U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

19–010

" SENATE ! 108TH CONGRESS

1st Session 

REPORT

2003

108–155

INTERNET TAX NON-DISCRIMINATION ACT 

OF 2003

REPORT

OF THE

COMMITTEE ON COMMERCE, SCIENCE, AND 

TRANSPORTATION

on

S. 150

SEPTEMBER 29, 2003.—Ordered to be printed 


congress.#13
(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

ERNEST F. HOLLINGS, South Carolina 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

BARBARA BOXER, California 

BILL NELSON, Florida 

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 

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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. 

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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), ‘‘teleVerDate jul 14 2003 07:18 Sep 30, 2003 Jkt 019010 PO 00000 Frm 00005 Fmt 6659 Sfmt 6601 E:\HR\OC\SR155.XXX SR155
4

communications 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. 

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• 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:

6

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 

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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 

8

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 reveVerDate jul 14 2003 07:18 Sep 30, 2003 Jkt 019010 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\SR155.XXX SR155
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1Though 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.’’ 

nues, 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

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, 

10

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. 

øPub. 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. 

ø(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— 

ø(1) taxes on Internet access, unless such tax was generally 

imposed and actually enforced prior to October 1, 1998; and 

ø(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. 

ø(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— 

11

ø(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 

ø(2) a State or political subdivision thereof generally collected such tax on charges for Internet access.¿

ø(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 

12

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 øservices.¿ 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’’ 

13

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.

14

SEC. ø1104.¿ 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) øexcept 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-ofState 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 deVerDate jul 14 2003 07:18 Sep 30, 2003 Jkt 019010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6601 E:\HR\OC\SR155.XXX SR155
15

livery 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 øservices.¿ 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 

16

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 øservices unless such tax was generally imposed and actually enforced prior to October 1, 1998.¿ services.

Æ