Internet Access Tax Moratorium: Revenue Impacts Will Vary by State
Published: 2007-05-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to one report, at the end of 2006, about 92 million U.S. adults used the Internet on a typical day. As public use of the Internet grew from the mid-1990s onward, Internet access became a potential target for state and local taxation. In 1998, Congress imposed a moratorium temporarily preventing state and local governments from imposing new taxes on Internet access. Existing state and local taxes were grandfathered. In amending the moratorium in 2004, Congress required GAO to study its impact on state and local government revenues. The objectives of the resulting 2006 report were to determine the scope of the moratorium and its impact, if any, on state and local revenues. This testimony is based on that report (GAO-06-273).
section_title: What GAO Found
paragraphs: The Internet tax moratorium bars taxes on Internet access services provided to end users. GAO's interpretation of the law is that the bar on taxes includes whatever an access provider reasonably bundles to consumers, including e-mail and digital subscriber line (DSL) services. The moratorium does not bar taxes on acquired services, such as high-speed communications capacity over fiber, acquired by Internet service providers (ISP) and used to deliver Internet access. However, some states and providers have construed the moratorium as barring taxation of acquired services. Some officials told GAO when it was preparing its report that their states would stop collecting such taxes as early as November 1, 2005, the date they assumed that taxes on acquired services would lose their grandfathered protection. According to GAO's reading of the law, these taxes are not barred since a tax on acquired services is not a tax on Internet access. In comments, telecommunications industry officials continued to view acquired services as subject to the moratorium and exempt from taxation. As noted above, GAO disagrees. In addition, Federation of Tax Administrators officials expressed concern that some might have a broader view of what could be included in Internet access bundles. However, GAO's view is that what is included must be reasonably related to providing Internet access. The revenue impact of eliminating grandfathering in states studied by the Congressional Budget Office (CBO) would be small, but the moratorium's total revenue impact has been unclear and any future impact would vary by state. In 2003, when CBO reported how much states and localities would lose annually by 2007 if certain grandfathered taxes were eliminated, its estimate for states with grandfathered taxes in 1998 was about 0.1 percent of those states' 2004 tax revenues. Because it is hard to know what states would have done to tax access services if no moratorium had existed, the total revenue implications of the moratorium are unclear. In general, any future moratorium-related impact will differ by state. Tax law details and tax rates varied among states. For instance, North Dakota taxed access service delivered to retail consumers, and Kansas taxed communications services acquired by ISPs to support their customers.

section_title: Letter
paragraphs: I appreciate this opportunity to discuss the moratorium on taxing access  to the Internet. According to one study, at the end of 2006 about 92 million  U.S. adults used the Internet on a typical day. As Internet usage grew from  the mid-1990s onward, state and local governments imposed some taxes  on it and considered more. Concerned about the impact of such taxes,  Congress extensively debated whether state and local governments should  be allowed to tax Internet access. The debate resulted in legislation setting  national policy on state and local taxation of access.
In 1998, Congress enacted the Internet Tax Freedom Act, which imposed  a moratorium temporarily preventing state and local governments from  imposing new taxes on Internet access or multiple or discriminatory taxes  on electronic commerce. Existing state and local taxes were  “grandfathered,” allowing them to continue to be collected. Since its  enactment, the moratorium has been amended twice, most recently in  2004, when Congress included language requiring that we study the impact  of the moratorium on state and local government revenues and on the  deployment and adoption of broadband technologies. Such technologies  permit communications over high-speed, high-capacity media, such as that  provided by cable modem service or by a telephone technology known as  digital subscriber line (DSL). This year, bills have been introduced in both  houses of Congress to make the moratorium permanent.
My remarks today are based on the first of two reports we issued  responding to the mandate that we study the impact of the moratorium.  Issued in January 2006, that report focused on the moratorium’s impact on  state and local government revenues. Its objectives were to determine    (1) the scope of the moratorium and (2) the impact of the moratorium, if  any, on state and local revenues. In determining any impact on revenues,  the report explored what would happen if grandfathering of access taxes  on dial-up and DSL services were eliminated, what might have happened  in the absence of the moratorium, and how the impact of the moratorium  might differ from state to state. The report did not focus on taxing the sale  of items over the Internet. A second report discussed the impact that  various factors, including taxes, have on broadband deployment and  adoption.
To prepare the first report, we reviewed the language of the moratorium,  its legislative history, and associated legal issues; examined studies of  revenue impact done by the Congressional Budget Office (CBO) and  others; interviewed representatives of companies and associations  involved with Internet access services; and collected information through  case studies of eight states. We chose the states to get a mixture of those  that did or did not have taxes grandfathered for different forms of access  services, did or did not have local jurisdictions that taxed access services,  had high and low state tax revenue dollars per household and business  entity with Internet presence, had high and low percentages of households  online, and covered different urban and rural parts of the country. We did  not intend the eight states to represent any other states. In the course of  our case studies, state officials told us how they made the estimates they  gave us of tax revenues collected related to Internet access and how firm  these estimates were. We could not verify the estimates, and, in doing its  study, CBO supplemented estimates that it received from states with CBO- generated information. Nevertheless, based on other information we  obtained, the state estimates we received appeared to provide a sense of  the order of magnitude of the dollars involved. We did our work from  February through December 2005 in accordance with generally accepted  government auditing standards. A later section of this testimony contains a  complete discussion of our objectives, scope, and methodology.
Let me begin by summarizing the major points of the report:  The Internet tax moratorium bars taxes on Internet access, meaning taxes  on the service of providing Internet access. In this way, it prevents  services that are reasonably bundled as part of an Internet access package,  such as electronic mail and instant messaging, from being subject to taxes  when sold to end users. These tax-exempt services also include DSL  services bundled as part of an Internet access package. Some states and  providers have construed the moratorium as also barring taxation of what  we call acquired services, such as high-speed communications capacity  over fiber, acquired by Internet service providers and used by them to  deliver access to the Internet to their customers. Because they believed  that taxes on acquired services are prohibited by the 2004 amendments,  some state officials told us when we were preparing our report that their  states would stop collecting them as early as November 1, 2005, the date  they assumed that taxes on acquired services would lose their  grandfathered protection. However, according to our reading of the law,  the moratorium does not apply to acquired services since, among other  things, a tax on acquired services is not a tax on “Internet access.”  Nontaxable “Internet access” is defined in the law as the service of  providing Internet access to an end user; it does not extend to a provider’s  acquisition of capacity to provide such service. Purchases of acquired  services are subject to taxation, depending on state law.
The revenue impact of eliminating grandfathering in states studied by CBO  would be small, but the moratorium’s total revenue impact has been  unclear and any future impact would vary by state. In 2003, CBO reported  that states and localities would lose from more than $160 million to more  than $200 million annually by 2008 if all grandfathered taxes on dial-up and  DSL services were eliminated, although part of this loss reflected acquired  services. It also identified other potential revenue losses, although  unquantified, that could have grown in the future but that now seem to  pose less of a threat. CBO’s estimated annual losses by 2007 for states that  had grandfathered taxes in 1998 were about 0.1 percent of the total 2004  tax revenues for those states. Because it is difficult to know what states  would have done to tax Internet access services if no moratorium had  existed, the total revenue implications of the moratorium are unclear. The  1998 moratorium was considered before connections to the Internet were  as widespread as they later became, limiting the window of opportunity  for states to adopt new taxes on access services. Although some states had  already chosen not to tax access services and others stopped taxing them,  other states might have been inclined to tax access services if no  moratorium were in place. In general, any future impact related to the  moratorium will differ from state to state. The details of state tax law as  well as applicable tax rates varied from one state to another. For instance,  North Dakota taxed access service delivered to retail consumers. Kansas  taxed communications services acquired by Internet service providers to  support their customers. Rhode Island taxed both access service offerings  and the acquisition of communications services. California officials said  their state did not tax these areas at all.
In oral comments on a draft of our January 2006 report, CBO staff  members said we fairly characterized CBO information and suggested  clarifications that we made as appropriate. Federation of Tax  Administrators (FTA) officials said that our legal conclusion was clearly  stated and, if adopted, would be helpful in clarifying which Internet  access-related services are taxable and which are not. However, they  expressed concern that the statute could be interpreted differently  regarding what might be reasonably bundled in providing Internet access  to consumers. A broader view of what could be included in Internet access  bundles would result in potential revenue losses much greater than we  indicated. However, as explained in the appendix, we believe that what is  bundled must be reasonably related to accessing and using the Internet. In  written comments, company representatives disagreed with GAO by  commenting that the 2004 amendments make acquired services subject to  the moratorium and therefore not taxable, and that the language of the  statute and the legislative history support this position. While we  acknowledge that there are different views about the scope of the  moratorium, our view is based on the language and structure of the  statute.
We made no recommendations in the report, and we are not making any  recommendations in this testimony.
subsections: section_title: Background
paragraphs: As shown in figure 1, residential and small business users often connect to  an Internet service provider (ISP) to access the Internet. Well-known ISPs  include America Online (AOL) and Comcast. Typically, ISPs market a  package of services that provide homes and businesses with a pathway, or  “on-ramp,” to the Internet along with services such as e-mail and instant  messaging. The ISP sends the user’s Internet traffic forward to a backbone  network where the traffic can be connected to other backbone networks  and carried over long distances. By contrast, large businesses often  maintain their own internal networks and may buy capacity from access  providers that connect their networks directly to an Internet backbone  network. We are using the term access providers to include ISPs as well as  providers who sell access to large businesses and other users. Nonlocal  traffic from both large businesses and ISPs connects to a backbone  provider’s network at a “point of presence” (POP). Figure 1 depicts two  hypothetical and simplified Internet backbone networks that link at  interconnection points and take traffic to and from residential units  through ISPs and directly from large business users.
As public use of the Internet grew from the mid-1990s onward, Internet  access and electronic commerce became potential targets for state and  local taxation. Ideas for taxation ranged from those that merely extended  existing sales or gross receipts taxes to so-called “bit taxes,” which would  measure Internet usage and tax in proportion to use. Some state and local  governments raised additional tax revenues and applied existing taxes to  Internet transactions. Owing to the Internet’s inherently interstate nature  and to issues related to taxing Internet-related activities, concern arose in  Congress as to what impact state and local taxation might have on the  Internet’s growth, and thus, on electronic commerce. Congress addressed  this concern when, in 1998, it adopted the Internet Tax Freedom Act,  which bars state and local taxes on Internet access, as well as multiple or  discriminatory taxes on electronic commerce.
Internet usage grew rapidly in the years following 1998, and the  technology to access the Internet changed markedly. Today a significant  portion of users, including home users, access the Internet over  broadband communications services using cable modem, DSL, or wireless  technologies. Fewer and fewer users rely on dial-up connections through  which they connect to their ISP by dialing a telephone number. By 2004,  some state tax authorities were taxing DSL service, which they considered  to be a telecommunications service, creating a distinction between DSL  and services offered through other technologies, such as cable modem,  that were not taxed.
Originally designed to postpone the addition of any new taxes while the  Advisory Commission on Electronic Commerce studied the tax issue and  reported to Congress, the moratorium was extended in 2001 for 2 years  and again in 2004, retroactively, to remain in force until November 1, 2007.  The 2001 extension made no other changes to the original act, but the 2004  act included clarifying amendments. The 2004 act amended language that  had exempted telecommunications services from the moratorium.  Recognizing state and local concerns about their ability to tax voice  services provided over the Internet, it also contained language allowing  taxation of telephone service using Voice over Internet Protocol (VoIP).  Although the 2004 amendments extended grandfathered protection  generally to November 2007, grandfathering extended only to November  2005 for taxes subject to the new moratorium but not to the original  moratorium.
section_title: Objectives, Scope, and Methodology
paragraphs: To determine the scope of the Internet tax moratorium, we reviewed the  language of the moratorium, the legislative history of the 1998 act and the  2004 amendments, and associated legal issues.
To determine the impact of the moratorium on state and local revenues,  we worked in stages. First, we reviewed studies of revenue impact done by  CBO, FTA, and the staff of the Multistate Tax Commission and discussed  relevant issues with federal representatives, state and local government  and industry associations, and companies providing Internet access  services. Then, we used structured interviews to do case studies in eight  states that we chose as described earlier. We did not intend the eight  states to represent any other states.
For each selected state, we focused on specific aspects of its tax system  by using our structured interview and collecting relevant documentation.  For instance, we reviewed the types and structures of Internet access  service taxes, the revenues collected from those taxes, officials’ views of  the significance of the moratorium to their government’s financial  situation, and their opinions of any implications to their states of the new  definition of Internet access. We also learned whether localities within the  states were taxing access services. When issues arose, we contacted other  states and localities to increase our understanding of these issues.
We discussed with state officials how they derived the estimates they gave  us of tax dollars collected and how firm these numbers were. We could  not verify the estimates, and CBO supplemented estimates that it received  from states. Nevertheless, based on other information we obtained, the  state estimates appeared to provide a sense of the order of magnitude of  the numbers compared to state tax revenues.
We did our work from February through December 2005 in accordance  with generally accepted government auditing standards.
section_title: Internet Access Services, Including Bundled Access Services, May Not Be Taxed, but Acquired Services May Be
paragraphs: The moratorium bars taxes on the service of providing access, which  includes whatever an access provider reasonably bundles in its access  offering to consumers. On the other hand, the moratorium does not  prohibit taxes on acquired services, referring to goods and services that an  access provider acquires to enable it to bundle and provide its access  package to its customers. However, some providers and state officials  have expressed a different view, believing the moratorium barred taxing  acquired services in addition to bundled access services.
subsections: section_title: Internet Access Services, Including Bundled Broadband Services, May Not Be Taxed
paragraphs: “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. The term  ‘Internet access’ does not include telecommunications services, except to the extent such  services are purchased, used, or sold by a provider of Internet access to provide Internet  access.” (italics provided)
As shown in the simplified illustration in figure 2, the items reasonably  bundled in a tax-exempt Internet access package may include e-mail,  instant messaging, and Internet access itself. Internet access, in turn,  includes broadband services, such as cable modem and DSL services,  which provide continuous, high-speed access without tying up wireline  telephone service. As figure 2 also illustrates, a tax-exempt bundle does  not include video, traditional wireline telephone service referred to as  “plain old telephone service” (POTS), or VoIP. These services are subject  to tax. For simplicity, the figure shows a number of services transmitted  over one communications line. In reality, a line to a consumer may support  just one service at a time, as is typically the case for POTS, or it may  simultaneously support a variety of services, such as television, Internet  access, and VoIP.
Our reading of the 1998 law and the relevant legislative history indicates  that Congress had intended to bar taxes on services bundled with access.  However, there were different interpretations about whether DSL service  could be taxed under existing law, and some states taxed DSL. The 2004  amendment was aimed at making sure that DSL service bundled with  access could not be taxed. See the appendix for further explanation.
section_title: Acquired Services May Be Taxed
paragraphs: Figure 3 shows how the nature and tax status of the Internet access  services just described differ from the nature and tax status of services  that an ISP acquires and uses to deliver access to its customers. An ISP in  the middle of figure 3 acquires communications and other services and  incidental supplies (shown on the left side of the figure) in order to deliver  access services to customers (shown on the right side of the figure). We  refer to the acquisitions on the left side as purchases of “acquired  services.” For example, acquired services include ISP leases of high- speed communications capacity over wire, cable, or fiber to carry traffic  from customers to the Internet backbone.
Purchases of acquired services are subject to taxation, depending on state  law, because the moratorium does not apply to acquired services. As noted  above, the moratorium applies only to taxes imposed on “Internet access,”  which is defined in the law as “a service that enables users to access  content, information, electronic mail, or other services offered over the  Internet.…” In other words, it is the service of providing Internet access to  the end user—not the acquisition of capacity to do so—that constitutes  “Internet access” subject to the moratorium.
Some providers and state officials have construed the moratorium as  barring taxation of acquired services, reading the 2004 amendments as  making acquired services tax exempt. However, as indicated by the  language of the statute, the 2004 amendments did not expand the  definition of “Internet access,” but rather amended the exception from the  definition to allow certain “telecommunication services” to qualify for the  moratorium if they are part of the service of providing Internet access. A  tax on acquired services is not a tax directly imposed on the service of  providing Internet access.
Our view that acquired services are not subject to the moratorium on  taxing Internet access is based on the language and structure of the  statute, as described further in the appendix. We acknowledge that others  have different views about the scope of the moratorium. Congress could,  of course, deal with this issue by amending the statute to explicitly  address the tax status of acquired services.
section_title: Some States Have Applied the Moratorium to Acquired Services
paragraphs: As noted above, some providers and state officials have construed the  moratorium as barring taxation of acquired services. Some provider  representatives said that acquired services were not taxable at the time we  contacted them and had never been taxable. Others said that acquired  services were taxable when we contacted them but would become tax  exempt in November 2005 under the 2004 amendments, the date they  assumed that taxes on acquired services would no longer be  grandfathered.
As shown in table 1, officials from four out of the eight states we studied— Kansas, Mississippi, Ohio, and Rhode Island—also said their states would  stop collecting taxes on acquired services, as of November 1, 2005, in the  case of Kansas and Ohio whose collections have actually stopped, and  later for the others. These states roughly estimated the cost of this change  to them to be a little more than $40 million in revenues that were collected  in 2004. An Ohio official indicated that two components comprised most  of the dollar amounts of taxes collected from these services in 2004:     $20.5 million from taxes on telecommunications services and property  provided to ISPs and Internet backbone providers, and $9.1 million from  taxes for private line services (such as high-capacity T-1 and T-3 lines) and  800/wide-area telecommunications services that the official said would be  exempt due to the moratorium. The rough estimates in table 1 are subject  to the same limitations described in the next section for the state  estimates of all taxes collected related to Internet access.
section_title: While the Revenue Impact of Eliminating Grandfathering Would Be Small, the Moratorium’s Total Revenue Impact Has Been Unclear and Any Future Impact Would Vary by State
paragraphs: According to CBO data, grandfathered taxes in the states CBO studied  were a small percentage of those states’ tax revenues. However, because it  is difficult to know which states, if any, might have chosen to tax Internet  access services and what taxes they might have chosen to use if no  moratorium had ever existed, the total revenue implications of the  moratorium are unclear. In general, any future impact related to the  moratorium will differ from state to state.
subsections: section_title: According to Information in CBO Reports, States Would Lose a Small Fraction of Their Tax Revenues if Grandfathered Taxes on Dial-up and DSL Services Were Eliminated
paragraphs: In 2003, CBO reported how much state and local governments that had  grandfathered taxes on dial-up and DSL services would lose in revenues if  the grandfathering were eliminated. The fact that these estimates  represented a small fraction of state tax revenues is consistent with other  information we obtained. In addition, the enacted legislation was narrower  than what CBO reviewed, meaning that CBO’s stated concerns about VoIP  and taxing providers’ income and assets would have dissipated.
CBO provided two estimates in 2003 that, when totaled, showed that no  longer allowing grandfathered dial-up and DSL service taxes would cause  state and local governments to lose from more than $160 million to more  than $200 million annually by 2008. According to a CBO staff member, this  estimate included some amounts for what we are calling acquired services  that, as discussed in the previous section, would not have to be lost. CBO  provided no estimates of revenues involved for governments not already  assessing the taxes and said it could not estimate the size of any additional  impacts on state and local revenues of the change in the definition of  Internet access. Further, according to a CBO staff member, CBO’s  estimates did not include any lost revenues from taxes on cable modem  services. In October 2003, around the time of CBO’s estimates, the number  of cable home Internet connections was 12.6 million, compared to 9.3  million home DSL connections and 38.6 million home dial-up connections.
CBO first estimated that as many as 10 states and several local  governments would lose $80 million to $120 million annually, beginning in  2007, if the 1998 grandfather clause were repealed. Its second estimate  showed that, by 2008, state and local governments would likely lose more  than $80 million per year from taxes on DSL service.
The CBO numbers are a small fraction of total state tax revenue amounts.  For example, the $80 million to $120 million estimate for the states with  originally grandfathered taxes for 2007 was about 0.1 percent of tax  revenues in those states for 2004—3 years earlier.
The fact that CBO estimates are a small part of state tax revenues is  consistent with information we obtained from our state case studies and  interviews with providers. For instance, after telling us whether various  access-related services, including cable modem service, were subject to  taxation in their jurisdictions, the states collecting taxes gave us rough  estimates of how much access-service related tax revenues they collected  for 2004 for themselves and their localities, if applicable. (See table 2). All  except two collected $10 million or less.
The states made their estimates by assuming, for instance, that access  service-related tax revenues were a certain percentage of state  telecommunications sales tax revenues, by reviewing providers’ returns, or  by making various calculations starting with census data. Most estimates  provided us were more ballpark approximations than precise  computations, and CBO staff expressed a healthy skepticism toward some  state estimates they received. They said that the supplemental state-by- state information they developed sometimes produced lower estimates  than the states provided. According to others knowledgeable in the area,  estimates provided us were imprecise because when companies filed sales  or gross receipts tax returns with states, they did not have to specifically  identify the amount of taxes they received from providing Internet access- related services to retail consumers or to other providers. As discussed  earlier, sales to other providers remain subject to taxation, depending on  state law. Some providers told us they did not keep records in such a way  as to be able to readily provide that kind of information. Also, although  states reviewed tax compliance by auditing taxpayers, they could not audit  all providers.
The dollar amounts in table 2 include amounts, where provided, for local  governments within the states. For instance, Kansas’s total includes about  $2 million for localities. In this state as well as in others we studied, local  jurisdictions were piggybacking on the state taxes, although the local tax  rates could differ from each other.
State tax officials from our case study states who commented to us on the  impacts of the revenue amounts did not consider them significant.  Similarly, state officials voiced concerns but did not cite nondollar  specifics when describing any possible impact on their state finances  arising from no longer taxing Internet access services. However, one noted  that taking away Internet access as a source of revenue was another step  in the erosion of the state’s tax base. Other state and local officials  observed that if taxation of Internet access were eliminated, the state or  locality would have to act somehow to continue meeting its requirement  for a balanced budget. At the local level, officials told us that a revenue  decrease would reduce the amount of road maintenance that could be  done or could adversely affect the number of employees available for  providing government services.
section_title: Timing of Moratorium Might Have Precluded Many States from Taxing Access Services, with Unclear Revenue Implications
paragraphs: Because it is difficult to predict what states would have done to tax  Internet access services had Congress not intervened when it did, it is hard  to estimate the amount of revenue that was not raised because of the  moratorium. For instance, at the time the first moratorium was being  considered in 1998, the Department of Commerce reported Internet  connections for less than a fifth of U.S. households, much less than the  half of U.S. households reported 6 years later. Access was typically dial-up.  As states and localities saw the level of Internet connections rising and  other technologies becoming available, they might have taxed access  services if no moratorium had been in place. Taxes could have taken  different forms. For example, jurisdictions might have even adopted bit  taxes based on the volume of digital information transmitted.
The number of states collecting taxes on access services when the first  moratorium was being considered in early 1998 was relatively small, with  13 states and the District of Columbia collecting these taxes, according to  the Congressional Research Service. Five of those jurisdictions later  eliminated or chose not to enforce their tax. In addition, not all 37 other  states would have taxed access services related to the Internet even if they  could have. For example, California had already passed its own Internet  tax moratorium in August 1998.
Given that some states never taxed access services while relatively few  Internet connections existed, that some stopped taxing access services,  and that others taxed DSL service, it is unclear what jurisdictions would  have done if no moratorium had existed. However, the relatively early  initiation of a moratorium reduced the opportunity for states inclined to  tax access services to do so before Internet connections became more  widespread.
section_title: Any Future Impact of the Moratorium Will Vary by State
paragraphs: Although as previously noted the impact of eliminating grandfathering  would be small in states studied by CBO or by us, any future impact  related to the moratorium will vary on a state-by-state basis for many  reasons. State tax laws differed significantly from each other, and states  and providers disagreed on how state laws applied to the providers.
As shown in table 3, states taxed Internet access using different tax  vehicles imposed on diverse tax bases at various rates. The tax used might  be generally applicable to a variety of goods and services, as in Kansas,  which did not impose a separate tax on communications services. There,  the state’s general sales tax applied to the purchase of communications  services by access providers at an average rate of 6.6 percent, combining  state and average local tax rates. As another example, North Dakota  imposed a sales tax on retail consumers’ communications services,  including Internet access services, at an average state and local combined  rate of 6 percent.
Our case study states showed little consistency in the base they taxed in  taxing services related to Internet access. States imposed taxes on  different transactions and populations. North Dakota and Texas taxed  only services delivered to retail consumers. In a type of transaction which,  as discussed earlier, we do not view as subject to the moratorium, Kansas  and Mississippi taxed acquired communications services purchased by  access providers. Ohio and Rhode Island taxed both the provision of  access services and acquired services, and California and Virginia officials  told us their states taxed neither. States also provided various exemptions  from their taxes. Ohio exempted residential consumers, but not  businesses, from its tax on access services, and Texas exempted the first  $25 of monthly Internet access service charges from taxation.
Some state and local officials and company representatives held different  opinions about whether certain taxes were grandfathered and about  whether the moratorium applied in various circumstances. For example,  some providers’ officials questioned whether taxes in North Dakota,  Wisconsin, and certain cities in Colorado were grandfathered, and whether  those jurisdictions were permitted to continue taxing. Providers disagreed  among themselves about how to comply with the tax law of states whose  taxes may or may not have been grandfathered. Some providers told us  they collected and remitted taxes to the states even when they were  uncertain whether these actions were necessary; however, they told us of  others that did not make payments to the taxing states in similarly  uncertain situations. In its 2003 work, CBO had said that some companies  challenged the applicability of Internet access taxes to the service they  provided and thus might not have been collecting or remitting them even  though the states believed they should.
Because of all these state-by-state differences and uncertainties, the  impact of future changes related to the moratorium would vary by state.  Whether the moratorium were lifted or made permanent and whether  grandfathering were continued or eliminated, states would be affected  differently from each other.
section_title: External Comments
paragraphs: We showed staff members of CBO, officials of FTA, and representatives of  telecommunications companies assembled by the United States Telecom  Association a draft of our January 2006 report and asked for oral  comments. On January 5, 2006, CBO staff members, including the Chief of  the State and Local Government Unit, Cost Estimates Unit, said we fairly  characterized CBO information and suggested clarifications that we made  as appropriate. In one case, we noted more clearly that CBO supplemented  its dollar estimates of revenue impact with a statement that other potential  revenue losses could potentially grow by an unquantified amount.
On January 6, 2006, FTA officials, including the Executive Director, said  that our legal conclusion was clearly stated and, if adopted, would be  helpful in clarifying which Internet access-related services are taxable and  which are not. However, they expressed concern that the statute could be  interpreted differently regarding what might be reasonably bundled in  providing Internet access to consumers. A broader view of what could be  included in Internet access bundles would result in potential revenue  losses much greater than we indicated. However, as explained in the  appendix, we believe that what is bundled must be reasonably related to  accessing and using the Internet. FTA officials were also concerned that  our reading of the 1998 law regarding the taxation of DSL services is  debatable and suggests that states overreached by taxing them. We  recognize that Congress acted in 2004 to address different interpretations  of the statute, and we made some changes to clarify our presentation. We  acknowledge there were different views on this matter, and we are not  attributing any improper intent to the states’ actions.
When meeting with us, representatives of telecommunications companies  said they would like to submit comments in writing. Their comments argue  that the 2004 amendments make acquired services subject to the  moratorium and therefore not taxable, and that the language of the statute  and the legislative history support this position. In response, we made  some changes to simplify the appendix. That appendix, along with the  section of the testimony on bundled access services and acquired services,  contains an explanation of our view that the language and structure of the  statute support our interpretation.
Mr. Chairman, Mr. Vice Chairman, and Members of the Committee, this  concludes my testimony. I would be happy to answer any questions you  may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information, please contact James R. White on (202) 512-9110  or whitej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  testimony. Individuals who made key contributions to this testimony  include Michael Springer, Assistant Director; Edda Emmanuelli-Perez;  Lynn H. Gibson; Bert Japikse; Shirley A. Jones; Lawrence M. Korb;      Donna L. Miller; Walter K. Vance; and Bethany C. Widick.
section_title: Appendix I: Bundled Access Services May Not Be Taxed, but Acquired Services Are Taxable
paragraphs: The moratorium bars taxes on the service of providing access, which  includes whatever an access provider reasonably bundles in its access  offering to consumers. On the other hand, the moratorium does not bar  taxes on acquired services.
subsections: section_title: Bundled Services, Including Broadband Services, May Not Be Taxed
paragraphs: As noted earlier, the 2004 amendments followed a period of significant  growth and technological development related to the Internet. By 2004,  broadband communications technologies were becoming more widely  available. They could provide greatly enhanced access compared to the  dial-up access technologies widely used in 1998. These broadband  technologies, which include cable modem service built upon digital cable  television infrastructure as well as digital subscriber line (DSL) service,  provide continuous, high-speed Internet access without tying up wire-line  telephone service. Indeed, cable and DSL facilities could support multiple  services—television, Internet access, and telephone services—over  common coaxial cable, fiber, and copper wire media.
The Internet Tax Freedom Act bars “taxes on Internet access” and defines  “Internet access” as a service that enables “users to access content,  information, electronic mail, or other services offered over the Internet.”  The term Internet access as used in this context includes “access to  proprietary content, information, and other services as part of a package  of services offered to users.” The original act expressly excluded  “telecommunications services” from the definition. As will be seen, the act  barred jurisdictions from taxing services such as e-mail and instant  messaging bundled by providers as part of their Internet access package;  however, it permitted dial-up telephone service, which was usually  provided separately, to be taxed.
The original definition of Internet access, exempting “telecommunications  services,” was changed by the 2004 amendment. Parties seeking to carve  out exceptions that could be taxed had sought to break out and treat DSL  services as telecommunications services, claiming the services were  exempt from the moratorium even though they were bundled as part of an  Internet access package. State and local tax authorities began taxing DSL  service, creating a distinction between DSL and services offered using  other technologies, such as cable modem service, a competing method of  providing Internet access that was not to be taxed. The 2004 amendment  was aimed at making sure that DSL service bundled with access could not  be taxed. The amendment excluded from the telecommunications services  exemption telecommunications services that were “purchased, used, or  sold by a provider of Internet access to provide Internet access.”
The fact that the original 1998 act exempted telecommunications services  shows that other reasonably bundled services remained a part of Internet  access service and, therefore, subject to the moratorium. Thus,  communications services such as cable modem services that are not  classified as telecommunications services are included under the  moratorium.
section_title: Acquired Services May Be Taxed
paragraphs: As emphasized by numerous judicial decisions, we begin the task of  construing a statute with the language of the statute itself, applying the  canon of statutory construction known as the plain meaning rule. E.g.  Hartford Underwriter Insurance Co. v. Union Planers Bank, N.A., 530  U.S. 1 (2000); Robinson v. Shell Oil Co., 519 U.S. 337 (1997). Singer, 2A,  Sutherland Statutory Construction, §§ 46:1, 48A:11, 15-16. Thus, under the  plain meaning rule, the primary means for Congress to express its intent is  the words it enacts into law and interpretations of the statute should rely  upon and flow from the language of the statute. “The term ‘Internet access’ means a service that enables users to access content,  information, electronic mail, or other services offered over the Internet.…The term  “Internet access” does not include telecommunications services, except to the extent such  services are purchased, used, or sold by a provider of Internet access to provide internet  access.” Section 1105(5).
The language added in 2004—exempting from “telecommunications  services” those services that are “purchased, used, or sold” by a provider  in offering Internet access—has been read by some as expanding the  “Internet access” to which the tax moratorium applies, by barring taxes on  “acquired services.” Those who would read the moratorium expansively  take the view that everything acquired by Internet service providers (ISP)  (everything on the left side of figure 3) as well as everything furnished by  them (everything in the middle of figure 3) is exempt from tax.
In our view, the language and structure of the statute do not permit the  expansive reading noted above. “Internet access” was originally defined  and continues to be defined for purposes of the moratorium as the service  of providing Internet access to a user. Section 1105(5). It is this  transaction, between the Internet provider and the end user, which is  nontaxable under the terms of the moratorium. The portion of the  definition that was amended in 2004 was the exception: that is,  telecommunication services are excluded from nontaxable “Internet  access,” except to the extent such services are “purchased, used, or sold  by a provider of Internet access to provide Internet access.” Thus, we  conclude that the fact that services are “purchased, used, or sold” by an  Internet provider has meaning only in determining whether these services  can still qualify for the moratorium notwithstanding that they are  “telecommunications services;” it does not mean that such services are  independently nontaxable irrespective of whether they are part of the  service an Internet provider offers to an end user. Rather, a service that is  “purchased, used, or sold” to provide Internet access is not taxable only if  it is part of providing the service of Internet access to the end user. Such  services can be part of the provision of Internet access by a provider who,  for example, “purchases” a service for the purpose of bundling it as part of  an Internet access offering; “uses” a service it owns or has acquired for  that purpose; or simply “sells” owned or acquired services as part of its  Internet access bundle.
In addition, we read the amended exception as applying only to services  that are classified as telecommunications services under the 1998 act as  amended. In fact, the moratorium defines the term “telecommunications  services” with reference to its definition in the Communications Act of  1934, under which DSL and cable modem service are no longer classified  as telecommunications services. Moreover, under the Communications  Act, the term telecommunications services applies to the delivery of  services to the end user who determines the content to be communicated;  it does not apply to communications services delivered to access service  providers by others in the chain of facilities through which Internet traffic  may pass. Thus, since broadband services are not telecommunications  services, the exception in the 1998 act does not apply to them, and they are  not affected by the exception.
The best evidence of statutory intent is the text of the statute itself. While  legislative history can be useful in shedding light on the intent of the  statute or to resolve ambiguities, it is not to be used to inject ambiguity  into the statutory language or to rewrite the statute. E.g., Shannon v.  United States 512 U.S. 573, 583 (1994). In our view, the definition of  Internet access is unambiguous, and, therefore, it is unnecessary to look  beyond the statute to discern its meaning from legislative history. We note,  however, that consistent with our interpretation of the statute, the  overarching thrust of changes made by the 2004 amendments to the  definition of Internet access was to take remedial correction to assure that  broadband services such as DSL were not taxable when bundled with an  ISP’s offering. While there are some references in the legislative history to  “wholesale” services, backbone, and broadband, many of these pertained  to earlier versions of the bill containing language different from that which  was ultimately enacted. The language that was enacted, using the phrase  “purchased, used, or sold by a provider of Internet access” was added  through the adoption of a substitute offered by Senator McCain, 150 Cong.  Rec. S4402, which was adopted following cloture and agreement to several  amendments designed to narrow differences between proponents and  opponents of the bill. Changes to legislative language during the  consideration of a bill may support an inference that in enacting the final  language, Congress intended to reject or work a compromise with respect  to earlier versions of the bill. Statements made about earlier versions carry  little weight. Landgraf v. USI Film Products, 511 U.S. 244, 255-56 (1994).  Singer, 2A, Sutherland Statutory Construction, § 48:4. In any event, the  plain language of the statute remains controlling where, as we have  concluded, the language and the structure of the statute are clear on their  face. “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.”
At the time the 2003 report was drafted, the sentence of concern in the draft legislation  read, “Such term  does not include telecommunications  services, except to the extent such services are used to provide Internet access.” As  adopted, the wording became, “The term ‘Internet access’ does not include  telecommunications services, except to the extent such services are purchased, used, or  sold by a provider of Internet access to provide Internet access.”  The amended language  thus focuses on the package of services offered by the access provider, not on the act of  providing access alone.
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