Nothing sure but death and the Internet tax debate

Facing a November expiration of existing law, Congress contemplates a permanent ban on taxing Internet access

As a federal ban on discriminatory and access taxes on the Internet approaches a Nov. 1 expiration date, Congress is once again embroiled in a question that comes up every three or four years:  To what degree does the Internet merit special federal protection from state and local tax collectors?

The tax moratorium, which does not affect the states’ right to tax e-commerce, was first passed in 1998 and was extended twice since then.  While some senators have recently suggested they are not fully convinced it should be preserved, House members overseeing the issue agree that it should be, either temporarily or permanently.

“It sounds like just about everybody’s in agreement that we’ve got to extend the moratorium and perhaps make it permanent,” said Rep. John Conyers, D-Mich., Thursday at a hearing of the House Judiciary Subcommittee on Commercial and Administrative Law. 

Lawmakers agree that the very definition of Internet access needs to be refined because not all states have interpreted it the same way. It’s clear today that states can’t tax the provision of Internet connectivity, such as DSL and cable modem services.  However, the ban’s proponents want a broader definition to make it clear that the transport components of Internet connectivity (such as Internet backbone service) and services unrelated to access, such as e-mail and instant messaging, won’t be taxed either. 

The major telephone companies and cable providers are the key proponents of a permanent Internet access tax ban, and they are joined by IT companies, including Apple and Cisco, as well as Internet-based businesses, including, eBay and Yahoo.  Collectively lobbying as the Don’t Tax Our Web Coalition, these groups would bear the brunt of access taxes if the ban isn’t preserved or if Congress doesn’t make it clear that services unrelated to access aren’t included in it.  The cost of such taxes would be passed along to business and consumer end users.

The coalition is divided on the issue of Internet sales taxes, which will likely be addressed in separate legislation.

The states are pressing for a narrower definition of Internet access, fearing that if the definition is too broad they will be unable to tax traditional telecommunications and video services that are bundled with Internet access. VoIP was explicitly exempted when Congress last extended the ban, and the states are concerned that non-access related emerging services, such as IP TV, could end up tax-free if service providers bundle them with connectivity.

Two bills pending in the House would make the ban permanent, but questions have arisen whether the Internet is sufficiently mature to thrive without eternal federal protection.  A pending Senate bill would extend the ban for another four years.

“Since 1998, [Internet-related business has] grown and in 2006 was deemed to be worth an estimated $108.7 billion,” said Rep. Linda Sanchez , D-Calif., who chairs the subcommittee.  “What was still seen as a novelty by some in 1998, has become a daily part of life at home, in school, and in the workplace.”

The states support the Senate bill, arguing that Congress should not pass a permanent ban on an unpredictable technology.  The Senate bill also preserves an exemption for nine states that had Internet taxes in place in 1998.  David Quam, director of Federal Relations at the National Governors Association, told lawmakers at Thursday’s hearing that the House legislation would cost those states as much as $120 million in tax revenue a year.