Texas, Six Other States May Lose Ability to Tax Internet Access

Banning the taxes could block states and cities from big revenue streams in the future as broadband becomes more widespread.

by Kimberly Railey, McClatchy News Service / August 25, 2014

For nearly 20 years, Texas has collected taxes on Internet access as a steady part of its state and local budgets, bringing in $358 million last year.

If the U.S. House gets its way, that would stop.

Last month, lawmakers voted to block Texas and six other states from collecting taxes on Internet connections. Most Texans in the House support the bill, calling it good for consumers and for innovation.

In Austin, state officials say the change wouldn’t be a budget buster. Internet levies account for a fraction of the state’s $25.9 billion annual sales tax revenue. But banning the taxes could block Texas and its cities from big revenue streams in the future as broadband becomes more widespread.

“We’re concerned,” said Brett Wilkinson, the city of Dallas’ managing director of intergovernmental services. “Any revenue hit to us has an impact.”

It’s a fight that doesn’t fall neatly along party lines and, in some cases, has pitted federal lawmakers against local and state governments.

“At the end of the day, this is Washington, D.C., telling states what they can and cannot tax,” said David Quam, a deputy director at the National Governors Association.

Federal law has blocked most states from collecting taxes on Internet access since 1998. The ban expires Nov. 1.

When it adopted the politically popular ban, Congress exempted a handful of states — including Texas — that were already collecting such taxes. Currently, seven states have the fees.

With midterm elections looming, Congress is expected to extend the ban, at least in the short term.

It’s less certain whether Texas and the other states would be affected. A Senate bill would continue the ban but also Texas’ exemption.

The issue is separate from taxing online shopping purchases, though some senators — and their allies among brick-and-mortar retailers — want to link the debates.

On Internet access charges of more than $25 a month, Texas collects a 6.25 percent sales tax. Local sales tax can add 2 percent more. The state comptroller’s office estimates an average Internet bill in Texas is $60.

So Texans typically pay $2 to $3 per month in tax. Statewide, that adds up.

In fiscal 2013, Texas collected $280 million from the fees, according to the comptroller. Cities and other jurisdictions took in a combined $78 million.

The seven states with an Internet access tax collect more than $500 million per year, according to the Center on Budget and Policy Priorities, so Texas is by far the biggest single recipient.

Local government officials and advocates say they have less budget flexibility than the state, so the lost revenue could cut into cities’ abilities to provide basic services, such as funding for police and parks.

Dallas stands to lose roughly $2.4 million, according to estimates based on U.S. census figures.

Wilkinson said that total is significant, even compared with the $269 million Dallas expects to collect from its sales tax next fiscal year.

At the state level, Chris Bryan, a spokesman for the comptroller, said the agency is watching the issue closely.

Laws surrounding the tax date to the early stages of the Internet. Congress passed the first moratorium on Internet access taxes in 1998 to prop up the new industry and renewed it three times.

If Congress permanently banned the taxes, experts say, cities would have a hard time replacing the revenue. Raising property tax rates would be unpopular, and some cities have already hit the state-set limit.

“Cities would have to cut spending if they had such a big hit,” said Bennett Sandlin, executive director of the Texas Municipal League.

State officials are less worried. Tax collections are surpassing Comptroller Susan Combs' projections, and the Legislature expects a surplus when it sets the next two-year budget next year.

“The loss of this revenue would not have a dramatic impact,” said state Rep. John Otto, R-Dayton, vice chairman of the House Ways and Means Committee.

In the U.S. House, the bill to ban Internet access taxes passed with a voice vote, meaning the votes of individual lawmakers weren’t recorded.

The list of co-sponsors includes 21 Texans, including 18 of the state’s 24 Republicans, and three of 12 Democrats.

Reps. Joe Barton, R-Arlington, and Sheila Jackson Lee, D-Houston, have raised concerns over the effect on Texas.

“Why are we barring our states from doing their good due diligence, providing resources — needed resources — for schools and infrastructure and health care?” Jackson Lee said.

Barton, an original co-sponsor of the bill, said it could hurt his district’s biggest city, Arlington, which collects about $1 million yearly from the fees.

Backers of the ban say they want to help consumers.

“The current moratorium protects working families who rely on affordable Internet access,” Rep. Gene Green, D-Houston, said through an aide.

In the Senate, lawmakers are pursuing a different strategy.

A bipartisan group is trying to pair Internet access taxes with another issue: collecting sales taxes from out-of-state retailers.

Currently, states can only draw those taxes from sellers with a physical presence within their borders.

“You have the government basically picking winners and losers by preventing states from requiring remote sellers to collect the tax,” said Craig Johnson, executive director of the Streamlined Sales Tax Governing Board.

In 2012, the loophole cost states more than $23 billion, according to the National Conference of State Legislatures.

Many cities, including Dallas, want to collect taxes from out-of-state retailers. A bill to allow that, known as the Marketplace Fairness Act, passed the Senate last year but faces resistance in the U.S. House.

Sen. Ted Cruz voted against the legislation; Sen. John Cornyn missed the vote but said afterward he would have voted no.

Since 2011, Dallas has spent $440,000 lobbying for the Marketplace Fairness Act and other federal issues, Senate records show.

Opponents say the proposal would burden small businesses with a new tax collection process; supporters scoff at that complaint, noting that most retailers collect taxes of some sort.

The Senate bill would ban Internet access taxes for 10 more years. It would also let states like Texas continue collecting the taxes.

Cornyn hasn’t committed one way or the other on the legislation, spokesman Elliot Grimm said.

Cruz supports a permanent ban on Internet access taxes. But he opposes combining it with the online sales tax bill, spokeswoman Catherine Frazier said.

Some city officials say it makes sense to quickly tackle the sales tax issue, especially as more sales move online.

“If you do not provide for taxation of remote sellers, it will produce tremendous inequities,” said Bob Scott, chief financial officer for Carrollton.

©2014 The Dallas Morning News