A Tangled Web of Taxes

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The Web's been a fairly safe refuge from taxes for millions of shoppers and, more recently, for a growing number of callers as well. That may change as Congress and the Federal Communications Commission act--or fail to act--to come up with a coherent national policy on voice-over-IP services and Internet access taxes.

In my first column, I looked at the state of these issues at the end of last year. So where are we now? Surprisingly, given the government's typically glacial pace, there's been a lot of action over the past six months, most recently on Internet access taxes and most controversially on VoIP. Unfortunately, most of that action still leaves consumers in a bit of a muddle.

Internet Access Taxes: Banned?

Last September, the House of Representatives voted to permanently ban taxes on Internet access for consumers--meaning any rise in your ISP bills won't be the government's fault. However, in late April the Senate passed its version of the bill, sponsored by John McCain (R-Arizona). Moreover, the Senate's version only extends the ban for another four years; it doesn't make it permanent. (President George Bush is in favor of a permanent ban and has expressed his desire to leave broadband access off the tax table as well.)

That means Congress needs to come up with a compromise bill--and the governmental pace has returned to its traditional plod. It's unlikely that a compromise will be reached before Congress goes into summer recess; and with the election looming in November and more high-profile issues on the table we may not see a new bill until year's end (if then).

Naturally, one of the key points of contention is the duration of the ban: permanent or not? And the House version extends the ban to business-to-business communications and DSL services, which, like other types of broadband access, weren't clearly covered in the earlier, temporary versions of this law. The Senate version clarifies what's covered as well, and it deliberately bans certain items, like a tax on bandwidth traffic, and excludes certain services from the ban, such as VoIP.

What's the rush? Well, there's always a rush when it comes to money. And in the absence of clear direction from Washington, state and local governments may choose to impose their own taxes. There were Internet access taxes in some states prior to the original 1998 law, and those were allowed to stay on the books when the law was passed. There are already states that have imposed taxes on DSL access, for example, and some of these taxes would also stay in effect if the Senate version is signed into law. Some observers fear that if the federal government lets this go for another year, more states and towns strapped for cash will set their own rules, which may or may not survive once the compromise bill gets through the process. In the meantime, we would have to pay.

There's one more rub: Some bills currently pending before Congressional committees (H.R. 3184 and S. 1736) deal with the dreaded (by consumers, anyway) Streamlined Sales Tax Project. The project creates one set of definitions for goods and foods across state lines to make it easier for smaller shops and Internet vendors to keep track of sales tax requirements for--and charge them to--any customer, regardless of where they live and where such stores are physically located. Online vendors and shoppers especially have benefited from the fact that, according to a Supreme Court ruling and existing laws governing catalog sales, a store only has to charge sales tax in states where it has a physical presence, such as a call center or a warehouse.

Expect movement on this from Congress as well, though it's more likely next year. If the pending bills pass into law, states will have more muscle to force stores that don't already comply to charge you sales tax on your purchases. And you can be sure they will do more than try to remind you to pay up when you file your state income taxes next April.

Sound of Taxes

VoIP is at the heart of another set of pressing tax dilemmas. The industry is in its infancy, so many feel it should be protected from regulation and taxation until it has more time to grow and reach its potential.

But, like children, young services need some rules as they grow. This is especially true if they prove themselves capable of competing with more established (and rule-laden) telecom players, despite their youth. In February's PC World magazine, we looked at some affordable, good-quality VoIP services. In May, we followed that up with a more thorough roundup of several services, which are indeed ready for your prime time calls.

A December report from the New Millennium Research Council called for a national policy on VoIP; a degree of telecommunications-like regulation; ways to pay for and provide vital services such as 911 emergency calls and universal access, and to meet federal wiretapping needs; and equal regulation of VoIP providers, with none getting special treatment or exemptions.

That's not a bad set of recommendations, in my opinion. It's a pity that our government hasn't acted on it yet.

But there are bills pending in both the Senate and the House that would leave VoIP exempt from many regulations that traditional telecommunications companies must follow. And the FCC has solicited comments on VoIP in preparation for a ruling of some kind over the next 12 months. While that's happening, the FCC has already made some decisions on specific cases.

First, the FCC has ruled that, in keeping with Chairman Michael Powell's stated preference for less regulation,'s Free World Dial Up service will remain relatively regulation-free. The service is limited, however: Members don't use conventional phones and can only call each other.

In a second ruling, concerning AT&T's practice of mixing and matching call transmission technologies, things went quite differently. AT&T has the ability to route some of its customers' long-distance calls partway though the Internet--even though the calls begin and end in the regular public switched telephone network, with ordinary telephones. In this case, the FCC ruled that AT&T was subject to existing telecom regulations. Just as with its standard long-distance calls, AT&T must pay telecom rivals an access fee (which likely will be reflected in its long-distance charges) for these calls if they pass through its rivals' networks. The key difference for the FCC: AT&T's service isn't a pure Internet service; and it so closely resembles standard phone service that callers never know the anything out of the ordinary is going on with their calls.

Other petitions from such companies as Vonage, a well-known VoIP provider, are also pending before the FCC and may be decided over the next 12 months.

Tax Revenues Needed

Regardless of whether the FCC has the authority to regulate this industry in the absence of new laws, the questions before it and before Congress are thorny ones. Yes, we want this industry--and Internet services in general--to grow and to give us better or cheaper ways to achieve our ends, whether they be phone calls or something seemingly unrelated, like on-demand video. But I don't think companies that use the Internet to provide services can remain rule-free or tax-free, unfortunately for my bank account.

Services like AT&T's blur the line between what is and is not an Internet-only service; many perform exactly the same type of function as their more-traditional counterparts. And more players enter the game at every turn, such as MCI and Microsoft with an Internet-based collaboration and conferencing system, Morpheus with a VoIP service, and AT&T and Vonage with plans for Wi-Fi-based calls for home and away. With more and more people using the Internet for such services--and consequently bypassing taxes they'd be charged for conventional land-line service--all levels of government will lose money required to provide the services we want and need to keep our society going: The states alone reportedly collect some 11 to 20 billion dollars just from telecom taxes every year. That's a lot of fire trucks.

I still think the government needs a severe wake-up call and real accountability for the way it uses and misuses our collected funds. But I want government to function: I want my police officers to patrol, my schools to remain open, and my roads to be paved. That can't happen if its sources of revenue are cut off by a premature or too-broadly defined permanent ban on taxes for Internet access and services.

That does not mean, however, that we must rush to shoehorn new industries into regulations that were created for old ones. What we should do is take the opportunity to reexamine the reasons we imposed regulations in the first place, and see which ones are still valid, then discard the rest.

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