.R. 49, the Internet Tax Nondiscrimination 
Act, as ordered reported by the House Committee on the 
Judiciary on July 16, 2003. Unlike H.R. 49, which would 
eliminate the grandfather clause upon passage, S. 150 would 
allow the grandfather clause to remain in effect until October 
2006. Thus, while both bills contain an intergovernmental 
mandate with costs above the threshold, the enactment of S. 150 
would not result in revenue losses to states until October 
2006.
    Estimate prepared by: Impact on State, Local, and Tribal 
Governments: Sarah Puro. Federal Costs: Melissa Zimmerman. 
Impact on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                      Regulatory Impact Statement

  In accordance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee provides the 
following evaluation of the regulatory impact of the 
legislation, as reported:

                       NUMBER OF PERSONS COVERED

  S. 150 would extend permanently the current Internet tax 
moratorium under the ITFA. The revised definition of Internet 
access under the bill, as reported, would clarify that the 
definition of Internet access is meant to include all forms of 
Internet access, regardless of the medium by which such access 
is provided. However, the measure is not expected to have an 
effect on the number of persons regulated.

                            ECONOMIC IMPACT

  S. 150 would preserve State and local taxing authorities' 
ability to impose traditional sales and use taxes, excise 
taxes, property taxes, corporate income taxes, gross receipt 
taxes, business and occupational taxes, and other such taxes 
that are generally applied and are not enumerated in section 
1101(a) of the ITFA. Because these taxes make up the vast 
majority of State and local tax revenues, any adverse economic 
impact that the moratorium would have on States is expected to 
be relatively minimal. S. 150, as amended, would terminate the 
current grandfather clause after three years; therefore, after 
that time the States that are currently grandfathered may lose 
collectively between $80 million and $120 million in annual 
revenues beginning in 2007, according to CBO's initial analysis 
of S. 150.
  It is expected that S. 150 would continue to facilitate the 
growth of e-commerce and to encourage increasing numbers of 
Americans to access the Internet via various technological 
means. Accordingly, the permanent extension of the Internet tax 
moratorium is expected to create benefits for the economy.

                                PRIVACY

  S. 150 is not expected to have an adverse effect on the 
personal privacy of any individuals that will be impacted by 
this legislation.

                               PAPERWORK

  S. 150 would have a minimal impact on current paperwork 
levels.

                      Section-by-Section Analysis


Section 1. Short title

  This section provides that the bill may be cited as the 
``Internet Tax Non-discrimination Act''.

Section 2. Permanent extension of Internet Tax Freedom Act moratorium

  This section would extend permanently the current Federal 
moratorium on State and local Internet access taxes and on 
State and local multiple or discriminatory taxes on e-commerce. 
In addition, this section would make certain changes to the 
ITFA relating to the permanent extension of the tax moratorium. 
Significantly, this section also would amend the definitions of 
``Internet access'' and ``Internet access service'' contained 
in the ITFA by adding ``, except to the extent such services 
are used to provide Internet access'' at the end of the second 
sentence of each of sections 1101(e)(3)(D) and 1104(5) of the 
ITFA. Those sentences would thus read, ``Such term does not 
include telecommunications services, except to the extent such 
services are used to provide Internet access.'' \1\
---------------------------------------------------------------------------
    \1\ Though this report focuses specifically on the modified 
definition of ``Internet access,'' the discussion of that modified 
definition generally applies also to the modified definition of 
``Internet access service.''
---------------------------------------------------------------------------
  The permanent extension of the moratorium is consistent with 
the majority view of the Advisory Commission on Electronic 
Commerce (ACEC) established pursuant to the ITFA that the 
current moratorium on Internet access taxes should be extended 
permanently.

Section 3. Three-year sunset for pre-October 1998, tax exception

  This section would extend by three years, from October 1, 
2003, the current grandfathering provision that permits States 
that imposed or enforced a tax on Internet access prior to 
October 1, 1998, to continue taxing Internet access. 
Thereafter, the grandfathering protection would be eliminated.
  The elimination of the grandfathering protection is 
consistent with the majority view of the ACEC that the 
grandfathering protection of the ITFA should be abolished.

Section 4. Universal service

  This section states that nothing in the ITFA shall prevent 
the imposition or collection of any fees or charges used to 
preserve and advance universal service or similar State 
programs authorized by section 254 of the Communications Act of 
1934.

                        Changes in Existing Law

  In compliance with paragraph 12 of rule XXVI of the Standing 
Rules of the Senate, changes in existing law made by the bill, 
as reported, are shown as follows (existing law proposed to be 
omitted is enclosed in black brackets, new material is printed 
in italic, existing law in which no change is proposed is shown 
in roman):
  

                       Internet Tax Freedom Act.

  [Pub. L. 105-277, Div. C, Title XI, 112 Stat. 2681-719; as 
amended by Pub. L. 107-75, 115 Stat. 703 (47 U.S.C. 151 nt)]

SEC. 1100. SHORT TITLE.

  This title may be cited as the ``Internet Tax Freedom Act''.

SEC. 1101. MORATORIUM.

  [(a) Moratorium.--No State or political subdivision thereof 
shall impose any of the following taxes during the period 
beginning on October 1, 1998, and ending on November 1, 2003--
          [(1) taxes on Internet access, unless such tax was 
        generally imposed and actually enforced prior to 
        October 1, 1998; and
          [(2) multiple or discriminatory taxes on electronic 
        commerce.]
  (a) Moratorium.--No State or political subdivision thereof 
may impose any of the following taxes:
          (1) Taxes on Internet access.
          (2) Multiple or discriminatory taxes on electronic 
        commerce.
  (b) Preservation of State and Local Taxing Authority.--Except 
as provided in this section, nothing in this title shall be 
construed to modify, impair, or supersede, or authorize the 
modification, impairment, or superseding of, any State or local 
law pertaining to taxation that is otherwise permissible by or 
under the Constitution of the United States or other Federal 
law and in effect on the date of enactment of this Act.
  (c) Liabilities and Pending Cases.--Nothing in this title 
affects liability for taxes accrued and enforced before the 
date of enactment of this Act, nor does this title affect 
ongoing litigation relating to such taxes.
  [(d) Definition of Generally Imposed and Actually Enforced.--
For purposes of this section, a tax has been generally imposed 
and actually enforced prior to October 1, 1998, if, before that 
date, the tax was authorized by statute and either--
          [(1) a provider of Internet access services had a 
        reasonable opportunity to know by virtue of a rule or 
        other public proclamation made by the appropriate 
        administrative agency of the State or political 
        subdivision thereof, that such agency has interpreted 
        and applied such tax to Internet access services; or
          [(2) a State or political subdivision thereof 
        generally collected such tax on charges for Internet 
        access.]
  [(e)](d) Exception to Moratorium.--
          (1) In general.--Subsection (a) shall also not apply 
        in the case of any person or entity who knowingly and 
        with knowledge of the character of the material, in 
        interstate or foreign commerce by means of the World 
        Wide Web, makes any communication for commercial 
        purposes that is available to any minor and that 
        includes any material that is harmful to minors unless 
        such person or entity has restricted access by minors 
        to material that is harmful to minors--
                  (A) by requiring use of a credit card, debit 
                account, adult access code, or adult personal 
                identification number;
                  (B) by accepting a digital certificate that 
                verifies age; or
                  (C) by any other reasonable measures that are 
                feasible under available technology.
          (2) Scope of exception.--For purposes of paragraph 
        (1), a person shall not be considered to making a 
        communication for commercial purposes of material to 
        the extent that the person is--
          (A) a telecommunications carrier engaged in the 
        provision of a telecommunications service;
          (B) a person engaged in the business of providing an 
        Internet access service;
          (C) a person engaged in the business of providing an 
        Internet information location tool; or
          (D) similarly engaged in the transmission, storage, 
        retrieval, hosting, formatting, or translation (or any 
        combination thereof) of a communication made by another 
        person, without selection or alteration of the 
        communication.
          (3) Definitions.--In this subsection:
                  (A) By means of the world wide web.--The term 
                ``by means of the World Wide Web'' means by 
                placement of material in a computer server-
                based file archive so that it is publicly 
                accessible, over the Internet, using hypertext 
                transfer protocol, file transfer protocol, or 
                other similar protocols.
                  (B) Commercial purposes; engaged in the 
                business.--
                          (i) Commercial purposes.--A person 
                        shall be considered to make a 
                        communication for commercial purposes 
                        only if such person is engaged in the 
                        business of making such communications.
                          (ii) Engaged in the business.--The 
                        term ``engaged in the business'' means 
                        that the person who makes a 
                        communication, or offers to make a 
                        communication, by means of the World 
                        Wide Web, that includes any material 
                        that is harmful to minors, devotes 
                        time, attention, or labor to such 
                        activities, as a regular course of such 
                        person's trade or business, with the 
                        objective of earning a profit as a 
                        result of such activities (although it 
                        is not necessary that the person make a 
                        profit or that the making or offering 
                        to make such communications be the 
                        person's sole or principal business or 
                        source of income). A person may be 
                        considered to be engaged in the 
                        business of making, by means of the 
                        World Wide Web, communications for 
                        commercial purposes that include 
                        material that is harmful to minors, 
                        only if the person knowingly causes the 
                        material that is harmful to minors to 
                        be posted on the World Wide Web or 
                        knowingly solicits such material to be 
                        posted on the World Wide Web.
                  (C) Internet.--The term ``Internet'' means 
                collectively the myriad of computer and 
                telecommunications facilities, including 
                equipment and operating software, which 
                comprise the interconnected world-wide network 
                of networks that employ the Transmission 
                Control Protocol/Internet Protocol, or any 
                predecessor or successor protocols to such 
                protocol, to communicate information of all 
                kinds by wire or radio.
                  (D) Internet access service.--The term 
                ``Internet access service'' means a service 
                that enables users to access content, 
                information, electronic mail, or other services 
                offered over the Internet and may also include 
                access to proprietary content, information, and 
                other services as part of a package of services 
                offered to consumers. Such term does not 
                include telecommunications [services.] 
                services, except to the extent such services 
                are used to provide Internet access.
                  (E) Internet information location tool.--The 
                term ``Internet information location tool'' 
                means a service that refers or links users to 
                an online location on the World Wide Web. Such 
                term includes directories, indices, references, 
                pointers, and hypertext links.
                  (F) Material that is harmful to minors.--The 
                term ``material that is harmful to minors'' 
                means any communication, picture, image, 
                graphic image file, article, recording, 
                writing, or other matter of any kind that is 
                obscene or that--
                          (i) the average person, applying 
                        contemporary community standards, would 
                        find, taking the material as a whole 
                        and with respect to minors, is designed 
                        to appeal to, or is designed to pander 
                        to, the prurient interest;
                          (ii) depicts, describes, or 
                        represents, in a manner patently 
                        offensive with respect to minors, an 
                        actual or simulated sexual act or 
                        sexual contact, an actual or simulated 
                        normal or perverted sexual act, or a 
                        lewd exhibition of the genitals or 
                        post-pubescent female breast; and
                          (iii) taken as a whole, lacks serious 
                        literary, artistic, political, or 
                        scientific value for minors.
                  (G) Minor.--The term ``minor'' means any 
                person under 17 years of age.
                  (H) Telecommunications carrier; 
                telecommunications service.--The terms 
                ``telecommunications carrier'' and 
                ``telecommunications service'' have the 
                meanings given such terms in section 3 of the 
                Communications Act of 1934 (47 U.S.C. 153).
  (f) Additional Exception to Moratorium.--
          (1) In general.--Subsection (a) shall also not apply 
        with respect to an Internet access provider, unless, at 
        the time of entering into an agreement with a customer 
        for the provision of Internet access services, such 
        provider offers such customer (either for a fee or at 
        no charge) screening software that is designed to 
        permit the customer to limit access to material on the 
        Internet that is harmful to minors.
          (2) Definitions.--In this subsection:
                  (A) Internet access provider.--The term 
                ``Internet access provider'' means a person 
                engaged in the business of providing a computer 
                and communications facility through which a 
                customer may obtain access to the Internet, but 
                does not include a common carrier to the extent 
                that it provides only telecommunications 
                services.
                  (B) Internet access services.--The term 
                ``Internet access services'' means the 
                provision of computer and communications 
                services through which a customer using a 
                computer and a modem or other communications 
                device may obtain access to the Internet, but 
                does not include telecommunications services 
                provided by a common carrier.
                  (C) Screening software.--The term ``screening 
                software'' means software that is designed to 
                permit a person to limit access to material on 
                the Internet that is harmful to minors.
          (3) Applicability.--Paragraph (1) shall apply to 
        agreements for the provision of Internet access 
        services entered into on or after the date that is 6 
        months after the date of enactment of this Act.

           *       *       *       *       *       *       *


SEC. 1104. PRESERVATION OF PRE-OCTOBER, 1998, STATE AND LOCAL TAX 
                    AUTHORITY UNTIL 2006.

  (a) In General.--Section 1101(a) does not apply to a tax on 
Internet access that was generally imposed and actually 
enforced prior to October 1, 1998, if, before that date, the 
tax was authorized by statute and either--
          (1) a provider of Internet access services had a 
        reasonable opportunity to know by virtue of a rule or 
        other public proclamation made by the appropriate 
        administrative agency of the State or political 
        subdivision thereof, that such agency has interpreted 
        and applied such tax to Internet access services; or
          (2) a State or political subdivision thereof 
        generally collected such tax on charges for Internet 
        access.
  (b) Termination.--This section shall not apply after October 
1, 2006.
  (c) Tax on Internet Access.--Notwithstanding section 
1105(10), in this section the term `tax on Internet access' 
includes the enforcement or application of any preexisting tax 
on the sale or use of Internet services if that tax was 
generally imposed and actually enforced prior to October 1, 
1998.

SEC. [1104.] 1105. DEFINITIONS.

  For the purposes of this title:
          (1) Bit tax.--The term ``bit tax'' means 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.
          (2) Discriminatory tax.--The term ``discriminatory 
        tax'' means--
                  (A) any tax imposed by a State or political 
                subdivision thereof on electronic commerce 
                that--
                          (i) is not generally imposed and 
                        legally collectible by such State or 
                        such political subdivision on 
                        transactions involving similar 
                        property, goods, services, or 
                        information accomplished through other 
                        means;
                          (ii) is not generally imposed and 
                        legally collectible at the same rate by 
                        such State or such political 
                        subdivision on transactions involving 
                        similar property, goods, services, or 
                        information accomplished through other 
                        means, unless the rate is lower as part 
                        of a phase-out of the tax over not more 
                        than a 5-year period;
                          (iii) imposes an obligation to 
                        collect or pay the tax on a different 
                        person or entity than in the case of 
                        transactions involving similar 
                        property, goods, services, or 
                        information accomplished through other 
                        means;
                          (iv) establishes a classification of 
                        Internet access service providers or 
                        online service providers for purposes 
                        of establishing a higher tax rate to be 
                        imposed on such providers than the tax 
                        rate generally applied to providers of 
                        similar information services delivered 
                        through other means; or
                  (B) any tax imposed by a State or political 
                subdivision thereof, if--
                          (i) [except with respect to a tax (on 
                        Internet access) that was generally 
                        imposed and actually enforced prior to 
                        October 1, 1998,] the sole ability to 
                        access a site on a remote seller's out-
                        of-State computer server is considered 
                        a factor in determining a remote 
                        seller's tax collection obligation; or
                          (ii) a provider of Internet access 
                        service or online services is deemed to 
                        be the agent of a remote seller for 
                        determining tax collection obligations 
                        solely as a result of--
                                  (I) the display of a remote 
                                seller's information or content 
                                on the out-of-State computer 
                                server of a provider of 
                                Internet access service or 
                                online services; or
                                  (II) the processing of orders 
                                through the out-of-State 
                                computer server of a provider 
                                of Internet access service or 
                                online services.
          (3) Electronic commerce.--The term ``electronic 
        commerce'' means any transaction conducted over the 
        Internet or through Internet access, comprising the 
        sale, lease, license, offer, or delivery of property, 
        goods, services, or information, whether or not for 
        consideration, and includes the provision of Internet 
        access.
          (4) Internet.--The term ``Internet'' means 
        collectively the myriad of computer and 
        telecommunications facilities, including equipment and 
        operating software, which comprise the interconnected 
        world-wide network of networks that employ the 
        Transmission Control Protocol/Internet Protocol, or any 
        predecessor or successor protocols to such protocol, to 
        communicate information of all kinds by wire or radio.
          (5) Internet access.--The term ``Internet access'' 
        means a service that enables users to access content, 
        information, electronic mail, or other services offered 
        over the Internet, and may also include access to 
        proprietary content, information, and other services as 
        part of a package of services offered to users. Such 
        term does not include telecommunications [services.] 
        services, except to the extent such services are used 
        to provide Internet access.
          (6) Multiple tax.--
                  (A) In general.--The term ``multiple tax'' 
                means any tax that is imposed by one State or 
                political subdivision thereof on the same or 
                essentially the same electronic commerce that 
                is also subject to another tax imposed by 
                another State or political subdivision thereof 
                (whether or not at the same rate or on the same 
                basis), without a credit (for example, a resale 
                exemption certificate) for taxes paid in other 
                jurisdictions.
                  (B) Exception.--Such term shall not include a 
                sales or use tax imposed by a State and 1 or 
                more political subdivisions thereof on the same 
                electronic commerce or a tax on persons engaged 
                in electronic commerce which also may have been 
                subject to a sales or use tax thereon.
                  (C) Sales or use tax.--For purposes of 
                subparagraph (B), the term ``sales or use tax'' 
                means a tax that is imposed on or incident to 
                the sale, purchase, storage, consumption, 
                distribution, or other use of tangible personal 
                property or services as may be defined by laws 
                imposing such tax and which is measured by the 
                amount of the sales price or other charge for 
                such property or service.
          (7) State.--The term ``State'' means any of the 
        several States, the District of Columbia, or any 
        commonwealth, territory, or possession of the United 
        States.
          (8) Tax.--
                  (A) In general.--The term ``tax'' means--
                          (i) any charge imposed by any 
                        governmental entity for the purpose of 
                        generating revenues for governmental 
                        purposes, and is not a fee imposed for 
                        a specific privilege, service, or 
                        benefit conferred; or
                          (ii) the imposition on a seller of an 
                        obligation to collect and to remit to a 
                        governmental entity any sales or use 
                        tax imposed on a buyer by a 
                        governmental entity.
                  (B) Exception.--Such term does not include 
                any franchise fee or similar fee imposed by a 
                State or local franchising authority, pursuant 
                to section 622 or 653 of the Communications Act 
                of 1934 (47 U.S.C. 542, 573), or any other fee 
                related to obligations or telecommunications 
                carriers under the Communications Act of 1934 
                (47 U.S.C. 151 et seq.).
          (9) Telecommunications service.--The term 
        ``telecommunications service'' has the meaning given 
        such term in section 3(46) of the Communications Act of 
        1934 (47 U.S.C. 153(46)) and includes communications 
        services (as defined in section 4251 of the Internal 
        Revenue Code of 1986).
          (10) Tax on internet access.--The term ``tax on 
        Internet access'' means a tax on Internet access, 
        including the enforcement or application of any new or 
        preexisting tax on the sale or use of Internet 
        [services unless such tax was generally imposed and 
        actually enforced prior to October 1, 1998.] services.