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WASHINGTON -- Federal legislation to ban taxes unique to the Internet could cost states billions, if it also exempts many telecommunications services from state and local taxes, says a group representing most of the states.

The Internet Tax Nondiscrimination Act, which passed the House September 17, was amended to define Internet access to include telecommunications services offered over the Net. The bill's authors intended to ban Internet access taxes. But the Multistate Tax Commission fears it may also ban taxes on such telecommunications services as voice telephone services through packet switching technology, a growing trend.

Senate Considers Bill

The Internet Tax Nondiscrimination Act, which the Senate has not passed, would make permanent a moratorium on Internet-only taxes that has existed since 1998. Proponents say taxes unique to the Internet, such as bit taxes on data transmissions, would be a jurisdictional mess and hamper the Net's growth.

"This moratorium makes sure e-tailers have an equal shot at success in today's economy, and I believe they should be protected once and for all from unfair taxes that threaten their survival," Senator Ron Wyden, an Oregon Democrat and sponsor of the bill, said earlier this year. "States have never proven they've been injured by their inability to discriminate against online sellers."

The MTC released a study Wednesday that says the amended bill, as passed by the House, could cost state and local governments collectively between $4 billion and $8.75 billion yearly by 2006--far more than the $500 million loss projected when the bill was introduced. MTC members say they fear the legislation could also exempt telecommunications companies from other taxes, such as property and income tax.

Exempting voice services might not be what the bill's authors intended, the MTC acknowledges. But they're lobbying the Senate to change the wording. "Intent doesn't count when you're in court," says Dan Bucks, the MTC's executive director.

Just a Misunderstanding?

But supporters say the MTC is misreading the legislation. The bill bans only taxes unique to the Internet, such as bit taxes or Internet access taxes, but does not roll back property or income taxes that telecommunication carriers now pay, says a spokesperson for Representative Christopher Cox (R-California), primary sponsor.

"That's completely false," Cox's spokesperson says of the bill's potential to ban property or income taxes. "I don't know why they think that. I think they just don't understand the bill."

As for banning taxes on other telecommunications services such as voice over IP, the bill doesn't address that issue, Cox's spokesperson says. Such services are currently few, and Congress has not yet decided how to tax them, he adds. "We're not trying to solve all the problems or the debates of the telecom industry in this bill," the spokesperson says.

But MTC officials argue that voice over IP could easily fall under the bill's tax bans. The Cox legislation amends the language in the Internet Tax Freedom Act, the original 1998 tax moratorium. They cite a change in wording from that law.

The original law notes that Internet access "does not include telecommunications services." The current legislation adds, ". . . except to the extent such services are used to provide Internet access."

MTC officials say the change could easily be interpreted to mean voice or other telecommunications services offered through packet switching technology. With telecommunications companies expected to move much of their voice services from land-line to voice over IP services, the impact to state and local governments could grow significantly, says Loren Chumley, Tennessee's revenue commissioner.

Other Concerns

States don't object to a narrow ban on Internet access taxes, Chumley adds. "The new, multibillion losses for state and local governments would result from language in the House bill as courts interpret it as providing a blanket exemption for non-federal taxes for the telecommunications industry, granting that industry an unprecedented church-like exemption status," Chumley says.

Chumley and others at an MTC event noted that when the predicted $8.75 billion loss is spread over 50 states, the impact to each state is much lower. But every $1 billion that state and local governments lose would mean nearly 20,000 fewer police officers on the streets, 20,000 fewer firefighters, or 25,000 fewer teachers. With many states already facing budget shortages, governments would have to reduce services or raise other taxes, Bucks says.

"This is the perfect decision for Congress, so they can look like heroes at no cost to themselves," adds Ed Harrington, president of the Government Finance Officers Association and controller for the city and county of San Francisco. "We need to remind Congress that real-life individual taxpayers rarely show up in Washington, D.C. asking for services. We're the ones they call when their homes are on fire."

MTC members are also criticizing the bill for ending a grandfather clause allowed in the earlier moratorium for the ten states that have already passed Internet access taxes. Washington state could lose about $9 million yearly if the clause is eliminated, says Jim McIntire, the Democratic chair of the Washington state House Finance Committee.

"That's not much, compared to the federal deficit, but it still hurts because last spring, we closed a $2.6 billion deficit by cutting schools, universities, and public health, and closing parks," McIntire says.

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