```

[House Report 113-510]
[From the U.S. Government Publishing Office]

113th Congress   }                                          {    Report
                        HOUSE OF REPRESENTATIVES
 2d Session      }                                          {   113-510

======================================================================

 
                   PERMANENT INTERNET TAX FREEDOM ACT

                                _______
                                

  July 3, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

   Mr. Goodlatte, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 3086]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 3086) to permanently extend the Internet Tax Freedom 
Act, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     1
Background and Need for the Legislation..........................     2
Hearings.........................................................    10
Committee Consideration..........................................    10
Committee Votes..................................................    10
Committee Oversight Findings.....................................    12
New Budget Authority and Tax Expenditures........................    12
Congressional Budget Office Cost Estimate........................    12
Duplication of Federal Programs..................................    14
Disclosure of Directed Rule Makings..............................    15
Performance Goals and Objectives.................................    15
Advisory on Earmarks.............................................    15
Section-by-Section Analysis......................................    15
Changes in Existing Law Made by the Bill, as Reported............    15
Dissenting Views.................................................    16

                          Purpose and Summary

    In 1998, Congress temporarily banned state and local 
governments from taxing Internet access or placing multiple or 
discriminatory taxes on Internet commerce. With minor 
modifications, this ban was extended three times, with enormous 
bipartisan support. The most recent extension passed in 2007, 
but it expires on November 1, 2014. The Permanent Internet Tax 
Freedom Act (PITFA) would convert the moratorium into a 
permanent ban--on which consumers, innovators and investors can 
permanently rely--by simply striking the 2014 end date.

                Background and Need for the Legislation

                        I. HISTORICAL BACKGROUND

    The Internet Tax Freedom Act (ITFA) was enacted on October 
21, 1998 as Title XI of Division C of the Omnibus Consolidated 
and Emergency Supplemental Appropriations Act.\1\ ITFA 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 also grandfathered certain State and local access taxes 
that were ``generally imposed and actually enforced prior to 
October 1, 1998.''
---------------------------------------------------------------------------
    \1\Internet Tax Freedom Act, Pub. L. No. 105-277, Sec. 1101, 112 
Stat. 2681-719 (1998).
---------------------------------------------------------------------------
    This initial Internet tax moratorium expired on October 21, 
2001. The Internet Tax Nondiscrimination Act was then enacted 
on November 28, 2001.\2\ It provided for a 2-year extension of 
the prior moratorium, through November 1, 2003. The moratorium 
was then extended for an additional 4 years, through November 
1, 2007, by the Internet Tax Nondiscrimination Act of 2003, 
enacted on December 3, 2004.\3\ The moratorium was extended a 
third time through November 1, 2014 by the Internet Tax Freedom 
Act Amendments Act of 2007.\4\
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    \2\Pub. L. No. 107-75, Sec. 2, 115 Stat. 703 (2001).
    \3\Pub. L. No. 108-435, Sec. Sec. 2-6A, 118 Stat. 2615, 2615-2618 
(2004).
    \4\Pub. L. No. 110-108, Sec. Sec. 2-6, 121 Stat. 1024, 1024-1026 
(2007); INTERNET TAX FREEDOM ACT AMENDMENTS OF 2007, H. Rep. No. 110-
372.
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                             II. ITFA TODAY

    Previous extensions made substantive changes to the ITFA 
moratorium to clarify it and address technological 
developments. PITFA does not. It merely strikes the end date of 
the current moratorium. That current statutory framework 
appears at 47 U.S.C. 151 (note) and provides as follows:

        States and localities are prohibited from imposing 
        ``[t]axes on Internet access'' or ``[m]ultiple or 
        discriminatory taxes on electronic commerce.''

Internet Access
    Internet access means a service that ``enables users to 
connect to the Internet to access content, information, or 
other services.'' This includes ``telecommunications to the 
extent such telecommunications are purchased, used or sold to 
provide Internet access'' (e.g., DSL.) Also covered are 
incidental services ``such as a home page, electronic mail and 
instant messaging[,] video clips and personal electronic 
storage capacity'' whether packaged with Internet access or 
sold separately. The definition specifically excludes ``voice, 
audio or video programming'' or other products and services . . 
. that utilize Internet protocol or any successor protocol and 
for which there is a charge.''
Multiple or Discriminatory Taxes
    A multiple tax means ``any tax that is imposed by one State 
. . . on . . . essentially the same electronic commerce'' that 
is taxed by ``another State . . . without a credit for taxes 
paid in other jurisdictions.'' For example, a resident of 
Virginia downloads a movie from a company based in Seattle 
while waiting at the airport in Chicago. Three states could 
claim the right to tax it; Virginia, Washington and Illinois. 
The statute does not establish priority among those claims. It 
merely requires credits so the customer is not subject to three 
separate tax levies.
    A discriminatory tax on Internet commerce is defined as one 
that is either ``not generally imposed'' or is ``not imposed at 
the same rate'' on similar transactions ``accomplished through 
other means.'' Another form of discriminatory tax is separately 
classifying Internet service providers (ISPs) for purposes of 
applying a higher tax rate than is imposed on similar 
information services.
    The term also includes any tax where a factor in 
determining a remote seller's collection obligation is the sole 
ability to access a site on a seller's remote server. Similarly 
covered are taxes where the ISP is deemed the seller's agent 
solely because it displays information or processes orders for 
the seller on an out-of-state computer server.
Tax
    The term tax includes taxes on Internet access, regardless 
of whether it is imposed on the seller or the purchaser of 
Internet access. However, it excludes taxes on net income, 
capital stock, net worth, or property value as well as similar 
broad based receipts taxes that four states rely on in lieu of 
corporate income taxes: These are Washington's business & 
occupation tax, Michigan's gross receipts tax, Ohio's 
commercial activity tax and Texas's margins tax.
Pornography Exception
    The statute contains several exceptions. In particular, the 
taxing restrictions do not apply to commercial communications 
of pornography unless minors' access to the material is 
restricted by requiring a credit card, age verification or 
other reasonable measures. In addition, Internet access 
providers cannot enjoy the benefit of the tax moratorium unless 
they offer customers screening software to limit minors' access 
to pornographic material.
Bundling Rule
    The statute concludes with a number of miscellaneous items, 
first of which is a bundling rule. Ordinarily, if a merchant 
bundles taxable and non-taxable items, the taxable item 
``taints'' the nontaxable item and the entire bundled package 
is taxable. ITFA's accounting rule changes this, enabling 
companies to sell consumers a bundled package of services that 
includes Internet access, while allowing the vendor to unbundle 
the services in their internal books and records so that they 
can apply the tax just to the taxable portion. For example, 
consumers are offered a triple play package of voice, video and 
broadband. If the provider can reasonably identify the charges 
for Internet access (i.e., broadband) from its books and 
records kept in the regular course of business, only the 
taxable services (i.e., voice & video) will be subject to 
taxation and not the charges for broadband Internet access.
911 Access Fee, USF & Other Exceptions
    The law specifies that it does not prohibit the collection 
of the 911 access or Universal Service Fund (USF) fees. The USF 
is imposed on telephone service rather than Internet access 
anyway, although the FCC periodically contemplates broadening 
the base to include data services. The law adds that nothing in 
ITFA should affect a ``regulatory proceeding that is not 
related to taxation.'' This is important because the moratorium 
contains terminology like ``telecommunications service'' which 
is common to other regulatory contexts where the definition of 
the same words may have evolved differently.
    Finally, the statute exempts the Texas Municipal Access 
Line Fee (TMALF) from the moratorium. The TMALF is essentially 
a fee for the use of public rights of way to provide 
traditional telecommunications service. Providers did not 
consider the TMALF to be a tax on Internet access because it 
has always been imposed on communications lines used for 
traditional telecommunications services (e.g. voice).
Grandfathers
    A grandfather clause in ITFA allows states and localities 
to continue imposing state and local taxes on Internet access 
that were ``generally imposed and actually enforced prior to 
October 1, 1998.''
    The history behind the grandfathers is instructive as to 
the way the law has evolved to keep pace with technological 
innovation. In 1998, most Internet services were dial-up. Users 
unplugged their phones, plugged the line into their computers 
and dialed into a portal like AOL. If anyone called, Internet 
access was disrupted. Since customers still primarily used 
their phones for voice calls, protecting Internet access from 
taxation meant focusing on the portal. That soon changed with 
Digital Subscriber Lines (DSL) which split the telephone line 
to provide a dedicated Internet portal as well as uninterrupted 
phone service and cable modem service. Protecting Internet 
access required protection not only of the portal, but the 
dedicated transmission piece as well. In addition, Internet 
access sold by cable providers, often described as cable modem 
service, was ruled to be an information service. States took 
different views as to how these services should be taxed. Some 
states argued the moratorium applied only to the portal not the 
transmission component (telecommunications transport) sold by 
telephone companies; because cable modem service was 
characterized as an information service, states often found the 
moratorium applied to the entire Internet access charge by 
cable providers. Furthermore, if the Internet service provider 
(ISP) billed the transmission piece separately, states 
generally took the position the charge for transmission was 
taxable telecommunications,; if ISPs billed it as a package the 
states often claimed the entire package, including the portal, 
was ``tainted'' and taxable while other states found the 
moratorium to be applicable to such charges.
    The 2003 extension addressed the problem by clarifying that 
``Internet Access'' includes the transmission 
(telecommunications transport or backbone] piece: ``The term 
`Internet access' . . . means a service that enables users to 
connect to the Internet . . . [and] . . . includes the 
purchase, use or sale of telecommunications . . . to the extent 
such telecommunications are purchased, used or sold . . . to 
provide such service.''' As a concession, it gave states that 
had been taxing DSL as telecommunications until November 1, 
2005 to cease and desist.
    A number of states complied, but some recalcitrant 
jurisdictions sought to evade the law by reinterpreting the 
intent of the grandfathers. They claimed their taxation of the 
transmission component (DSL) was based upon laws ``generally 
imposed and actually enforced'' prior to 1998. This argument 
was strained since prior to 1998 DSL did not generally exist, 
however some states insisted their pre-1998 laws were always 
intended to apply to telecommunications services so the telecom 
transport component used in delivering Internet access should 
be covered by the original grandfather rather than the 2003 
grandfather that expired in 2005.
    To ensure that the transmission element (often referred to 
as the ``Internet backbone'') remained tax free, Congress 
addressed this lingering transmission issue in the 2007 
extension. It reinforced its intent that the moratorium on 
taxing Internet access included the transmission piece and that 
only those states subject to the original grandfather could 
take advantage of it. These original state taxes, identified at 
the time ITFA was originally enacted, were distinguishable from 
the recalcitrant states who had not taken public positions 
indicating an intent to tax the Internet portal alone, prior to 
1998. Nevertheless, it gave the final recalcitrant states until 
June 30, 2008 to comply, provided the tax on transmission was 
based on a public ruling or pending litigation prior to July 1, 
2007.
    In sum, as the moratorium stands today, only the pre-1998 
grandfather clause survives. It covers seven states. They are, 
SD, ND, WI, NM, HI (excise tax), TX (on amounts over $25) and 
OH (tax on Internet use by business).

                       III. MAJOR CONSIDERATIONS

A Permanent Moratorium Is Warranted
    The policy reasons for renewing the moratorium have shifted 
over time. The original justification was to incubate a 
fledgling industry. It has worked: According to the Pew 
Research Center, 86 percent of American adults used the 
Internet in 2013, up from 14 percent in 1995.\5\
---------------------------------------------------------------------------
    \5\Nat'l Assoc. of Counties, Protect County Taxing Authority: 
Support a Short-Term Extension of the Internet Tax Freedom Act (ITFA) 
(2014).
---------------------------------------------------------------------------
    Today, it is precisely the ubiquity of the Internet that 
councils for a permanent extension. The Internet has become the 
primary driver of U.S. economic growth, innovation and 
productivity. The Internet is indispensable for finding jobs 
and accessing education and healthcare resources. It helps 
small businesses find new markets and consumers across the 
country and the world. For example, during the 2007 renewal, 
the Committee heard testimony that more than 75% of the 
remarkable productivity growth that has increased jobs and 
income since 1995 was due to investment in telecommunications 
networks and the information technology transported across 
them.\6\
---------------------------------------------------------------------------
    \6\Internet Tax Freedom Act: Internet Tax Moratorium: Hearing 
Before Subcomm. on Commercial and Admin. Law of the H. Comm. On the 
Judiciary, 110th Cong. 30 (2007).
---------------------------------------------------------------------------
    One should be highly skeptical of the suggestion from 
States and localities that Internet adoption rates are not 
affected by taxes. It is an economic axiom that as price rises 
demand falls. If the moratorium lapses, state 
telecommunications taxes could take effect and those rates are 
already inordinately high: In 2007, the average tax rate on 
communications services was 13.5%, more than twice the rate of 
6.6% on all other goods and services. Some rates even exceed 
sin tax rates. For example, in Jacksonville, Florida, 
households pay 33.24% wireless taxes, higher than beer (19%), 
liquor (23%) and tobacco (28%). Moreover, these tax burdens 
fall heavier on low income households. They pay ten times as 
much in communications taxes as high income households as a 
share of income.\7\
---------------------------------------------------------------------------
    \7\Id. at 32.
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    In an attempt to overcome this basic economic truth, 
opponents of H.R. 3086 cite a 2006 Government Accountability 
Office (GAO) study. They say it found ``no significant 
difference'' in broadband adoption between states that tax 
Internet access (pursuant to grandfathers) and those that do 
not.\8\ Actually, GAO said its study ``indicat[ed] that the 
imposition of the tax may have reduced the likelihood that a 
household would purchase broadband service.'' However, it could 
not be confident of that finding because it was only 
statistically significant at the 10 percent level, rather than 
the traditional 5% cutoff, and there were confounding factors.
---------------------------------------------------------------------------
    \8\Michael Mazerov, Congress Should End, Not Extend, Prohibition on 
Taxing Internet, Ctr. on Budget and Policy Priorities (Jun. 18, 2014), 
http://www.offthechartsblog.org/congress-should-end-not-extend-
prohibition-on-taxing-Internet-access/.
---------------------------------------------------------------------------
    Standing against this equivocal finding, are a number of 
studies showing that price has a demonstrable impact. The same 
year the GAO report was published, former White House Chief 
economist Austan Goolsbee authored a paper finding the average 
elasticity for broadband to be 2.75. Elasticity is a measure of 
price sensitivity and here indicates that a $1.00 increase in 
Internet access taxes would reduce expenditures on those 
services by an average of $2.75.\9\
---------------------------------------------------------------------------
    \9\Adams Nager, Misinformation in the Internet Tax Freedom Act 
Debate, The Innovation Files (Jun. 23, 2014), http://
www.innovationfiles.org/misinformation-in-the-Internet-tax-freedom-act-
debate/.
---------------------------------------------------------------------------
    According to a 2010 survey by the National 
Telecommunications and Information Administration, 24% of 
Americans who do not use the Internet report cost as the main 
reason.\10\ Figures from 2012 show that 25.2% of the US 
population remains without Internet access.\11\ The numbers are 
dramatically higher for low income and minority households. 
Just 43 percent of households with incomes less than $25,000 
had Internet access in 2011, and only 35% of households with no 
high school diploma. The data also showed that only 55% of 
African American households and 56% of Hispanic households had 
Internet access.\12\
---------------------------------------------------------------------------
    \10\The Information Technology & Innovation Foundation, The Whole 
Picture: Where America's Broadband Networks Really Stand at 35 (2013) 
(available at http://www2.itif.org/2013-whole-picture-america-
broadband-networks.pdf); Presumably by ``price'' some respondents meant 
the price of hardware such as a computer, not simply the connection 
fee. On the other hand, hardware as a one-time cost may not present as 
daunting a burden as an access tax which is recurring.
    \11\U.S. Census Bureau, Computer and Internet Access in the United 
States (2012) (available at https://www.census.gov/hhes/computer/files/
2012/Computer_Use_Infographic_
FINAL.pdf).
    \12\Nat'l Telecomm. and Info. Admin., Exploring the Digital Nation: 
America's Emerging Online Experience at 26 (2013) (available at http://
www.ntia.doc.gov/files/ntia/publications/exploring_the_digital_nation_-
_americas_emerging_online_experience.pdf).
---------------------------------------------------------------------------
    These findings are consistent with the fact that, in most 
places in America, even an incremental cost increase is not 
trivial. The White House underscored this point in another 
context by launching an initiative called ``What $40 means to 
Americans Across the Country.'' It highlighted how, for working 
families, that money ``buys things like school lunches, the gas 
needed to get to work or visit ailing relatives, and co-pays 
for doctor visits and essential prescription medicines.''\13\
---------------------------------------------------------------------------
    \13\What 40 Means to Americans Across the Country, White House, 
http://www.whitehouse.gov/40dollars.
---------------------------------------------------------------------------
    Finally, Internet access is not simply a consumer good to 
be taxed. It is the greatest gateway to knowledge and self-help 
that has ever existed. It is the modern equivalent of the great 
library of Alexandria, accessible from anywhere on the planet. 
Government simply should not charge citizens a fee to enter 
this remarkable world. Government will reap dividends later as 
citizens leverage unprecedented scientific, educational and 
economic opportunities to better their lives, improve society 
and grow the economy.
Action Is Needed Now
    Even though PITFA enjoys enormous bipartisan support, ISPs 
must prepare for the possibility that ITFA could lapse. The 
moratorium has lapsed twice before; for a month in 2001, and 13 
months in 2003. In both cases, subsequent renewals applied 
retroactively without much fuss. This time it would be 
different for several reasons:
    Broader Customer Base--Consider Verizon as an example. In 
2003, approximately 5% of its revenue was derived from Internet 
access.\14\ Today, it is approximately 40-45%.\15\ Similarly, 
the customer base for Internet access services has grown from 
approximately 6 million in 2003 to 75 million today. All these 
new customers mean many more Americans would be affected by new 
Internet access taxes.
---------------------------------------------------------------------------
    \14\Delivering the New World of Communication, 2003 Verizon Comm. 
Inc. Ann. Rep. 9.
    \15\The World's Biggest Challenges Deserve Even Bigger Solutions: 
Powerful Answers, 2013 Verizon Comm. Inc. Ann. Rep. 2.
---------------------------------------------------------------------------
    Expiring Moratorium is Broader Today--Under early versions 
of the moratorium, states continued to be aggressive in taxing 
the data transmission associated with Internet access. States 
argued that Federal law only forbade taxing the Internet portal 
not the data transmission used to `travel' the Internet. For 
example, they claimed the portal access to the AOL server was 
tax free, but the data transmission used to connect to the web 
and access data was not. Congress eventually closed this 
loophole by barring taxes on transmission to the extent it was 
used to provide Internet access, but not until 2004. Thus, 
customers were likely paying taxes on the transmission piece, 
which is the bulk of the charges for Internet service, even 
before the moratorium lapsed in 2003. Accordingly, the impact 
of the lapse was not as noticeable. Today, because transmission 
is not taxable, consumers would be much harder hit by any lapse 
in the moratorium.
    Expiration Could Automatically Trigger State Taxes--Montana 
law specifically states that should ITFA expire, Internet 
access will be taxed at 3.75%. In the other 49 states, it is 
feared that the current telecom and sales tax laws are broad 
enough to cover at least some portion of the Internet access 
under their existing statutes. In other words, were ITFA to 
lapse, Internet access taxes would be triggered automatically 
in many states without further state action. This was not a 
problem in 2003, because the types of taxes that would be 
primarily triggered by a lapse today are taxes on the 
transmission piece which were arguably not prohibited by ITFA 
at that time.
    Telecommunications companies (wire-line, cable and 
wireless) have already begun undertaking comprehensive analyses 
of state and local tax statutes. It is a substantial 
undertaking. Their tax divisions need to examine taxation of 
Internet access under sales and use taxes, utility taxes, 
telephone taxes, wireless taxes and cable franchise fees. They 
need to study taxability of Internet access, broadband access, 
email, instant messaging, home page, video clips, personal 
electronic storage capacity as well as examine taxability as a 
telecommunications service, information service, data 
processing service, computer service, and digital service. The 
uncertainty is a drain on their resources.
    Notice to Customers--If ITFA expires, broadband providers 
believe customers need 30-60 days' notice of the tax increase 
either by law, contract or as a matter of good customer 
service. State notice laws would primarily affect land line and 
cable providers because wireless carriers are not covered by 
most state regulatory regimes. Additionally, while customer 
contracts typically do not require notice of sales tax changes, 
many of the rate changes would be classified as telecom 
specific taxes which do require notice. The biggest issue is 
one of customer service. Consumers have not been taxed on these 
services for more than 10 years. One carrier estimates that the 
typical family could see anywhere from $11 to $22 in new taxes 
every month for using the Internet. If the tax increase is 
unexpected, providers anticipate a flood of calls to their 
customer service centers. Handling customer care calls is 
expensive. To prevent this, the carriers would likely begin 
notifying customers no later than September 1, unless PITFA 
becomes law sooner.
    Preparing IT for Compliance--In case ITFA lapses, broadband 
providers are already dedicating resources to prepare their 
information technology and billing systems for compliance with 
these new taxes. In many states where taxes could be triggered, 
bills must list the state tax as a distinct line item on the 
customer's bill. More importantly, to minimize tax exposure, 
bundled services will have to be broken into components to 
separate out the portal from the transmission element. ITFA 
does not distinguish between these elements, but many state 
laws do. When ITFA expires, these states will begin taxing the 
data transmission, but the portal could still be tax-free under 
state law. If providers fail to separate out the portal piece, 
and tax the entire bundle, they could be at risk to class 
action lawsuits for collecting too much tax.
    Retroactive Renewal Insufficient--Given the increased user 
base, ITFA cannot simply be renewed retroactively, as it was in 
the past, without creating complications. States would need to 
work with providers to refund the taxes collected from a much 
larger pool of customers than existed during prior extensions. 
This becomes even more challenging for customers that are no 
longer with the provider that collected the taxes originally. 
Continuing customers could receive a credit on their current 
bill, but providing refunds to significant numbers of customers 
who switched to other providers would be far more challenging. 
For example, Verizon has customer churn of approximately 
100,000 per month.\16\ Verizon would need to undertake a search 
for these customers and refund the taxes they previously paid.
---------------------------------------------------------------------------
    \16\The World's Biggest Challenges Deserve Even Bigger Solutions: 
Powerful Answers, 2013 Verizon Comm. Inc. Ann. Rep. 13.
---------------------------------------------------------------------------
Grandfathers Should be Properly Permitted to Expire
    Seven states remain grandfathered under current law. They 
are, SD, ND, WI, NM, HI (excise tax), TX (tax on amounts over 
$25) and OH (tax on Internet use by business). Both the 
moratorium and the grandfathers expire on November 1, 2014, but 
under separate expiration provisions. PITFA strikes only the 
moratorium's expiration provision. This allows the grandfathers 
to expire for the remaining seven state and local taxes, so 
that the tax moratorium is consistent nationwide.
    There are good reasons to let the remaining grandfather 
lapse. For example, the original intent of the grandfather was 
to give states then taxing Internet access some time to 
transition to other sources of revenue. Indeed, a number of 
states discontinued their taxation of Internet access in 
support of a national broadband policy. For those that still 
haven't ceased their taxation of Internet access, it has been 
16 years, time enough to change their tax codes.
    PITFA enjoys support even from Members in the grandfathered 
states, a number of whom have signed on as cosponsors in both 
chambers.
Constitutional Authority
    Article 1, Section 8, Clause 3 of the U. S. Constitution 
gives Congress authority to ``regulate Commerce . . . among the 
several States.'' As the Supreme Court has explained, the 
Commerce Clause . . . [is] informed . . . by structural 
concerns about the effects of state regulation on the national 
economy. Under the Articles of Confederation, state taxes and 
duties hindered and suppressed interstate commerce; the Framers 
intended the Commerce Clause as a cure for these structural 
ills.''\17\ The Federal ban on multiple and discriminatory 
taxes on e-commerce fits squarely within this authority.
---------------------------------------------------------------------------
    \17\Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
---------------------------------------------------------------------------
    Internet access taxes fall within that framework as well. 
Furthermore, even if the hardware to provide that connection 
exists entirely within the taxing state, the levy hinders 
access to a nationwide network. Internet access may properly be 
viewed as the on-ramp to the information superhighway and thus 
indispensable to the Internet itself. A helpful analogy may be 
that taxing Internet access is like a state putting a tollbooth 
on the Interstate Highway System which generally is 
prohibited.\18\
---------------------------------------------------------------------------
    \18\Robert S. Kirk, Cong. Research Serv., Tolling of Interstate 
Highways: Issue in Brief (2013) (available at http://www.fas.org/sgp/
crs/misc/R42402.pdf).
---------------------------------------------------------------------------
    Indeed, there are a variety of Federal statutes that 
preempt state and local taxation in similar contexts. For 
example, 49 U.S.C 40116 prohibits states and localities from 
imposing a tax on ``an individual or the transportation of an 
individual traveling in air commerce, the sale of air 
transportation or the gross receipts from that air commerce or 
transportation.'' Other similar statutes prohibit taxation of 
interstate bus services and discriminatory taxation of 
railroads.\19\
---------------------------------------------------------------------------
    \19\49 U.S.C Sec. 14505, 49 U.S.C Sec. 11501.
---------------------------------------------------------------------------

                                Hearings

    The Committee on the Judiciary held no hearings on H.R. 
3086.

                        Committee Consideration

    On June 18, 2014, the Committee met in open session and 
ordered the bill H.R. 3086 favorably reported without 
amendment, by a rollcall vote of 30 to 4, a quorum being 
present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
following rollcall votes occurred during the Committee's 
consideration of H.R. 3086.
    1. Mr. Conyers offered an amendment that would extend the 
moratorium for 4 years rather than make it permanent. The 
amendment was defeated 12 to 21.

                             ROLLCALL NO. 1
------------------------------------------------------------------------
                                                  Ayes    Nays   Present
------------------------------------------------------------------------
Mr. Goodlatte (VA), Chairman...................              X
Mr. Sensenbrenner, Jr. (WI)....................              X
Mr. Coble (NC).................................              X
Mr. Smith (TX).................................              X
Mr. Chabot (OH)................................              X
Mr. Bachus (AL)................................              X
Mr. Issa (CA)..................................              X
Mr. Forbes (VA)................................              X
Mr. King (IA)..................................              X
Mr. Franks (AZ)................................              X
Mr. Gohmert (TX)...............................              X
Mr. Jordan (OH)................................              X
Mr. Poe (TX)...................................
Mr. Chaffetz (UT)..............................              X
Mr. Marino (PA)................................              X
Mr. Gowdy (SC).................................              X
Mr. Labrador (ID)..............................              X
Ms. Farenthold (TX)............................
Mr. Holding (NC)...............................              X
Mr. Collins (GA)...............................              X
Mr. DeSantis (FL)..............................
Mr. Smith (MO).................................              X
[Vacant].......................................

Mr. Conyers, Jr. (MI), Ranking Member..........      X
Mr. Nadler (NY)................................      X
Mr. Scott (VA).................................      X
Ms. Lofgren (CA)...............................              X
Ms. Jackson Lee (TX)...........................      X
Mr. Cohen (TN).................................              X
Mr. Johnson (GA)...............................      X
Mr. Pierluisi (PR).............................      X
Ms. Chu (CA)...................................      X
Mr. Deutch (FL)................................
Mr. Gutierrez (IL).............................
Ms. Bass (CA)..................................
Mr. Richmond (LA)..............................      X
Ms. DelBene (WA)...............................      X
Mr. Garcia (FL)................................      X
Mr. Jeffries (NY)..............................      X
Mr. Cicilline (RI).............................      X
                                                ------------------------
    Total......................................     12      21
------------------------------------------------------------------------

    2. Motion to report H.R. 3086 favorably. Passed by a vote 
of 30 to 4.

                             ROLLCALL NO. 2
------------------------------------------------------------------------
                                                  Ayes    Nays   Present
------------------------------------------------------------------------
Mr. Goodlatte (VA), Chairman...................      X
Mr. Sensenbrenner, Jr. (WI)....................      X
Mr. Coble (NC).................................      X
Mr. Smith (TX).................................      X
Mr. Chabot (OH)................................      X
Mr. Bachus (AL)................................      X
Mr. Issa (CA)..................................      X
Mr. Forbes (VA)................................      X
Mr. King (IA)..................................      X
Mr. Franks (AZ)................................      X
Mr. Gohmert (TX)...............................      X
Mr. Jordan (OH)................................      X
Mr. Poe (TX)...................................      X
Mr. Chaffetz (UT)..............................      X
Mr. Marino (PA)................................      X
Mr. Gowdy (SC).................................      X
Mr. Labrador (ID)..............................      X
Ms. Farenthold (TX)............................      X
Mr. Holding (NC)...............................      X
Mr. Collins (GA)...............................      X
Mr. DeSantis (FL)..............................      X
Mr. Smith (MO).................................      X
[Vacant].......................................

Mr. Conyers, Jr. (MI), Ranking Member..........
Mr. Nadler (NY)................................              X
Mr. Scott (VA).................................              X
Ms. Lofgren (CA)...............................      X
Ms. Jackson Lee (TX)...........................
Mr. Cohen (TN).................................      X
Mr. Johnson (GA)...............................      X
Mr. Pierluisi (PR).............................      X
Ms. Chu (CA)...................................              X
Mr. Deutch (FL)................................
Mr. Gutierrez (IL).............................
Ms. Bass (CA)..................................
Mr. Richmond (LA)..............................      X
Ms. DelBene (WA)...............................      X
Mr. Garcia (FL)................................      X
Mr. Jeffries (NY)..............................      X
Mr. Cicilline (RI).............................              X
                                                ------------------------
    Total......................................     30       4
------------------------------------------------------------------------

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 3086, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 26, 2014.
Hon. Bob Goodlatte, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3086, the 
``Permanent Internet Tax Freedom Act.''
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Melissa 
Merrell, who can be reached at 225-3220.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                  Director.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member

             H.R. 3086--Permanent Internet Tax Freedom Act.

      As ordered reported by the House Committee on the Judiciary 
                           on June 18, 2014.

                                SUMMARY

    H.R. 3086 would make permanent a moratorium on state and 
local taxes on Internet access and some taxes on electronic 
commerce. Under current law, the moratorium is set to expire on 
November 1, 2014. CBO estimates that enacting H.R. 3086 would 
have no impact on the Federal budget, but beginning in 2014, it 
would impose significant annual costs on some state and local 
governments. The bill would not affect Federal direct spending 
or revenues; therefore, pay-as-you-go procedures do not apply.
    By permanently prohibiting state and local government from 
collecting certain types of taxes, H.R. 3086 would impose an 
intergovernmental mandate as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the mandate would cause 
some state and local governments to lose revenue beginning in 
November 2014; those losses would exceed the threshold 
established in UMRA for intergovernmental mandates ($76 million 
in 2014, adjusted annually for inflation) beginning in 2015. 
CBO estimates that the direct costs to states and local 
governments would probably total more than several hundred 
million dollars annually. The bill contains no private-sector 
mandates as defined in UMRA.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    CBO estimates that enacting H.R. 3086 would have no impact 
on the Federal budget.

                      PAY-AS-YOU-GO CONSIDERATIONS

    None.

        ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

    The Internet Tax Freedom Act (ITFA), as amended, currently 
prohibits state and local governments from imposing taxes on 
Internet access and some taxes on electronic commerce until 
November 1, 2014. The ITFA also contains an exception to this 
moratorium, sometimes referred to as the grandfather clause, 
which allows some state and local governments to continue 
taxing Internet access if such tax was generally imposed and 
actually enforced prior to October 1, 1998. H.R. 3086 would 
make permanent the moratorium and eliminate the grandfather 
clause. Those changes constitute intergovernmental mandates as 
defined in UMRA because they would prohibit state and local 
governments from collecting taxes that they otherwise would 
collect, and in some cases, are currently collecting.
    The primary effect of the bill would be the loss of state 
and local revenue starting in November 2014. 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. Eliminating the 
grandfather clause would result in direct costs (in the form of 
forgone tax revenues) to those state and local governments that 
are currently collecting such revenues but would be precluded 
from doing so after H.R. 3086 is enacted.
    While there is some uncertainty about the number of 
jurisdictions currently collecting affected taxes-and the 
precise amount of those collections-CBO believes that as many 
as seven states (Hawaii, New Mexico, North Dakota, Ohio, South 
Dakota, Texas, and Wisconsin) and several local jurisdictions 
in those states are currently collecting such taxes. 
Information from four of those states indicates that the tax 
collections that would be prohibited total several hundred 
million dollars annually; those losses would exceed the 
threshold established in UMRA for intergovernmental mandates 
($76 million in 2014, adjusted annually for inflation) for each 
year, beginning in 2015.
    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 and on electronic commerce during the 
next 5 years. It is also possible that some governments would 
repeal existing taxes or preclude their application to those 
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.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    This bill contains no private-sector mandates as defined in 
UMRA.

                         ESTIMATE PREPARED BY:

Federal Costs: Susan Willie
Impact on State, Local, and Tribal Governments: Melissa Merrell
Impact on the Private Sector: Amy Petz

                         ESTIMATE APPROVED BY:

Theresa Gullo
Deputy Assistant Director for Budget Analysis

                    Duplication of Federal Programs

    No provision of H.R. 3086 establishes or reauthorizes a 
program of the Federal Government known to be duplicative of 
another Federal program, a program that was included in any 
report from the Government Accountability Office to Congress 
pursuant to section 21 of Public Law 111-139, or a program 
related to a program identified in the most recent Catalog of 
Federal Domestic Assistance.

                  Disclosure of Directed Rule Makings

    The Committee estimates that H.R. 3086 specifically directs 
to be completed no specific rule makings within the meaning of 
5 U.S.C. 551.

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
3086, makes permanent an existing moratorium that bars state 
and local governments from taxing Internet access or placing 
multiple or discriminatory taxes on Internet commerce.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 3086 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(e), 9(f), or 9(g) of Rule XXI.

                      Section-by-Section Analysis

    The following discussion describes the bill as reported by 
the Committee.
Sec. 1. Short title
    Section 1 sets forth the short title of the bill as the 
Permanent Internet Tax Freedom Act.
Sec. 2. Permanent Moratorium
    (a) Strikes the end date in the existing moratorium (47 
U.S.C. 151 note) rendering it permanent.
    (b) Effective Date--The date of enactment.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, 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 and 
existing law in which no change is proposed is shown in roman):

                        INTERNET TAX FREEDOM ACT

(Public Law 105-277; 112 Stat. 2681-719; 47 U.S.C. 151 note)

           *       *       *       *       *       *       *

DIVISION C--OTHER MATTERS

           *       *       *       *       *       *       *

                 TITLE XI--MORATORIUM ON CERTAIN TAXES

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 
may impose any of the following taxes [during the period 
beginning November 1, 2003, and ending November 1, 2014]:
            (1) * * *

           *       *       *       *       *       *       *

                            Dissenting Views

                              INTRODUCTION

    H.R. 3086, the ``Permanent Internet Tax Freedom Act,'' 
makes the Internet Tax Freedom Act\1\ permanent and ends the 
Act's grandfather protections that apply to certain states. As 
a result, the legislation will substantially reduce revenues 
for those states. In fact, the Congressional Budget Office 
estimates that H.R 3086 will cost states ``several hundred 
million dollars annually'' in lost revenues.\2\
---------------------------------------------------------------------------
    \1\Pub. L. 105-277, div. C, tit. XI (1998), 112 Stat. 2681-719, as 
amended (codified in 47 U.S.C. Sec. 151 note (2014)).
    \2\Congressional Budget Office Cost Estimate: Permanent Internet 
Tax Freedom Act, H.R. 3086, 113th Cong. (June 26, 2014) (emphasis 
added).
---------------------------------------------------------------------------
    Citing these problems and other concerns presented by the 
bill, the National Governors Association, the National 
Association of Counties, the National League of Cities, the 
U.S. Conference of Mayors, the Federation of Tax 
Administrators, the League of California Cities, the California 
State Association of Counties, the International City/County 
Management Association, the Government Finance Officers 
Association, the National Association of Telecommunications 
Officers and Advisors, the American Federation of Labor and 
Congress of Industrial Organizations (AFL-CIO), the American 
Federation of State, County and Municipal Employees (AFSCME), 
the American Federation of Teachers (AFT), the American 
Federation of Government Employees (AFGE), the Communication 
Workers of America (CWA), the Department for Professional 
Employees (DPE), the International Association of Fire Fighters 
(IAFF), the International Federation of Professional and 
Technical Engineers (IFPTE), the International Union of Police 
Associations (IUPA), the National Education Association (NEA), 
the Services Employees Union International (SEIU), the United 
Food and Commercial Workers International Union (UFCW), and the 
Multistate Tax Commission oppose H.R. 3086.\3\
---------------------------------------------------------------------------
    \3\Press Release, Nat'l Governors Ass'n, Regarding Internet Access 
Tax (June 17, 2014), available at http://nga.org/cms/sites/NGA/home/
news-room/news-releases/2014--news-releases/col2-content/nga-statement-
regarding-intern-2.html; Letter from the League of Cal. Cities Exec. 
Dir. Christopher McKenzie & the Cal. State Ass'n of Counties Exec. Dir. 
Matt Cate to Rep. John Conyers, Jr., Ranking Member of the H. Comm. on 
the Judiciary (June 17, 2014) (on file with the H. Comm. on the 
Judiciary, Democratic Staff); Letter from the Nat'l Ass'n of Counties, 
et al. to Rep. John Conyers, Jr., Ranking Member of the H. Comm. on the 
Judiciary (June 17, 2014) (on file with the H. Comm. on the Judiciary, 
Democratic Staff); Letter from the Am. Fed'n of Labor and Cong. of 
Indus. Org. (AFL-CIO), et al. to Members of the H. Comm. on the 
Judiciary (June 17, 2014) (on file with the H. Comm. on the Judiciary, 
Democratic Staff); Letter from the Fed'n of Tax Adm'rs President David 
M. Sullivan to Rep. Bob Goodlatte, Chair of the H. Comm. on the 
Judiciary, & Rep. John Conyers, Jr., Ranking Member of the H. Comm. on 
the Judiciary (June 19, 2014) (on file with the H. Comm. on the 
Judiciary, Democratic Staff); Letter from the Multistate Tax Comm'n 
Exec. Dir. Joe Huddleston to Rep. Bob Goodlatte, Chair of the H. Comm. 
on the Judiciary, & Rep. John Conyers, Jr., Ranking Member of the H. 
Comm. on the Judiciary (June 23, 2014) (on file with the H. Comm. on 
the Judiciary, Democratic Staff).
---------------------------------------------------------------------------
    For these reasons, and those discussed below, we 
respectfully dissent and urge our colleagues to reject this 
seriously flawed legislation.

                DESCRIPTION AND BACKGROUND OF H.R. 3086

    H.R. 3086 makes permanent the Internet Tax Freedom Act 
(ITFA or Act) by striking the language in current law that 
specifies the expiration date of the Act's temporary 
moratorium, which currently is November 1, 2014. The bill also 
eliminates the Act's current grandfather protections for states 
that had in effect, as of the Act's original enactment date in 
1998, laws taxing Internet access. The bill makes no other 
changes to current law.
    When enacted in 1998, the ITFA was originally intended to 
prevent the potential stifling of the Internet and to foster 
the growth of electronic commerce.\4\ It did so by: 1) 
establishing a 3-year moratorium to prevent state and 
localities from imposing new taxes on Internet access; 2) 
prohibiting multiple states from taxing the same electronic 
commerce transaction; and 3) ensuring that commerce over the 
Internet would not be singled out for new discriminatory tax 
treatment. Nevertheless, Congress also understood that while 
encouraging the development of the Internet and its related 
industries, it should balance the interests of state and local 
governments to collect revenue. For that reason, the ITFA 
included a grandfather clause to protect the state and local 
Internet access taxes in effect prior to the enactment of the 
Act. In adherence to this guidance, subsequent Congresses have 
extended the Act's temporary moratorium, revised definitions, 
and have expanded or extended certain grandfather 
protections.\5\
---------------------------------------------------------------------------
    \4\H.R. Rep. No. 105-570, pt. 1, at 7 (1998); H.R. Rep. No. 105-
570, pt. 2, at 2 (1998).
    \5\The Internet Tax Nondiscrimination Act, Pub. L. No. 107-75, 115 
Stat. 703 (2001), extended the moratorium until November 1, 2003. The 
Internet Tax Nondiscrimination Act, Pub. L. No. 108-435, 118 Stat. 2615 
(2004), extended the moratorium until November 1, 2007 and reimposed 
the moratorium retroactively to November 1, 2003. The Internet Tax 
Freedom Act Amendments Act of 2007, Pub. L. No. 110-108, 121 Stat. 
1024-1026 (2007), extended the moratorium until November 1, 2014.
---------------------------------------------------------------------------

                        CONCERNS WITH H.R. 3086

I. H.R. 3086 Ignores the Evolution of the Internet Since 1998
    The ITFA was intended as a temporary measure to assist and 
nurture the fledgling Internet that back in 1998 was still in 
its commercial infancy. In apparent oblivion to the 
significantly changed environment that surrounds today's 
Internet, H.R. 3086 still regards this technology as emerging 
and in need of extraordinary protection in the form of 
exemption from state taxation.
    In many respects, the Internet of 2014 is nearly 
unrecognizable from its 1998 predecessor. Today's Internet is 
considerably different in terms of both the extent of 
accessibility and the accompanying technology.\6\ What started 
as primarily a dial-up service available through a handful of 
providers, the Internet of today is nearly universally 
available through thousands of Internet service providers using 
technologies ranging from high-speed broadband cable or Digital 
Subscriber Line services, to wireless, satellite, fiber optics, 
and even broadband Internet access over power lines. This 
evolution has helped the Internet spawn major innovation 
initiatives and create myriad new industries.
---------------------------------------------------------------------------
    \6\See Henry J. Reske, Ending Internet Law's Grandfather Clause 
Could Cost States $500 Million, TAX ANALYSTS, June 24, 2014.
---------------------------------------------------------------------------
    In recognition of the fact that the Internet's pace of 
innovation would be complex and ever-changing technologically, 
Congress intentionally made the original moratorium temporary 
to ensure that Congress, industry, and state and local 
governments would be able to monitor the issue and make 
adjustments where necessary to accommodate new technologies and 
market realities. With continued questions as to the scope of 
the moratorium, the ongoing evolution of the Internet and its 
developing role in commerce, a permanent moratorium is unwise. 
A temporary moratorium, on the other hand, allows Congress to 
exercise its oversight and legislative authority over the 
ITFA.\7\ Indeed, it was because of the temporary nature of the 
Internet tax moratorium that Congress was able in 2007 to 
update the law's definition of Internet access, which had not 
changed significantly since the Act's enactment in 1998.
---------------------------------------------------------------------------
    \7\Letter from Jeffrey L. Esser, Exec. Dir. of the Gov't Fin. 
Officers Ass'n (Apr. 7, 2014) (on file with H. Comm. on the Judiciary, 
Democratic Staff).
---------------------------------------------------------------------------
    Further, one of the original goals of the ITFA--to foster 
electronic commerce by protecting it from multiple and 
discriminatory taxation--has already been met as evidenced by 
the explosion of commercial transactions over the Internet.\8\ 
The Internet is no longer a nascent development in need of 
Federal tax protection to grow. It is now a prosperous sector 
of the global economy. Thus, the reasons that initially 
warranted a moratorium simply no longer apply.
---------------------------------------------------------------------------
    \8\See Exploring Alternative Solutions on the Internet Sales Tax 
Issue: Hearing Before the H. Comm. on the Judiciary, 113th Cong. 
(2014).

II. LH.R. 3086 Will Devastate State Revenues, Thereby Potentially 
        Forcing States to Cut Essential Services and Increase Taxes for 
        Consumers and Businesses
    H.R. 3086 will severely impact the immediate revenues for 
the grandfather protected states and all states progressively 
in the long term. As noted earlier, the CBO estimates that H.R 
3086 ``would impose significant annual costs on some state and 
local governments''\9\ and far exceed the Unfunded Mandates 
Reform Act threshold of $76 million in 2014.\10\ As the CBO 
explained, ``the direct costs to states and local governments 
would probably total more than several hundred million dollars 
annually.'' Not surprisingly, the Federation of Tax 
Administrators estimates that H.R. 3086 would lead to at least 
$500 million in lost revenue per year from the states that 
currently are protected by the grandfather clause.\11\ 
Specifically, ``[if] the grandfather clause is eliminated, 
Texas would be hit the hardest'' losing $358 million a year in 
revenue, Wisconsin would lose about $127 million per year, Ohio 
would lose about $65 million per year, and South Dakota would 
lose about $13 million per year.\12\ Separately, the League of 
California Cities and the California State Association of 
Counties estimate that the bill would cost California 
municipalities over $500 million.\13\
---------------------------------------------------------------------------
    \9\Congressional Budget Office Cost Estimate, supra note 2.
    \10\The Unfunded Mandates Reform Act is intended to curb the 
practice of imposing Federal mandates on state and local governments 
without adequate funding. Unfunded Mandates Reform Act of 1995, Pub. L. 
No. 104-4, 109 Stat. 48 (1995).
    \11\Letter from the Fed'n of Tax Adm'rs President David M. Sullivan 
to Rep. Bob Goodlatte, Chair of the H. Comm. on the Judiciary, and Rep. 
John Conyers, Jr., Ranking Member of the H. Comm. on the Judiciary 
(June 19, 2014) (on file with the H. Comm. on the Judiciary, Democratic 
Staff).
    \12\Henry J. Reske, Ending Internet Law's Grandfather Clause Could 
Cost States $500 Million, TAX ANALYSTS, June 24, 2014.
    \13\Letter from the League of Cal. Cities Exec. Dir. Christopher 
McKenzie & the Cal. State Ass'n of Counties Exec. Dir. Matt Cate to 
Rep. John Conyers, Jr., Ranking Member of the H. Comm. on the Judiciary 
(June 17, 2014) (on file with the H. Comm. on the Judiciary, Democratic 
Staff).
---------------------------------------------------------------------------
    H.R. 3086 will restrain the states' ability to cope with 
economic downturns and deficits in several respects. First, the 
legislation will deny all states the flexibility to raise 
revenue from one sector of the economy. Second, H.R. 3086's 
inflexible effective date (November 1, 2014) fails to take into 
consideration that it occurs during the grandfather protected 
states' fiscal years, and may not give them sufficient time to 
adjust their budgetary commitments to take into consideration 
the expected revenue losses.\14\ At the markup, Ranking Member 
John Conyers, Jr. offered an amendment to extend the moratorium 
and the grandfather protections for 4 years, which would have 
given sufficient time for state governments to plan 
accordingly.\15\ This amendment, however, was defeated.\16\ 
Third, H.R. 3086 will hinder the states' ability to balance 
their budgets, especially the grandfather protected states. 
Most states are required, either statutorily or 
constitutionally, to balance their state budgets which 
typically are based on anticipated revenue and spending for the 
fiscal cycle.\17\ When revenue declines or spending increases 
during the fiscal cycle, states begin to run a deficit which 
means cutting spending or raising taxes.
---------------------------------------------------------------------------
    \14\H.R. 3086, Sec. 2(b) (2013).
    \15\The Permanent Internet Tax Freedom Act: Markup of H.R. 3086 
Before the H. Comm. on the Judiciary, 113th Cong. 11 (June 18, 2014) 
(amendment of Ranking Member John Conyers, Jr.).
    \16\The amendment failed by a roll call vote of 12-21. Id. at 50.
    \17\Nat'l Ass'n of State Budget Officers, Budget Processes in the 
States 40 (Summer 2008).
---------------------------------------------------------------------------
    If state and local governments choose to cut spending, then 
essential government services--such as educating our children, 
maintaining needed transportation infrastructure, and providing 
essential public health and safety services--will suffer. If 
state and local governments choose to raise taxes, then they 
would be forced to shift the tax burden onto other taxpayers, 
such as retailers, consumers, and homeowners, through increased 
property, income, and sales taxes. In sum, H.R. 3086 will 
burden taxpayers while excluding an entire industry from paying 
their fair share of taxes.
    Instead of limiting the tax base for state and local 
governments, Congress should be focusing on meaningful ways to 
help state and local governments and by extension, taxpayers 
and local retailers. One such approach is by passing 
legislation that would address the remote sales tax issue. The 
Senate has already acted by passing the Marketplace Fairness 
Act of 2013.\18\ Under that bill, remote sellers who currently 
do not collect sales taxes would be incentivized through free 
tax collection software and services to collect the taxes and 
remit them to the states in which they are due. That bill would 
also require states to simplify several procedures which will 
benefit retailers. Such legislation could help states and local 
governments collect the over $23 billion in estimated 
uncollected sales taxes each year.\19\
---------------------------------------------------------------------------
    \18\See H.R. 743, 113th Cong. (2013) (as passed by Senate, May 6, 
2013).
    \19\See Exploring Alternative Solutions on the Internet Sales Tax 
Issue: Hearing Before the H. Comm. on the Judiciary, 113th Cong. 212 
(2014) (Written statement of Nat'l Governors Ass'n, et al.).
---------------------------------------------------------------------------
    Not only do state and local governments suffer, local 
retailers--who have to collect sales taxes--are increasingly 
losing to out-of-state businesses that do not collect these 
taxes. Retail competitors should be able to compete on a level 
playing field with their Internet counterparts at least with 
respect to sales tax policy. The House should do its part and 
address the remote sales tax disparity before the end of this 
Congress.

                               CONCLUSION

    H.R. 3086 is misguided legislation that will devastate 
state revenues especially for those states currently protected 
by the grandfather clause, could force state governments to 
eliminate essential governmental programs and services, and 
burden taxpayers. For all of these reasons, we respectfully 
dissent.

                                   John Conyers, Jr.
                                   Jerrold Nadler.
                                   Robert C. ``Bobby'' Scott.
                                   Sheila Jackson Lee.
                                   Judy Chu.
                                   David N. Cicilline.

                                 [all]

```