Internet Tax Ban Meets Resistance in Senate

Several U.S. senators questioned whether to extend a ban on access and other Internet-only taxes, at least in their current form, during a hearing Wednesday.

The current moratorium on Internet taxes expires on Nov. 1. Representatives of Verizon Communications Inc. and the National Taxpayer Union Foundation called on Congress to make the tax ban permanent, but several senators said the current ban could allow Internet service providers to package other products with access and exempt them from taxes.

The current ban should be extended temporarily, "if at all," said Senator Daniel Inouye, a Hawaii Democrat and chairman of the Senate Commerce, Science and Transportation Committee. On Tuesday, three groups representing state government officials called for a more limited, temporary ban.

Several other senators said they would support a temporary ban on Internet access taxes, but only if language in the moratorium is changed to make clear that states are allowed to tax services packaged with access, including music and movies and television over Internet Protocol, called IPTV. When the moratorium was last debated in Congress in 2004, a group of senators, many of whom are former state government officials, raised concerns that the Internet tax ban could cost states billions of dollars.

The original Internet tax ban, which went into effect in October 1998, said that access and "other services as part of a package services offered to consumers" may be exempt from taxes. The last extension of the ban, passed in 2004, removed VOIP (voice over IP) from the tax ban, but states need assurance that they can tax other services packaged with access, said Senator Tom Carper, a Delaware Democrat.

On Wednesday, Carper and four other senators introduced a bill, called the Internet Tax Freedom Extension Act, that would extend the ban on Internet access taxes another four years while closing the "loophole" that could allow other bundled services to be exempt from taxes. Three bills introduced this year would permanently extend the ban on Internet-only taxes.

The tax ban needs to stay limited to protect state and local governments' ability to offer essential services and pay firefighters, police officers and teachers, added Senator Mike Enzi, a Wyoming Republican. "You can't drink water from the Internet," he said. "You can't flush your toilet on the Internet. You can't drive your car on the Internet."

But other senators called for the tax ban to be made permanent. If the ban expires, consumers in some U.S. cities could pay up to an additional 30 percent for Internet access, said Annabelle Canning, vice president for state tax policy at Verizon.

A permanent ban would help with Internet service providers' plans to invest in new services, added Jeff Dircksen, director of congressional analysis for the National Taxpayer Union Foundation. "It's time to send a clear signal to consumers and service providers," he said.

Senator John Sununu, a New Hampshire Republican, agreed. While state and local government officials often want improved broadband services for their residents, they also want to tax the Internet, he said.

The Internet is a global service, Sununu noted. "We do have a responsibility at the federal level to try to reasonably protect interstate commercial activity ... from either fragmented regulations or burdensome taxes," he said. "That's the idea here. The Internet has been an engine of economic growth across the entire country."

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