Too Many Grandfathers Spoil the Broth: The Failure of the Internet Tax Nondiscrimination Act?

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1 Too Many Grandfathers Spoil the Broth: The Failure of the Internet Tax Nondiscrimination Act? by James P. Kratochvill and Pilar M. Sansone James P. Kratochvill is of counsel to and Pilar M. Sansone is an associate with Morrison & Foerster LLP. Congress recently returned its attention to determining whether to extend the Internet Tax Nondiscrimination Act (ITNA), which imposes a moratorium on the state and local taxation of Internet access and prohibits multiple or discriminatory taxes on electronic commerce. 1 However, the 2004 expansion of the definition of Internet access to include telecommunications services purchased, used, or sold by an Internet service provider (ISP) for the provision of Internet access, combined with poor drafting of multiple provisions intended to grandfather states that taxed such Internet access before the 2004 amendments, has created uncertainty and confusion among the states, telecommunications providers, and ISPs about when those changes are to take effect. As a result, several states have to date been able to thwart the purpose of the 2004 amendment by taking the position that a technical reading of ITNA would allow those states to tax telecommunications services used to provide Internet access throughout the ITNA s duration. Congress should be mindful of that predicament in deciding whether and how to extend ITNA when it expires in November Congress should also 1 Four bills have been introduced in the 110th Congress: H.R. 743, H.R. 1077, S. 156, and S Three of those bills would make the moratorium permanent and would effectively prohibit all states from imposing a tax on Internet access. Of those three, H.R would also remove any existing provisions grandfathering some jurisdictions. S would amend the definition of Internet access, extend ITNA until November 1, 2011, and grandfather jurisdictions that had imposed a tax on Internet access through the end of the moratorium. (For H.R. 743, see Doc or 2007 STT 23-1.) consider providing legislative clarification regarding its original intent to encourage states to administer ITNA consistently and to potentially reduce litigation regarding that issue. This article provides a brief historical overview of ITNA, explains the grandfather provisions, analyzes the conflicting interpretations, and attempts to draw some conclusions as to the merits of each. The Internet Tax Freedom Act Congress enacted the original Internet Tax Freedom Act (ITFA) in Generally speaking, the purpose of ITFA was to encourage the development of the Internet by preventing states from imposing taxes on Internet access, multiple taxes on a single electronic commerce transaction, and discriminatory taxes aimed toward commerce conducted over the Internet. 2 The original ITFA imposed a three-year moratorium on the state and local taxation of Internet access. 3 Internet access was defined as: A service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. Such term does not include telecommunications services. 4 However, Congress specifically excluded from the moratorium taxes that had been generally imposed and actually enforced before ITFA via a grandfather provision, hereinafter referred to as the ITFA grandfather. The ITFA grandfather provided that: 2 See, for example, Steven Maguire and Nonna A. Noto, Congressional Research Service, Report for Congress RL33261, Internet Taxation: Issues and Legislation in the 109th Congress (Feb. 2, 2006) U.S.C. section 151 at section 1101(a)(1) (1994 & Supp ). 4 Id. at section 1104(5) (emphasis added). State Tax Notes, October 1,

2 Special Report For purposes of this section, a tax has been generally imposed and actually enforced prior to October 1, 1998, if, before that date, the tax was authorized by statute and either (1) a provider of Internet access services had a reasonable opportunity to know by virtue of a rule or other public proclamation made by the appropriate administrative agency of the State or political subdivision thereof, that such agency has interpreted and applied such tax to Internet access services; or (2) a State or political subdivision thereof generally collected such tax on charges for Internet access. 5 Ten states Connecticut, Iowa, New Mexico, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, and Wisconsin the District of Columbia claimed to be grandfathered under the ITFA grandfather. 6 Three of those states North Dakota, Tennessee, and Wisconsin did not tax Internet access under clear statutory authority but rather sought to include Internet access under the category of taxable telecommunications by administrative fiat. 7 Although North Dakota and Wisconsin continue to assert their tax, the Tennessee Court of Appeals held that Tennessee s efforts to tax Internet access as telecommunications were illegal. 8 The court held that Internet access did not constitute telecommunications under the applicable statute because the ISP was a consumer rather than the provider of telecommunications services and because telecommunications service was not the true object of the ISP s sale of Internet access to its customers. 9 5 Id. at section 1101(d) (emphasis added). 6 Subsequently, Connecticut, Iowa, Tennessee, and the District of Columbia eliminated their tax on Internet access, and South Carolina has not enforced the collection of its tax during the federal moratorium. Those developments left six states imposing a sales tax (or equivalent tax) on Internet access as of January 2006: New Mexico, North Dakota, Ohio (on commercial use only), South Dakota, Texas (on monthly charges over $25), and Wisconsin. Also, Hawaii levies a general excise tax, New Hampshire levies a communications services tax (imposed on all two-way communications equipment), and Washington state levies a business and occupation tax (a gross receipts tax levied on business) on Internet access. See Maguire and Noto, supra note 2. 7 Sales Tax Newsletter (Office of State Tax Commissioner, State of North Dakota), March 1996; Notice on Sales of Internet Access and Related Services (Department of Revenue, State of Tennessee), Nov. 1996; letter from Wisconsin Department of Revenue dated Dec. 1, Prodigy Services Corp. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003), discretionary appeal denied by M SC-R11-CV, 2003 Tenn. LEXIS 1270 (Tenn. Dec. 22, 2003). 9 The Tennessee DOR subsequently issued a notice changing its position and advising that Internet access was no longer considered a taxable telecommunications service. (Footnote continued in next column.) The original ITFA expired on November 1, On November 28, 2001, Congress extended the moratorium, otherwise unchanged, until November 1, The Internet Tax Nondiscrimination Act ITNA was signed into law on December 3, ITNA amended ITFA, made it retroactive to November 1, 2003, 11 and extended it to November 1, ITNA included two changes that have created the controversy discussed in this article. First, ITNA expanded the definition of Internet access to include specific telecommunications services used or sold in the provision of Internet access. Second, ITNA added three grandfather provisions, two of which are relevant here. As evidenced by the legislative history of ITNA, those grandfather provisions were intended to turn on ITFA s definition of Internet access and ITNA s expanded definition of Internet access. However, because those two grandfather provisions used identical terminology (that is, both simply used the term Internet access ), the grandfather provisions have been subject to different interpretations and are not being administered consistently by the states. ITNA s Definition of Internet Access ITNA amended the definition of Internet access by expanding it to include telecommunications services used or sold in the provision of Internet access. ITNA now defines Internet access as: 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. 13 Sales and Use Tax Changes for Internet Access, Sales & Use Tax Important Notice #04-03 (Department of Revenue, State of Tennessee), Jan. 30, See Internet Tax Nondiscrimination Act of 2001, Pub. L. No , 115 Stat. 703 (2001). President Bush signed the bill into law on November 28, The name of the act was then technically changed to the Internet Tax Nondiscrimination Act. However, for purposes of this article and to reduce the reader s confusion, the use of the title Internet Tax Nondiscrimination Act (ITNA) will be confined to the act enacted in 2004, and ITFA will be used to describe the law before that date U.S.C. section 151 at section 1101(a) (2000 & Supp ). 12 See Internet Tax Nondiscrimination Act of 2004, Pub. L. No , sections 2-6A, 118 Stat (2004) U.S.C. section 151 at section 1105(5) (2000 & Supp ) (emphasis added). 30 State Tax Notes, October 1, 2007

3 Congress amended the definition of Internet access for two reasons. First, Congress sought to prevent states from taxing Internet access differently depending on how a provider assembled and delivered the service to consumers. For example, in many instances, Internet access is provided using a method of transmission that is considered integral to the Internet access service itself. In particular, digital subscriber lines (DSL), cable broadband, and wireless services generally are not considered to be sold by the ISP separately from Internet access. The amendment of the term Internet access was intended to equalize the tax treatment of similar technology used to provide Internet access. Although most states took the position that the DSL and other telecommunications services sold to an ISP were used by the ISP to provide a nontaxable, high-speed Internet access service and thus were not subject to tax when sold to the end user, 14 some states administratively asserted that ISPs were selling a taxable telecommunications service to their customers. For example, Kentucky issued a letter saying that companies that sold Internet access and DSL to end users as a bundled product were selling taxable communications services. 15 The Colorado Department of Revenue took the position that when the ISP chose to bundle otherwise nontaxable Internet access with a taxable telecommunications service (such as DSL), the ISP was responsible for determining a reasonable breakdown of the charges for Internet access and telecommunications services. Colorado subjects the telecommunications portion of the transaction to its sales tax. 16 Also, many states taxed telecommunications services used to deliver Internet access to the end user. For example, one source reported that 27 states taxed DSL service while competing cable modem 14 See, e.g., State of Louisiana, Department of Revenue, LTR (Apr. 4, 2003); New York State Department of Taxation and Finance, Advisory Opinion TSB-A-03(37)S (Sept. 3, 2003); Okla. Admin. Code section 710: (b)(1); State of South Carolina, Department of Revenue, LTR 03-2 (Mar. 10, 2003). Some states took the position that Internet access using DSL was not subject to tax unless the ISP separately charged for the DSL to the end user. See, e.g., Illinois Department of Revenue, LTR ST GIL (May 23, 2001); Missouri Department of Revenue, LTR LR2685 (Jan. 31, 2001). 15 LTR from Kentucky Revenue Cabinet to Kentucky Telephone Association dated Jan, 23, 2003 (on file with authors). 16 Colorado Revenue Today, Notice to Internet Service Providers, Colorado Department of Revenue (May 2001). Special Report services were exempt from tax. 17 The amendment of the term Internet access thus also was intended to equalize the tax treatment of similar technology used to provide Internet access. ITNA s legislative history generally supports the reasoning and importance to Congress of enacting the modified definition. Rep Melvin L. Watt, D-N.C., and Chris Cannon, R-Utah, originally introduced the amendment to the definition of Internet access into the House of Representatives. Watt provided the following rationale for the change to the definition: This amendment is intended to address certain ambiguities that have surfaced concerning the proper interpretation of the Internet Tax Freedom Act. The exclusion of telecommunications service from the current definition of Internet access was intended to ensure that traditional telecommunications services were not covered by the moratorium. But some States have interpreted this exclusion to permit taxation in ways that we believe are inconsistent with the Internet Tax Freedom Act. For example, some State rulings have held that DSL Internet access, when sold to a consumer as part of a larger telecommunications package, is taxable as telecommunications service, while fully exempting some similar competing services offered by others when they are not part of a package. Other States have, more in keeping with the goals of the Internet Tax Freedom Act, interpreted the moratorium to fully exempt the sale of DSL Internet access to consumers, regardless of how it is provided or packaged to the consumer. Further adding to the confusion are interpretations by some States that would tax the underlying telecommunications used by Internet service providers to provide access to the Internet. The amendment I am offering would clarify that the exclusion of telecommunications services from the moratorium does not apply to telecommunications used to provide Internet access. Internet access offered by DSL, wireless, satellite or cable technologies would all be free from State or local taxes when purchased by consumers. 18 Cannon agreed that the amendment language makes clear that Internet access, regardless of the 17 See Internet Tax Act Could Cost States Billions, CBPP Says, State Tax Notes, Oct. 27, 2003, p. 321, Doc or STT 203-2, para. 31 (Oct. 20, 2003). 18 H.R. Rep. No (2003). State Tax Notes, October 1,

4 Special Report technology used, cannot be taxed under the ITFA. 19 No major dispute as to that purpose was raised in the House, as evidenced by the statements of Reps. John R. Conyers Jr., D-Mich., Bob Goodlatte, R-Va., and James R. Langevin, D-R.I., all of whom indicated that the modified language would render ITNA technology neutral. 20 Two of the main proponents of the current ITNA definition in the Senate, former Sen. George Allen and Sen. John McCain, R-Ariz., agreed with the House as to the purpose of the modified definition. Allen said the modified language make[s] clear the original intent of the Internet Tax Freedom Act by updating the definition of Internet access to ensure the moratorium applies consistently to all consumers. 21 He added: Since the last extension of the Internet Tax Freedom Act in 2001, some States have begun taxing the high-speed component of broadband Internet access services by asserting that certain portions of high-speed broadband Internet access are telecommunication services rather than Internet access services. The States doing this are therefore circumventing the original intentions of the law. Working with our chairman of the Commerce Committee, Senator John McCain, as well as Senator Ron Wyden and Senator John Sununu in the Commerce Committee, we have updated the definition of Internet access to ensure that all Internet access services, regardless of the technology used to deliver that service, are covered by the moratorium and therefore exempt from State and local taxation. 22 McCain concurred with Allen s rationale for the amendment, saying that whether consumers log onto the Internet via cable modem, DSL, dial-up, or another technology that has yet to be invented, under S they will not see any State and local taxes on their monthly Internet bill. 24 The second and related purpose for expanding the definition of Internet access was to prevent states from taxing the wholesale purchase of backbone telecommunications services used to provide Internet access (that is, the underlying telecommunications services purchased and used by ISPs to provide end users with Internet access). Before ITNA, most states regarded the ISPs as the end users of telecommunications services, and thus took the position that those services were taxable to the ISPs. Many of 19 Id. 20 See 149 Cong. Rec. H8295 (2003) Cong. Rec. S13791 (2003). 22 Id. 23 S. 150 was the amendment to the Internet Tax Nondiscrimination Act proposed in the Senate Cong. Rec. S14156 (2003). those rulings were in the form of denying sale-forresale status to telecommunications purchased by ISPs. 25 More recently, those positions have been confirmed on appeal. 26 When ITNA was pending before the House of Representatives, Watt confirmed that it was, in fact, his intent that ITNA apply to those backbone telecommunications services. He said that the telecommunications used by the Internet access provider would also be free from taxation. This would ensure that the consumers are not paying the heavy burden of these taxes by increasing the cost of Internet access. 27 The Senate Commerce, Science, and Transportation Committee also reported that under the amended definition of Internet access, 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. 28 ITNA s Grandfather Provisions Like ITFA, ITNA sought to protect existing state taxes from the moratorium. However, ITNA included three grandfather provisions. The first grandfather provision says that the moratorium 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 (A) the tax was authorized by statute; and (B) either (i) a provider of Internet access services had a reasonable opportunity to know, by 25 See, e.g., State of Connecticut, Department of Revenue Service, Rul (Dec. 17, 2002); State of Florida, Department of Revenue, Technical Assistance Advisement TAA 00A- 042 (July 26, 2000); Massachusetts Department of Revenue, 2003 STT (June 18, 2003); New York State Department of Taxation and Finance, Advisory Opinion TSB-A- 03(37)S (Sept. 3, 2003); Pennsylvania Department of Revenue, LTR SUT (Aug. 27, 1999). 26 See, e.g., Concentric Network Corp. v. Commonwealth, 877 A.2d 542 (Pa. Commw. Ct. 2005), aff d, 922 A. 2d 883 (Pa. 2007) (refund claims denied to an ISP that argued unsuccessfully that its purchase of data transmission services from telecommunications carriers used by it to provide Internet access services was not subject to sales tax). (For the Pennsylvania Supreme Court s decision, see Doc or 2007 STT ) In re Concentric Corp., DTA No , 2006 N.Y. Tax LEXIS 44 (NY Div. of Tax Appeals, Tax Appeals Tribunal, Mar. 16, 2006) (ISP s purchase of transmission services constitutes taxable telecommunications but is excluded from sales tax because interstate in nature). (For the new Tax Tribunal s decision, see Doc or 2006 STT ) 27 H.R. Rep. No (2003). 28 S. Rep. No (2003). 32 State Tax Notes, October 1, 2007

5 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 (ii) a State or political subdivision thereof generally collected such tax on charges for Internet access. 29 That grandfather provision applies until November 1, 2007, and is hereinafter referred to as the 2007 grandfather. The 2007 grandfather is materially identical to the ITFA grandfather. Notably, it applies to taxes in existence as of the date the ITFA was enacted and exempts those taxes from the moratorium until the moratorium expires. 30 The second grandfather provision says that the moratorium: does not apply to a tax on Internet access that was generally imposed and actually enforced as of November 1, 2003, if, as of that date, the tax was authorized by statute and (A) a provider of Internet access services had a reasonable opportunity to know by virtue of a public 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; and (B) a State or political subdivision thereof generally collected such tax on charges for Internet access. 31 This grandfather provision applied until November 1, 2005, and is hereinafter referred to as the 2005 grandfather. It applied to taxes in existence as of the date ITNA became effective. The 2005 grandfather is at the heart of the confusion regarding the date when telecommunications services became protected by the moratorium. The third grandfather provision says: State telecommunications service tax. (i) Date for termination. This subsection shall not apply after November 1, 2006, with respect to a State telecommunications service tax described in clause (ii). (ii) Description of tax. A State telecommunications service tax referred to in subclause (i) is a State tax Special Report (I) enacted by State law on or after October 1, 1991, and imposing a tax on telecommunications service; and (II) applied to Internet access through administrative code or regulation issued on or after December 1, That grandfather provision was intended to apply only to Wisconsin and is hereinafter referred to as the Wisconsin grandfather. The Wisconsin grandfather sought to address and curtail Wisconsin s administrative position to apply sales tax to Internet access under the statute taxing telecommunications services. However, Wisconsin Gov. Jim Doyle (D) and the Wisconsin DOR claim the Wisconsin grandfather does not apply to Wisconsin because its tax statute was enacted before October 1, 1991, 33 and Wisconsin continues to tax Internet access. Because the Wisconsin grandfather does not implicate the controversy at issue in this article, it is not discussed further. The Controversy: Interpreting the 2005 Grandfather and the 2007 Grandfather Provisions To recap, ITNA contains two grandfather provisions indicating that the moratorium shall not apply to taxes imposed on Internet access. The 2007 grandfather applies to taxes imposed and enforced as of October 1998 and permits those taxes until November 2007; that grandfather requires an acknowledgement by public rule or proclamation that Internet access was subject to tax or that the state generally collected such tax. In contrast, the 2005 grandfather applied to taxes imposed and enforced as of November 2003 and permitted those taxes until November Unlike the 2007 grandfather, the 2005 grandfather required both an acknowledgement by public rule or proclamation that Internet access was subject to tax and that the state generally collected that tax. As noted above, the 2007 grandfather and the 2005 grandfather both apply to taxes on Internet access. Although a plain-language reading of the grandfathers suggests that their use of the term Internet access refers to Internet access as was redefined in ITNA, and thus includes general Internet access protected by ITFA (hereinafter referred to as Internet service), as well as telecommunications services purchased, used, or sold by a provider of Internet access to provide Internet access (hereinafter referred to as Internet telecommunications services), the legislative history and purpose of ITNA s amendments strongly convince us that the U.S.C. section 151 at section 1104(a)(1) (2000 & Supp ) (emphasis added). 30 See id. at section 1104(a)(2), 1104(a)(1). 31 Id. at section 1104(b)(1) (emphasis added). 32 Id. at section 1104(a)(2)(B). 33 See Wisconsin Department of Revenue, Response to CCH Survey (Feb. 4, 2005). State Tax Notes, October 1,

6 Special Report 2007 grandfather was intended to apply to Internet services, whereas the 2005 grandfather was intended to apply to Internet telecommunications services. Indeed, we believe that construing the grandfather provisions according to the plain language would undermine Congress s entire purpose for expanding the definition of Internet access to include Internet telecommunications services because taxes imposed on those telecommunications services would be allowed until ITNA expires in Construing the grandfather provisions according to the plain language would undermine Congress s entire purpose for expanding the definition of Internet access to include Internet telecommunications services. Telecommunications providers generally have interpreted ITNA consistent with the legislative intent, taking the position that the 2007 grandfather applies to Internet access as defined in the original ITFA (and thus Internet services) and that the 2005 grandfather applies to the expanded ITNA definition of Internet access (and thus Internet telecommunications services). Many states have also adopted that interpretation. However, several states have adopted a plainlanguage interpretation of ITNA, as that interpretation provides them with the broadest authority to tax Internet telecommunications services. Further contributing to the confusion, some ISPs have advocated that the 2005 grandfather should be interpreted even more narrowly, and have maintained that taxes are subject to the ITNA s moratorium unless each of the conditions specified in the 2005 grandfather has been strictly satisfied. Finally, the Government Accountability Office has taken yet another position, maintaining that Internet telecommunications services include only telecommunications services sold by ISPs to their end users and not backbone telecommunications services used by ISPs in the provision of Internet access. This section of the article expands on those positions and sets forth the support and criticism for each interpretation. A. The Legislative Intent Interpretation Favored by Telecommunications Providers Telecommunications service providers, many of whom lobbied for and worked to produce the amendment of the definition of Internet access to include telecommunications services used and sold in the provision of Internet access, generally favor the position that only the 2005 grandfather applies to those telecommunications services. Under that interpretation, the term Internet access as used in the 2007 grandfather would be deemed to mean Internet services only. The 2007 grandfather would continue to apply to states that were grandfathered under ITFA and would protect such taxes throughout the duration of ITNA. The term Internet access as used in the 2005 grandfather would mean Internet telecommunications services. Thus, states that taxed Internet services before October 1, 1998, would continue to tax the same until November 1, However, states that taxed Internet telecommunications services before November 1, 2003 (regardless of whether that state was grandfathered under the original ITFA), would have been allowed to tax those services only until November 1, Support for that interpretation can be found in the legislative history before adoption of ITNA. For example, the Senate Commerce, Science, and Transportation Committee indicated before the adoption of ITNA that the 2007 grandfather would extend by three years [originally, the grandfather was to extend only to 2006], 34 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. 35 That the legislation extend[ed]...the current grandfathering provision in the ITFA suggests that the 2007 grandfather otherwise was identical to the ITFA grandfather, which applied to Internet services only. Another argument for that interpretation focuses on how members of Congress differentiated the two grandfather clauses by distinguishing between the types of Internet access that is, Internet services versus Internet telecommunications services, to which they applied. For example, Sen. Lamar Alexander, R-Tenn., indicated that the 2007 grandfather allows States to continue collecting taxes on the Internet and to continue to do so for 2 to 4 years [referring to the original 2006 expiration], depending on the type of access. 36 Sen. Dianne Feinstein, D-Calif., reiterated that access-type distinction by pointing out that ITNA includes a 3-year grandfather [also referring to the original 2006 expiration] on Internet access taxes that existed in 1998 and a 2-year grandfather on Digital Subscriber Line (DSL) taxes. 37 That access-type distinction would imply 34 The original amendment to ITNA would have provided that the 2007 grandfather applied only until This was extended to 2007 by the time Congress adopted ITNA. 150 Cong. Rec. S4635 (2004). 35 S. Rep (2003) (emphasis added) Cong. Rec. S11671 (2004) Cong. Rec. S4345 (2004). 34 State Tax Notes, October 1, 2007

7 that the 2007 grandfather allowed a four-year extension (when contemplating the 2007 expiration) for Internet services, whereas the 2005 grandfather allowed a two-year extension for Internet telecommunications services. The most compelling support for that interpretation, however, came four days after ITNA was signed into law. Cannon (who was significantly involved in the amendment of the term Internet access for the purposes of H.R. 49) sought to clarify the legislation as follows: For clarification purposes on the grandfather of states that tax Internet access, I wish to offer an explanation distinguishing the difference between the pre-october 1998 and pre- November 2003 dates as found in Section While both sections use the term Internet access, Section 1104(a), the provision for pre- October 1998 taxes, applies only to the states that were lawfully taxing Internet access before the original enactment of the Internet Tax Freedom Act in The definition of Internet access that applies to the Section 1104(a) grandfather clause is the definition as set forth in the 1998 Internet Tax Freedom Act, asthe amended definition does not take effect until November 1, Those states that were grandfathered under the Internet Tax Freedom Act from 1998 to 2003 will continue to be grandfathered under Section 1104(a). Section 1104(b), the provision for pre- November 2003 taxes, applies only to those states that were taxing telecommunication services purchased, used, or sold by an Internet access provider to provide Internet access, such as Digital Subscriber Line (DSL) access technology, if they were doing it lawfully prior to November 1, The amended definition of Internet access in the Internet Tax Freedom Act is effective November 1, 2003 and applies to section 1104(b). Section 1104(b) expires November 1, 2005 in order to eliminate any tax on Internet access (as defined in Section 1104(10)) regarding telecommunications services purchased, used or sold by an Internet access provider for the purpose of providing Internet access. 38 Several states, including Delaware, Kentucky, Louisiana, Massachusetts, Minnesota, and North Carolina, have announced that they are abiding by that legislative intent interpretation and have ceased to impose their taxes on Internet telecommunications services as of November 1, In fact, Cong. Rec. E2200 (2004). 39 See, for example, Kentucky Department of Revenue, LTR (Oct. 24, 2005) (on file with authors); Louisiana Department (Footnote continued in next column.) Special Report Delaware enacted a law in February 2005 that incorporated ITNA s definition of Internet access for the purpose of exempting Internet access charges from the state s public utility tax. 40 B. The Plain-Language Interpretation Favored by Several States Although Congress s intent is evident in the legislative history, several states (including Alabama, Florida, Illinois, Missouri, New Hampshire, Pennsylvania, and Washington) nonetheless have taken the position that the term Internet access means Internet access as defined in ITNA and thus includes Internet services as well as Internet telecommunications services for the purposes of both the 2005 and the 2007 grandfathers. Under that interpretation, states that taxed Internet services before October 1, 1998, may continue to tax the same until November 1, 2007, and states that taxed Internet telecommunications services before October 1, 1998, may continue to tax the same until November 1, States that taxed Internet telecommunications services before November 1, 2003, but after October 1, 1998, would have been permitted to tax the same only until November 1, The end result of this plain-language interpretation is that those states maintain that because they taxed Internet telecommunications services before October 1, 1998, they may continue to do so until ITNA expires on November 1, Almost all of the states adopting that position have simply declared that the 2007 grandfather applies, without explaining the rationale or justification for their position other than saying that they taxed such of Revenue, LTR (Dec. 14, 2005) (on file with authors); Taxation of Internet Access, Electronic Commerce and Telecommunications Services: Recent Federal Legislation, Technical Information Release TIR 05-8 (Department of Revenue, Commonwealth of Massachusetts), July 14, 2005; Sales Tax Newsletter 65 (Department of Revenue, State of Minnesota), December 2005, at 5; Important Notice: Telecommunications Services, Sales and Use Tax Importance Notices (Department of Revenue, State of North Carolina), October H.R. 11, 143d Gen. Assem., Reg. Sess. (Del. 2005). 41 See, for example, Alabama Department of Revenue, LTR (Oct. 26, 2005) (on file with authors); Notice on Impact of ITNA on Florida Taxes, Florida Department of Revenue (Feb. 2, 2005); Digital Subscriber Line (DSL) Services Purchased, Used, or Sold for Internet Access, Informational Bulletin FY (Department of Revenue, State of Illinois), Mar. 2006; Missouri Department of Revenue, LTR LR3375 (Oct. 12, 2006); 2005 Statutory Changes for Real Estate Transfer Tax, Communication Services Tax, and for the Administration of Taxes by the Department of Revenue Administration: Communications Tax, Technical Information Release TIR (Department of Revenue Administration, State of New Hampshire), Jan. 18, 2006; Sales Tax Bulletin (Department of Revenue, Commonwealth of Pennsylvania), Sept. 30, 2005; Taxation of network telephone services used to provide Internet access services, Excise Tax Advisory (Department of Revenue, State of Washington), Feb. 24, State Tax Notes, October 1,

8 Special Report telecommunications services before Washington was the first of those states to publish an explanation attempting to justify its position. On February 24, 2006, the Washington Department of Revenue issued an excise tax advisory indicating that Washington is grandfathered until November 1, 2007, and that it will continue to impose tax on telephone services purchased, used, or sold by ISPs until that date. 43 Although Washington s retail sales tax was not grandfathered regarding Internet services under ITFA, the DOR now takes the position in the advisory that the 2007 grandfather applies to permit sales taxes on Internet telecommunications services, stating: The first grandfather clause, effective until November 1, 2007, applies to any tax on Internet access that was generally imposed and actually enforced prior to October 1, The term Internet access service is defined to include telecommunications services...purchased, used, or sold by a provider of Internet access to provide Internet access. To the extent this modified definition includes purchased telecommunications used to provide Internet access, the first grandfather clause clearly applies to allow Washington State s taxation of these telecommunications services used to provide Internet access, because these taxes were imposed and enforced before October There is no indication in the statutory language that Congress intended the separate clauses to apply to different types of services, as opposed to covering taxes imposed in different time periods the language describing the applicable service is identical in both clauses. The applicable rule of statutory interpretation is that if the statutory language is unambiguous, a court will not consider the legislative history of the statute to reach a contrary conclusion. Whitfield v. U.S., 543 U.S. 209, 215 (2005). Even if a court were to look to the legislative history of the act, however, the record 42 The New Hampshire Department of Revenue Administration, in fact, followed up on its earlier technical information release by ruling recently that its communications services tax applied to DSL services sold to ISPs after November 1, 2005, but again without stating any further rationale for its position. State of New Hampshire, Department of Revenue Administration, Declaratory Rul. 8761, In re Petition of AB, Inc. (Nov. 17, 2006). More recently the Florida Department of Revenue has explained its position that it satisfies the 2007 grandfather requirements in order to continue subjectiing to tax communications services sold by communications services providers to ISPs. Technical Assistance Advisement 07A19-001; Florida Department of Revenue (July 24, 2007). See discussion of that TAA on p Excise Tax Advisory , supra note 40. is far from definitive and contains statements that could be seen to support either reading of the statute. 44 Because Washington has provided a legal rationale for taking that position, that rationale can be a basis for examining that position. Though we use Washington as an example, the intent is not to analyze Washington s position specifically but to consider the position favoring that interpretation generally. First, the express language in the 2007 grandfather uses the term Internet access. Internet access is defined in ITNA to include Internet telecommunications services and thus arguably allows states to claim that if they imposed and collected tax on those services before October 1998, those taxes are grandfathered until November 1, 2007, under the plain language of the statute. States taking that position may further argue that under that interpretation, there is no apparent need to look beyond the plain language of ITNA, thus preventing a court from ascertaining that Congress intended the 2005 and 2007 grandfathers to apply to different services. However, Washington overstates its position when it suggests the plain language of the 2007 grandfather is unambiguous. A statute is generally construed as ambiguous if it can reasonably be interpreted in two or more ways, 45 and once it is deemed ambiguous, a court s consideration of legislative history is appropriate. We question that a court would not view the 2005 and 2007 grandfathers as ambiguous when the two provisions are read in tandem. The controversy surrounding those provisions and the different interpretations accorded those provisions by telecommunications providers, various states, ISPs, and the GAO further support that conclusion. For example, Cannon s clarification regarding the intended meaning of the two grandfather clauses soon after the adoption of ITNA directly contradicts Washington s plain-language interpretation. Moreover, several states have announced that they will abide by the legislative-intent interpretation set forth by Cannon and favored by telecommunications providers. The different stances among the states alone illustrate the ambiguity inherent in these ITNA provisions. It may be correct, however, to note that the legislative history before the adoption of ITNA can be confusing. We discussed above the preenactment support for the position that the 2005 grandfather alone applies to the new Internet access definition. However, one argument derived from the legislative 44 Id (emphasis added). 45 See, for example, State v. Van Woerden, 967 P.2d 14 (Wash. Ct. App. 1998). 36 State Tax Notes, October 1, 2007

9 history that a plain-language advocate might advance is the way that some members of Congress differentiated the two grandfather clauses by the type of state involved that is, states that taxed Internet access before October 1, 1998, and thus were grandfathered under the original ITFA, and states that did not. Washington overstates its position when it suggests the plain language of the 2007 grandfather is unambiguous. For example, McCain said that the amendment would grandfather for 3 years [referring to the original 2006 expiration], from November 1, 2003, the States that were taxing Internet access in October It would grandfather for 2 years, from November 1, 2003, the States that began to tax according to many, improperly Internet access after October Sen. Trent Lott, R-Miss., also appeared to subscribe to that view. When Lott proposed that the 2007 grandfather provision be extended from 2006 to 2007, he said, I support ending this grandfather provision for States that had already enacted some Internet tax by By separating the 2007 and 2005 grandfathers by states that were grandfathered under the original ITFA and those that were not, those senators may have implied that ITFA-grandfathered states are entitled to tax any type of Internet access (under either definition) until 2007, whereas states that were not grandfathered under the original ITFA could tax Internet telecommunications services only until November 1, 2005, if they had taxed those services before November 1, Of course, not all senators follow that dichotomy for the two grandfather provisions, and those who did may have referenced Internet access loosely without intending to refer specifically to the ITFA s definition of Internet access or the expanded ITNA definition. Moreover, Washington s retail sales were not grandfathered under ITFA, and thus the state could not use that rationale to support its position legitimately. A second argument that could be made to support the plain-language interpretation may be derived, ironically, by reexamining the reasons for the modified definition of Internet access. As noted above in this article s section describing the legislative history for modifying the definition, Allen indicated that the modified language make[s] clear the original intent of the Internet Tax Freedom Act by Cong. Rec. S4402 (2004); See also 150 Cong. Rec. S4345 (2004) Cong. Rec. S4635 (2004). Special Report updating the definition of Internet access to ensure the moratorium applies consistently to all consumers. 48 (He also said that states were circumventing the original intentions of the law. ) Also, the House Judiciary Committee reported that States have adopted differing views of Internet access, some of which have been overly narrow. 49 Watt also said that some States have interpreted this exclusion to permit taxation in ways that we believe are inconsistent with the Internet Tax Freedom Act, while other states have, more in keeping with the goals of the Internet Tax Freedom Act, interpreted the moratorium to fully exempt the sale of DSL Internet access to consumers, regardless of how it is provided or packaged to the consumer. 50 Those comments, taken at face value, suggest that the original definition of Internet access provided in ITFA actually encompassed both Internet services and Internet telecommunications services, and that the ITNA amendment simply clarified that point for states that had misinterpreted the statute. If so, the ITFA and ITNA definitions of Internet access both would include Internet services and Internet telecommunications services, one implicitly and one explicitly. That said, interpreting ITFA s definition of Internet access in that manner is contrary to the plain language of ITFA and the manner in which the definition has been interpreted for several years by most states and taxpayers. Moreover, the extent of the debates in the Senate regarding the definition of Internet access lends support to the conclusion that the modified definition did more than merely clarify a misinterpretation of the original definition in ITFA. In fact, some senators, including Sen. Thomas R. Carper, D-Del., thought the old statute did not cover the subject of telecommunications services, so the amendment was truly breaking new ground. 51 Whatever arguments may be made in favor of a plain-language reading, we believe the strongest argument against such a reading and in support of the grandfathers ambiguity is the questionable result produced by the plain-language interpretation. The Washington DOR s advisory had little to say about the 2005 grandfather, except to assert that the language in the two grandfather provisions is substantially identical except for the different time periods and the fact that the 2007 grandfather is written in the disjunctive and the 2005 grandfather is written in the conjunctive. 52 Those differences are not so easily dismissed when considered in light of the ramifications of the plain-language position Cong. Rec. S13791 (2003) (emphasis added). 49 H.R. Rep (2003) (emphasis added). 50 Id. 51 See 150 Cong. Rec. S4635 (2004). 52 Excise Tax Advisory , supra note 40. State Tax Notes, October 1,

10 Special Report A results-oriented analysis of the plain-language position demonstrates some significant inconsistencies created by that interpretation. First, the plain-language interpretation would grant more favorable status to states that imposed their tax on Internet telecommunications services before October 1998 than to states that taxed those services after October 1998 but before November Although continuing throughout the duration of ITNA to permit state taxes on Internet services that were grandfathered originally by ITFA may be appropriate, it does not necessarily follow that Congress would accord similar status to taxes on Internet telecommunications services based on the October 1998 date. Moreover, we find no indication in the legislative history that Congress intended to differentiate between the state taxes on that basis. Second, the 2005 grandfather appears to require that three conjunctive conditions be met (that is, the state must have authorized the tax by statute, acknowledged by public rule or proclamation that Internet access was subject to tax, and generally collected the tax). But the 2007 grandfather only requires that two conditions be met (that is, the state must have authorized the tax by statute and either acknowledged by public rule or proclamation that Internet access was subject to tax or, alternatively, generally collected the tax). Under the plainlanguage interpretation, states that taxed Internet telecommunications services before October 1998 could avoid the more stringent conditions for meeting this qualification set forth under the 2005 grandfather, while the 2005 grandfather would impose its more stringent conditions only on states that taxed Internet telecommunications services after October 1998 but before November More likely, Congress intended to differentiate those conditions based on the types of services subject to tax rather than based on the states timing for imposing those taxes. Third, and most importantly, because the termination date of ITNA coincides with the termination date of the 2007 grandfather, the amendment to protect Internet telecommunications services under the moratorium becomes a nullity under the plainlanguage interpretation. As discussed above, the protection of Internet telecommunications services was considered to be of critical importance by several members of Congress. Yet the vast majority of states taxed telecommunications services by statute and collected those taxes before October Thus, the plain-language interpretation would grandfather most states until ITNA expired and would undermine Congress s purpose for amending the definition of Internet access and protecting telecommunications used to provide Internet access from taxation. A recent decision by the Missouri DOR illustrates how a state can completely thwart the intention of Congress to prevent state taxation of telecommunications transmission integral to high-speed or broadband Internet access service. 53 The DOR determined that the provision of a DSL connection to the Internet as part of a broadband Internet access service is a taxable telecommunications service at least until November 1, The DOR concluded without analysis as follows: While the federal government has provided that no state or political subdivision shall impose a tax on Internet access including the underlying telecommunications services used in providing such Internet access, states that taxed DSL services prior to the effective date of the federal statute may still collect the tax. Pursuant to current federal law, Missouri may still collect the tax on DSL service until November 1, On that date the federal law that provides the moratorium on such taxes expires. 54 Another recent decison by the Florida Department of Revenue similarily thwarts the intention of Congress to prevent states from taxing purchases of 53 Missouri Department of Revenue, LTR LR3375 (Oct. 12, 2006). 54 Id. Further, a recent decision by the Washington Court of Appeals, Community Telecable of Seattle Inc. v. City of Seattle, 149 P.3d 380 (Wash. Ct. App. 2006), though addressing issues technically outside the ITNA time frame, may be another portent of the confusion yet to come and further evidence of the disparate state taxation of telecommunications services enabling Internet access. The court in Telecable addressed the situation of an ISP providing Internet access using its own integrated cable transmission facilities. However, instead of viewing the data transmission component of this service as integral to providing Internet access, the court instead considered the data transmission component separately from the Internet service and held that the transmission component was subject to tax as a telephone business activity under the city of Seattle s telephone utility tax. The court stated that the ISP could not avoid the city s tax on data transmission activities by bundling its charges for cable data transmission with its charges for Internet services. Further, because of its focus on the cable transmission facilities used by the ISP in Seattle and elsewhere in Washington, the court ignored the interstate nature of the entire service extending into the Internet, even though Seattle could legally impose the tax only on intrastate services. The Washington Supreme Court disapprove[d] of this latter interpretation by the Court of Appeals regarding municipal taxation of interstate services, holding that Washington cities were prohibited under Washington law from imposing utility taxes on interstate services. Qwest Corp. v. City of Bellevue, No , 2007 WL (Wa. Sup. Ct. Aug. 30, 2007). (For the Court of Appeals decision in Community Telecable, see Doc or 2007 STT ; for the decision in Qwest, see Doc or 2007 STT ) 38 State Tax Notes, October 1, 2007

11 backbone telecommunications services by ISPs to provide Internet access. 55 The DOR ruled that communications services sold by communications providers (such as the taxpayer) to ISPs, which were then used by the ISPs to provide Internet access service, were subjct to Florida s communications services tax. Furthermore, although the taxpayer asserted that ITNA generally prohibits Florida s taxation of such sales of communications services to an ISP after November 1, 2005, the DOR concluded that Florida satisfies the 2007 grandfather provision and, therefore, it is not preempted from continuing to enforce its taxation of such communications services. It reached that latter conclusion because Florida imposed its tax on telecommunication services that were purchased, used, or sold by a provider of Internet access to provide Internet access since 1985 and thus before The DOR noted: The November 1, 2007, expiration of the Section 1104(a) grandfather provision is of no consequence with respect to Florida s authority to enforce its taxation of the services at issue in this advisement, because the Internet Tax Freedom Act itself expires on the same date. Although we acknowledge the logic and simplicity of the plain-language interpretation, we question why Congress would substantially change the definition of Internet access to include and protect Internet telecommunications services but simultaneously excuse almost all states from the moratorium for the entire duration of ITNA. The plainlanguage interpretation thus does not withstand scrutiny. 56 C. The ISP Ruling Interpretation Favored by ISPs A third interpretation has been raised by some ISPs. That interpretation is similar to the legislative-intent interpretation in that it would define Internet access as Internet services for the 2005 grandfather and as Internet telecommunications services for the 2007 grandfather. However, the ISP ruling interpretation then focuses on the conjunctive and conditional language in the Technical Assistance Advisement 07A19-001, Florida Department of Revenue (July 24, 2007). 56 However, it seems reasonable for Congress to have to maintain the status quo under ITNA and continue grandfathering those states that were originally grandfathered under ITFA regarding taxes on Internet services. It also seems reasonable for Congress to have imposed separately a shorter grandfather period for Internet telecommunications services, thus ending more quickly their disparate tax treatment, but grant all states that taxed Internet telecommunications services before November 1, 2003 (including those originally grandfathered for purposes of Internet services), with a year to prepare for the potential loss of tax revenues that would result from the expanded moratorium. Special Report grandfather and would read the 2005 grandfather in the most restrictive manner possible, thus seeking to limit the number of states that could benefit from that grandfather provision. Under the ISP ruling interpretation, states that taxed Internet telecommunications services before November 1, 2003, would be grandfathered only if the tax was authorized by statute, the state collected it, and if ISPs had reasonable opportunity to know of it by virtue of an actual public rule or proclamation issued by the agency that interpreted and applied that tax to those services. States that taxed Internet telecommunications services before November 1, 2003, but that did not meet all of those other criteria would not be protected under the 2005 grandfather. Those states thus could not tax Internet telecommunications services as of November 1, 2003, the effective date of ITNA. 57 For example, under that interpretation, a state collecting tax under an appropriate statute, but having made no other agency public rule or proclamation, would not be grandfathered. That interpretation of the 2005 grandfather is particularly problematic given the circumstances surrounding ITNA s enactment. As discussed above, ITFA expired on November 1, 2003, and ITNA was not signed into law until December 3, 2004, at which point it was made retroactive to November 1, Under the ISP ruling interpretation, the moratorium would prohibit the taxation of Internet telecommunications services as of November 1, 2003, even though the legislation did not become law until more than a year after that date. Under that interpretation, the state would have to provide refunds for taxes that it had collected in the interim but that were then not subject to the moratorium (except for the retroactive effect of ITNA). There is no indication that Congress intended that result. Nonetheless, some ISPs have taken that position one step further and would argue that the public rules or proclamations arguably required by the 2005 grandfather must be specific to ISPs. ISPs making that case appear to have an even weaker case for two reasons. First, ISPs likely would have had reasonable opportunity to know about the taxation of certain types of telecommunications services even if the applicable rule or proclamation was not directed at ISPs. Second, the express language of the grandfather does not describe the specificity of the required public rule or proclamation and only requires that an ISP might reasonably know that a 57 As discussed above, ITNA was signed into law on December 3, 2004, but made retroactive to November 1, 2003, the date ITFA expired. Under that interpretation, a 13-month period of time would elapse during which states were not entitled to tax Internet telecommunications services but were not informed of that limitation. State Tax Notes, October 1,

12 Special Report particular telecommunications service was taxable. That condition likely would be met regardless of whether the ruling or proclamation was specific to ISPs. As would be expected, no states apparently have adopted the ISP ruling interpretation. D. The End User Interpretation Favored by the GAO In January 2006 the GAO issued a study at the request of Congress. In that study, the GAO took the position that the definition of Internet access (particularly the language defining Internet access as a service that enables users to access content, information, electronic mail, or other services offered over the Internet ) makes it clear that the moratorium applies only to Internet access service provided to end users. 58 Thus, under that interpretation, Internet access does not include, and the moratorium would not apply to, the acquisition of telecommunications used by ISPs to provide Internet access. The GAO s end-user interpretation accepts the telecommunications providers legislative-intent interpretation and thus would read the 2007 grandfather as applying to Internet services and the 2005 grandfather as applying to Internet telecommunications services. However, by limiting the definition of Internet access to Internet telecommunications services sold to end users, the moratorium would not extend to telecommunications sold to ISPs and thus would not reach backbone telecommunications services. A letter to the GAO from several communications companies, included in the GAO report, argues persuasively against the GAO interpretation and is supported by an extensive body of legislative history and other statutory construction arguments that effectively counter the GAO analysis. We share the communications providers conclusion based on the legislative history of ITNA. The legislative history indicates that several senators were concerned because the sponsors of the modified definition of Internet access appeared to intend to cover not only the direct connection between the consumer and the ISP, but also the telecommunications services used by the ISP in supplying that service (that is, the backbone of the provision of Internet access). For example, Carper summed up the view of those senators: We believe we should focus on what I call the last mile. There are others who believe we should focus on the first mile, all the way through the last mile. When we do that, we take for [sic] the States potentially a fair amount of revenue generation capability off of 58 U.S. Government Accountability Office, Report to Congressional Committees GAO , Internet Access Tax Moratorium (Jan. 23, 2006). the table at a time when obviously they are hurting and they need every dime they can raise. 59 Under the GAO s interpretation, Internet access does not include, and the moratorium would not apply to, the acquisition of telecommunications used by ISPs to provide Internet access. In fact, Alexander and Carper introduced an amendment that would have restricted the moratorium on taxes on telecommunications to the extent such services are purchased, used, or sold by an Internet access provider to connect a purchaser of Internet access to the Internet access provider. 60 That amendment was not adopted. Moreover, when the bill was in the House, Watt said it was his intent that ITNA s moratorium apply to taxes on backbone telecommunications services. Indeed, he said that the telecommunications used by the Internet access provider would also be free from taxation. This would ensure that the consumers are not paying the heavy burden of these taxes by increasing the cost of Internet access. 61 Moreover, the Senate Commerce, Science, and Transportation Committee reported that under the modified definition of Internet access, if a telecommunications carrier sells wholesale telecommunications services to provide Internet access, the exemption would apply. 62 Once the language was agreed on, Alexander admitted that the definition expands the tax-exempt coverage to what we call the backbone and [to] a number of other Internet activities. 63 Thus, supporters and opponents of ITNA agree that the expanded definition of Internet access was meant to apply to the backbone of Internet access in addition to the connection itself. In fact, on publication of the GAO study, Allen and Wyden issued a joint statement criticizing the GAO s conclusions about backbone services as a flawed interpretation of the law and reiterating that the language of ITNA and the relevant legislative history reflect a clear legislative intent to ban Internet access taxes at both the retail and wholesale level. 64 No state has yet formally endorsed the GAO s interpretation. However, in its excise tax advisory, Washington suggested that it might in the future Cong. Rec. S14250 (2003) Cong. Rec. S14182 (2003) (emphasis added). 61 H.R. Rep (2003). 62 S. Rep (2003) Cong. Rec. S4635 (2004). 64 Press release, Sens. Allen and Wyden (Jan. 23, 2006) 40 State Tax Notes, October 1, 2007

13 consider the GAO s interpretation of ITNA and therefore might raise that position were it challenged on its 2007 grandfather position. The DOR said: This conclusion [i.e., that taxation of network telephone service used to provide Internet access qualifies under the 2007 Grandfather provision of ITFA and will continue as described above until at least November 1, 2007] makes it unnecessary for the department to adopt a position with respect to the interpretation of the term Internet access advanced in the January 2006 Government Accountability Office report Internet Access Tax Moratorium: Revenue Impacts Will Vary by State. The department may, before the expiration of the grandfather period, consider whether the amended definition allows the continued taxation of telecommunications services used to provide Internet access services, but does not do so at this time. 65 Conclusion Almost a full two years have passed since the 2005 grandfather expired. Many, including ITNA s sponsors, most members of the telecommunications industry, and many state tax administrators, believe that Internet telecommunications services are no longer subject to state and local taxation under ITNA s moratorium. Yet neither Congress nor the courts have provided further clarity regarding the correct interpretation of these dueling grandfather provisions, and most states have not published their positions regarding the taxable status of those services after November 1, In the meantime, many telecommunications service providers have acted on their good-faith belief and have decided not to collect taxes that otherwise would be imposed on the sale of the telecommunications services to ISPs. Litigation will undoubtedly ensue, and because the cases will likely be brought in state courts, the chances for diverse holdings on the meaning of that single federal law will be heightened. Should each state continue to be the final arbiter of its own right to tax services that Congress clearly intended (by expressly changing the definition of Internet access) to be outside the scope of state taxation entirely? Could that lingering confusion and uncertainty caused by the similar language of the multiple grandfathers have been avoided and can it be fixed? Certainly, it would have taken minimal effort to address those concerns on December 7, 2004, when Cannon expressly clarified the legislative intent regarding the operation of the Special Report 2005 and 2007 grandfathers, a mere four days after the legislation was signed into law. 66 Ironically, those adhering to the plain-language interpretation might suggest that Congress s failure to amend ITNA solidifies its intent to grandfather the majority of states that have taxed Internet telecommunications services since at least October Congress should not continue to ignore the need to clarify its meaning or, at least, to foreclose any further grandfathering of Internet telecommunications services taxation. 67 Should each state continue to be the final arbiter of its own right to tax services that Congress clearly intended (by expressly changing the definition of Internet access) to be outside the scope of state taxation entirely? As explained above, the legislative history and purpose for amending the definition of Internet access under ITNA was to address the perceived inequities caused by the exclusion of Internet telecommunications services from the original ITFA moratorium. However, because of inattentive drafting by Congress of multiple grandfather clauses, the promise of ITNA to correct those inequities may never be fully realized. Some states have seized the opportunity on technical grounds to frustrate that goal, and it remains to be seen whether courts will be persuaded to look outside the plain language of ITNA to discern Congress s true intent. Indeed, states advocating the plain-language interpretation have a basic statutory construction argument to make, as Congress included a single definition of Internet access in ITNA and used that term in each of the grandfather provisions. Yet the disparate and illogical results of that interpretation counsel against stopping the analysis there. 66 For example, Congress could have considered amending its use of the term Internet access in the 2007 grandfather by inserting thereafter something like as such term was in effect before October 31, 2003, and in the 2005 grandfather by inserting as such term was in effect on November 1, As of this writing, S.1453 would appear to continue to grandfather states through 2011 under the same wording as the existing 2007 grandfather, but would do nothing to clarify the meaning of, or stem the controversy over, the use therein of the term Internet access. As noted above, H.R would simply remove the grandfathering provisions. 65 Excise Tax Advisory , supra note 41. State Tax Notes, October 1,

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