Update: Senators seek to limit Internet tax moratorium

Four U.S. senators will introduce a bill to extend a now-expired Internet tax moratorium by two years, instead of a permanent ban on Internet-only taxes that passed through the House in September.

Senators opposed to the permanent ban in the House-passed Internet Tax Non-discrimination Act say the definition of "Internet access" in the bill could result in a ban on taxing many telecommunications services as carriers of traditional telephone service move more of their traffic to the Internet. Senators Thomas Carper, a Delaware Democrat, and Lamar Alexander, a Tennessee Republican, said their two-year extension of a five-year moratorium would continue the ban but define Internet access as not including telecommunications services.

If taxes on telecommunications services were eliminated by the Internet Tax Non-discrimination Act, as opponents fear, the losses to state and local jurisdictions in the U.S. could reach $11.7 billion a year, said Senator Dianne Feinstein, a California Democrat. California could lose up to $836 million in telecommunications taxes a year, Florida nearly $1.1 billion and Texas $1.2 billion, according to opponents of the permanent ban. Senator Kay Bailey Hutchison, a Texas Republican, was the fourth senator speaking for the Carper-Alexander bill at a Wednesday press conference.

Supporters of the Carper-Alexander bill, called the Internet Tax Ban Extension and Improvement Act, have lined up 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, and 118 California cities opposed to the permanent ban contacted her office, she said.

Senators George Allen, a Virginia Republican, and Ron Wyden, an Oregon Democrat, cosponsors of the permanent Internet Tax Non-discrimination Act in the Senate, have backed a permanent ban as good for growth of the Internet. A temporary ban on Internet taxes would eventually allow Internet access taxes, and the Carper-Alexander bill would carve out a new exemption to the tax ban for states to tax DSL (digital subscriber line), Allen argued. The DSL exemption could create a new "telephone-like" tax and cost some consumers up to $150 a year, Allen said.

"Make no mistake about it -- the proposal offered today would continue to allow harmful, regressive taxes on Internet access services," Allen said in a statement. "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 added. "This bill would have a negative effect on small businesses, rural communities and lower income Americans," he said. "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."

Carper's office disagreed with Allen's interpretation of the new bill. The Carper-Alexander bill will make clear that DSL service qualifies as Internet access exempt from tax, but it grandfathers in about 16 states that are currently taxing DSL, even under the old tax moratorium, said a Carper spokesman. The old tax moratorium grandfathered in 11 states that were taxing Internet access before the first Internet tax moratorium passed in 1998.

"There's no new phone taxes in our bill," said Carper's spokesman. "That's ridiculous."

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

"If, in fact, the more than 7,000 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."

The "murkiness" in the definition of Internet access in the Internet Tax Non-discrimination Act would likely face legal challenges, Carper said during a press conference Wednesday. That bill says telecommunications services as defined in the Communications Act of 1934 are not considered Internet access, but Carper and other opponents said 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 Wednesday, would expand the old Internet tax ban to include all types of traditional Internet access, including high-speed cable modem service and DSL, according to Carper. The Internet tax moratorium, which expired Nov. 1 after first passing in 1998, prohibits states and other taxing jurisdictions from levying taxes unique to the Internet, including access taxes and "bit" taxes, the taxing of Internet traffic as it passes through Internet infrastructure located in the jurisdiction.

After passing the House, the Internet Tax Non-discrimination Act stalled in the Senate when a group of senators questioned its impact on state and local governments. The bill stalled before the Senate's December recess.

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

Copyright © 2004 IDG Communications, Inc.

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