Internet Tax Reconsidered

WASHINGTON -- Four U.S. senators are introducing a bill to extend a now-expired Internet tax moratorium by two years, as an alternative to adopting the permanent ban on Internet-only taxes that passed through the House of Representatives in September.

Senators who oppose the permanent ban in the House-approved Internet Tax Non-discrimination Act say that the definition of "Internet access" in the bill could prevent taxing many telecommunications services, as carriers of traditional telephone service move more of their traffic to the Internet. Senators Thomas Carper (D-Delaware) and Lamar Alexander (R-Tennessee) say their two-year extension of the old five-year moratorium will continue the ban but define Internet access so that it does not include telecommunications services.

If taxes on telecommunications services were eliminated by the ITNA, as opponents fear, losses to state and local jurisdictions could reach $11.7 billion yearly, says Senator Dianne Feinstein (D-California). California could lose up to $836 million in telecommunications taxes annually; Florida, nearly $1.1 billion; and Texas, $1.2 billion, according to opponents of the permanent ban. Senator Kay Bailey Hutchison (R-Texas) is the fourth senator who spoke in favor of the Carper-Alexander bill at a Wednesday announcement.

Supporters of the Carper-Alexander bill, called the Internet Tax Ban Extension and Improvement Act, have support from the National Governors Association and the National Association of Counties. The phones in Feinstein's office began "ringing off the hook" when the permanent ban came to the Senate floor late last year, she says. In addition, 118 California cities that oppose the permanent ban contacted her office.

Competing Proposal

Senators George Allen (R-Virginia) and Ron Wyden (D-Oregon), cosponsors of the ITNA in the Senate, believe that a permanent ban would be good for the Internet's growth. A temporary ban on Internet taxes would eventually allow Internet access taxes, Allen argues.

"Make no mistake about it--the proposal offered today would continue to allow harmful, regressive taxes on Internet access services," Allen says in a statement about the Carper-Alexander bill. "I continue to support a ban on taxing access to the Internet. The Internet should remain as accessible as possible to all people, in all parts of the country."

The Carper-Alexander bill could eventually make Internet access more expensive for consumers and small-business owners, Allen adds. "This bill would have a negative effect on small businesses, rural communities and lower income Americans," he says. "It would not help to close the economic 'digital divide.' Instead, it would expand the divide, diminishing the availability of high-speed broadband which is essential for economic and educational opportunities."

Wyden has defended a permanent ban as potentially saving Internet service providers from thousands of taxing jurisdictions.

"If, in fact, the more than 7000 taxing jurisdictions in this country are allowed to take a bite out of the Internet...I think that could derail the very impressive progress that we have seen in the technology sector in the last two months," Wyden said during debate on the bill in November. "Let us not put in place a regime of multiple and discriminatory taxes on electronic commerce, if for no other reason that it would send a horrendous message to this sector."

Bill's Background

The "murkiness" in the definition of Internet access in the ITNA would likely face legal challenges, Carper said at a press conference Wednesday. That bill states that telecommunications services as defined in the Communications Act of 1934 are not considered Internet access. However, Carper and other opponents say, the definition doesn't envision telecommunications services such as voice over Internet Protocol (VOIP).

"Our bill, if enacted, will not end up in a court battle," Carper said. "Our bill can be enacted quickly...and will provide clarity for consumers."

The Carper-Alexander bill, scheduled to be introduced this week, would expand the old Internet tax ban to include all types of traditional Internet access, including high-speed cable modem service and digital subscriber lines, according to Carper. The Internet tax moratorium expired on November 1, 2003, after passing originally in 1998 and being extended once. It prohibits states and other taxing jurisdictions from levying taxes unique to the Internet, including access taxes and "bit" taxes, which would tax Internet traffic as it passes through infrastructure in a jurisdiction.

Earlier Efforts

After passing the House, the ITNA stalled in the Senate when a group of senators questioned its impact on state and local governments. The bill ran into significant resistance before the Senate's December recess.

With the Federal Communications Commission just beginning to define regulations on VOIP service, passing a permanent ban that might include VOIP services doesn't make sense, Alexander argues. "When it's not clear what to do, a temporary solution is better than a permanent one," he says.