Internet Tax Ban Reconsidered

WASHINGTON -- Taxing Internet access would slam the virtual door to the Web on the poor and many rural residents, representatives of some of America's largest online companies say.

Only nine states can tax Internet access now. The rest are stopped by a 1998 moratorium established by the Internet Tax Freedom Act. That measure bans taxes on Internet access, discriminatory taxes on purchases made over the Internet, and the double-taxation (by two different states, for instance) of Internet commerce.

It does not, however, outlaw collecting sales taxes on items bought in Internet transactions. But two bills in the U.S. Senate would permanently prohibit a tax on Internet access.

Industry Favors Ban

At a hearing Wednesday before the Senate Commerce, Science, and Transportation Committee, online executives and state representatives discussed the Internet Tax Non-Discrimination Acts (S 150 and S 52).

Both bills would make the access-tax moratorium permanent and eliminate a grandfather clause exempting nine states. The tax ban, which expired and was renewed in 2001 by President George W. Bush, is set to expire again on November 1.

The online executives praised the ban and called for its extension.

A more restrictive national tax policy will keep the online industry from maintaining affordable service and expanding its reach, according to Joseph Ripp, vice chairman of America Online. He said taxes could prevent the company from spreading access to the World Wide Web to those who are "disproportionately poor, less affluent, less educated, elderly, ethnic minorities, or live in rural communities."

"It will have serious implications for our ability to reach the 50 percent of Americans who are not logged on," Ripp told lawmakers. "Keeping the cost of the service low for those people to get on board is very important."

One member of the panel, Texas Deputy Comptroller Billy Hamilton, argued in favor of repealing the moratorium. The ban is foiling "the states' attempt to exercise common sense in most instances when it comes to taxing business and commerce," Hamilton said.

Texas raised $45 million by levying Internet-related taxes in 2002, Hamilton added. The state assuaged concerns like Ripp's by exempting taxes on the first $25 of Internet access.

Action Expected

But Committee Chairman John McCain (R-Arizona) concurred with Ripp. Exemption or no, more taxes mean higher costs for service, he noted.

Both men pointed to Europe, where value-added taxes in several countries drove up access prices and slowed growth of the Internet's reach. When Hamilton disagreed, McCain chided his understanding of economic cause and effect.

"Obviously, you and I have a different view of the fundamentals of economics," McCain said.

The author of S 150 and a strong proponent of the tax moratorium, Sen. George Allen (R-Virginia), hopes to push his bill through a committee vote before Congress's August break. His primary concern is adjusting the proposal's language to account for the rapid evolution of technology.

"There are still some definitional things that need to be worked out," Allen said after the hearing. "But I think [Sen. McCain] wants this to get this marked up and voted out of committee too. I think there's a will. Hopefully, we will find a way."

The House version of the anti-tax bill, HR 49, went through a full committee markup in the House Judiciary Committee Wednesday morning and passed through by voice vote. Only Rep. Sheila Jackson Lee (D-Texas) voted in opposition.