Congress Tackles Taxing Issues

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WASHINGTON -- With the U.S. Congress winding down its work for 2004, technology lobbying groups are stepping up their push for lawmakers to pass several pieces of legislation, including extensions to a research-and-development tax credit and an Internet access tax moratorium.

Many tech groups have pushed for a permanent R&D tax credit, but separate bills passed by both the House of Representatives and Senate only extend the credit for 18 months. The R&D tax credit is one small piece of the huge corporate tax bills passed by the chambers, but significant differences exist between the two pieces of legislation, and a compromise isn't likely to be ironed out in conference committee before Congress adjourns for its election recess around October 1.

Congress may return for a lame-duck session after the November election.

Tax Talk

Tech groups also have asked Congress for a permanent ban on taxes unique to the Internet, but a Senate version of the Internet tax moratorium, passed in April, would only extend the moratorium for four years. House legislation, passed in September 2003, would permanently ban Internet access taxes and other taxes unique to the Internet, but a group of senators questioned whether the ban would limit states and local governments from levying taxes on telecommunications services as telecom companies move their traffic to IP.

The moratorium expired last November, and if Congress fails to act, state legislatures may begin to look at taxing Internet access, says Joe Tasker, senior vice president and general counsel at the Information Technology Association of America. "If Congress doesn't get it done in conference, it sends a signal to states," he adds. "It's important for the Internet."

While supporters of the tax moratorium say access and other Internet taxes would slow the grow of the Internet in the U.S., a group of senators, lead by Tennessee Republican Lamar Alexander, have said a broad ban on Internet taxes, including voice over IP service, could cost states billions of dollars in tax revenues.

The House version of the moratorium would have "permanently taken away state and local authority to include high-speed Internet access in its taxation plans and would have put at risk literally billions of dollars in revenues that states, cities, and towns now depend on to pay for police, schools, parks and other local services," Alexander said, in a speech on the Senate floor earlier this month.

Alexander urged the House to adopt the Senate temporary moratorium, and he questioned whether taxing the Internet would hurt its growth as much as some proponents of a permanent tax ban have suggested. Broadband adoption has outpaced the adoption of cell phones, color television, and CD players, he noted.

"There were dire predictions that if states were allowed to keep taxing this access that it would become a terrible burden for the industry, restrict its growth, and put the United States in some technological backwater," Alexander said. "Nothing could be further from the truth.

"Almost every day in my mailbox comes a new offer from someone to sell me high-speed Internet access," he added. "Electric companies are selling high-speed Internet access. Next thing you know, I expect the milkman to show up offering to provide me with high-speed Internet access."

Offshore Outsourcing

The Information Technology Association of America included both the R&D tax credit and the Internet tax moratorium on its list of congressional "must do" items released this month.

In the past year, the ITAA also has fought proposals to limit so-called offshore outsourcing in about 40 state legislatures, Tasker noted. "Dealing with that issue in 40 states is an enormous undertaking," he added. "It's extremely important that we don't deal with Internet taxation, too."

The corporate tax bills awaiting conference committee compromises also have items that could affect offshore outsourcing, or global hiring. Both the House bill, called the American Jobs Creation Act, and the Senate bill, called the Jumpstart Our Business Strength (JOBS) Act, include incentives for U.S. companies to reinvest their foreign earnings back in the United States. The two bills differ in their approach, but both would temporarily reduce the tax on foreign income brought back into the United States from the typical 35 percent to 5.25 percent.

Republicans argue the provision would potentially pump billions of dollars back into the U.S. economy, while some Democrats, led by Representative Charles Rangel of New York, questioned whether the bill sends a message to companies that the U.S. government supports offshore outsourcing. "I believe this bill may create more jobs, but they will not be American jobs," Rangel said in June.

The Senate JOBS Act also includes an amendment, sponsored by Senator Christopher Dodd, a Connecticut Democrat, that would prohibit U.S. government contracts from being performed by overseas labor. The ITAA has pushed for Congress to kill the Dodd amendment, saying it could lead to a trade war where other countries refuse to allow U.S. IT companies to do government work.

Dodd has defended the amendment as protecting U.S. jobs. "Our nation's chief export shouldn't be jobs for foreign workers," Dodd said in a statement earlier this year. "Thankfully this measure says enough is enough. Taxpayers' hard-earned money shouldn't be used to bankroll the loss of taxpayers' jobs to overseas workers."

ITAA's Tasker said the amendment doesn't belong in the corporate tax bill. "If the Senate wants to pass it, let's debate it up and down," he said. "It's very badly drafted legislation. Nobody's really sure what its impact will be."

Patent Reform

Also on the ITAA's to-do list is patent reform. The ITAA supports a bill, called the United States Patent and Trademark Fee Modernization Act, that would end the transfer of excess fees collected by the U.S. Patent and Trademark Office back into U.S. Treasury. In the past 12 years, an estimated $650 million in fees collected above the office's Congress-approved budget were returned to the U.S. government's general budget. The bill would also raise patent fees about 15 percent.

Other technology groups, including the Institute of Electrical and Electronics Engineers-USA, also have called for an end to this patent-fee "diversion" as a way to reform the patent-application process. The Patent Office now takes about four years to clear a patent, Tasker noted, and a larger Patent Office budget would also help solve much-publicized problems with the office granting bogus patents.

The patent-reform debate is one of the first steps toward a longer-term discussion on intellectual property law in Congress, Zuck predicts. A handful of bills, unlikely to get through Congress this year, attempt to balance copyright protections.

Copyright Concerns

Both ACT and ITAA, along with about 40 companies, trade associations, and public interest groups, have opposed the Inducing Infringements of Copyright Act, which would allow artists and entertainment companies to sue firms that market products that "induce" copyright violations.

Induce Act sponsor Senator Orrin Hatch, a Utah Republican, has pushed the bill as a way for entertainment companies to collect damages for unauthorized file-trading over peer-to-peer networks. But opponents, including Zuck, say the bill could lead to lawsuits against vendors of technologies that have significant legitimate uses. Zuck and Tasker called on the Senate to sit on the bill, but the bill could come to the Senate floor as early as this week.

"It is incredibly broad," Representative Rick Boucher, a Virginia Democrat, says of the Induce Act. "If it were to be enacted into law, it would basically let the content community outlaw anything they don't like."

ACT also opposes another copyright bill designed to protect consumers. The Digital Media Consumers' Rights Act would require copy-protected compact discs to be labeled and it would amend the Digital Millennium Copyright Act to spell out that it's legal to market software or hardware that has "significant" uses beyond infringing copyright.

ACT doesn't see a need for the bill's change to the DMCA, Zuck says. "The bottom line is the courts have done a good job of striking the balance between [intellectual property] and fair use rights," Zuck says.

Boucher, sponsor of the Digital Media Consumers' Rights Act, says the bill is an important step toward protecting the rights of consumers and of technology companies marketing products such as digital music players. Although Boucher's bill isn't likely to get through the House this year, it has support from Representative Joe Barton, the Republican chairman of the House Energy and Commerce Committee.

"This measure will be enacted into law sometime," Boucher predicts.

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