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Internet Tax Ban Passes House, But Could Stall In Senate

The House unanimously passed a bill Wednesday that would permanently ban state and local taxes on Internet access, but the effort could be doomed in the Senate.

The Permanent Internet Tax Freedom Act, sponsored by Republican Rep. Bob Goodlatte and Democratic Rep. Anna Eshoo, would end Congress’s practice of periodically extending a temporary moratorium that was originally passed in 1998.

The original Internet Tax Freedom Act has been extended five times since 1998, and the current iteration expires Oct. 1. “If the moratorium is not renewed, the potential tax burden on consumers will be substantial,” Goodlatte warned in his floor statement Wednesday. (RELATED: Costly Internet Tax Could be on the Horizon)

Not only is the average tax rate on communications services roughly double the average rate for all other goods and services, he explained, but Internet taxes are also highly regressive, putting a disproportionate burden on low-income households.

“The American people deserve affordable access to the Internet and the Permanent Internet Tax Freedom Act will help prevent unreasonable cost increases that hurt consumers and slow job creation,” the bill’s sponsors said in a joint statement.

“Internet access drives innovation and the success of our economy,” they noted. “PITFA is a necessary measure to keep Internet access free of taxation.” (RELATED: The House Has Introduced a Bipartisan Bill to Keep Internet Access Untaxed)

Despite its overwhelming, bipartisan support in the House, however, PITFA is likely to face resistance in the Senate, according to The Washington Examiner.

Last year, a previous version of the bill likewise passed the House by a voice vote, only to stall in the Senate, where lawmakers insisted on combining it with the Marketplace Fairness Act, which would allow states to collect sales taxes on remote purchases.

MFA supporters say the legislation is necessary to “level the playing field” between online retailers and brick-and-mortar stores, because current law only allows sales taxes to be collected when the seller has a physical presence in the state where the buyer is located.

This tends to encourage consumers—particularly those in cities or states with high sales tax rates—to make more online purchases, which is estimated to reduce annual sales tax revenues by about $34 billion nationwide. (RELATED: Will Congress Kill Cyber Monday Deals?)

Opponents, such as Republican Sen. Ted Cruz, counter that the MFA is a “massive new sales tax” that would cripple small businesses by forcing them to comply with hundreds of different state and local tax rates.

The House refused to consider the combined legislation last time, citing concerns that the Senate’s version of the MFA would “open the door to aggressive state action against out-of-state companies.” The looming expiration of ITFA, though, means legislators will face heightened pressure to reach a compromise this time around, even if that only amounts to another temporary extension of ITFA.

Goodlatte acknowledged that “small pockets of resistance remain,” but sought to reassure opponents by asserting that, “the Committee is also eager to proceed with legislation that levels the playing field between traditional and online retailers without letting states tax and regulate beyond their borders.”

MFA supporters, though, argue the sales tax issue should take precedence over PITFA, fearing that the MFA would not have enough votes to pass as a standalone measure. (RELATED: Conservative Groups Split on Marketplace Fairness Act)

National Governors Association (NGA) Executive Director Dan Crippen, for instance, released a statement Monday saying the group is “very disappointed” that the House took up PITFA “before discussing the tax issue of greatest importance to states: the need to create parity between in-state and out-of-state retailers regarding the collection of state and local sales taxes.”

A top Senate aide told The Examiner “it would not be surprising at all” if the two measures are combined again this year. “They are trying to attach a controversial bill to one that is universally accepted and supported,” the aide explained.

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