by Gail Perry

A debate over the issue of Internet access taxation continues to rage in Congress, where the latest development is the Senate’s recent passage of a bill providing a four-year moratorium on the controversial taxes.

The Internet Tax Non-Discrimination Act (S.150) sailed through the Senate on April 29 with a resounding vote of 93-3. Voting against the bill were Senators Jeff Bingaman, D-N.M., Bob Graham, D-Fla., and Frank Lautenberg, D-N.J.

Senators George Allen, R-Va., and Ron Wyden, D-Ore., who wanted to make the ban on Internet access taxes permanent, introduced the bill over a year ago, but the Senate couldn’t come together to agree on a permanent ban.

It was Senate Commerce Committee chairman John McCain, R-Ariz., who ultimately led the charge and got the bill passed with an amendment to provide a four-year moratorium on the taxes in lieu of the permanent ban.

Meanwhile, over in the House of Representatives, legislators have taken a stronger stand against Internet access taxes. H.R. 49, sponsored by Rep. Christopher Cox, R-Calif., would permanently ban all Internet access taxes, including existing taxes.

Internet access taxes — not to be confused with Internet sales taxes, another controversial issue — are taxes collected by Internet service providers and paid to state and local jurisdictions, much like the taxes contained in phone bills. In fact, it is actually the telephone taxes that are responsible for some of the controversy surrounding Internet access taxes.

Because many telecommunications companies are also ISPs and were already paying taxes on telecommunication services before they began providing Internet services, it seemed perfectly natural and proper to assess these companies with Net access taxes as well.

But Internet providers such as cable and satellite companies, and other non-telecommunications companies such as digital subscriber line services, were allowed to offer Internet services without the burden of the taxation. Telecommunications companies objected to the inequity, claiming that the cable companies and others had an unfair competitive edge. Taxing authorities began to realize that there was a large source of untapped revenue, and the battle was afoot.

The Internet Tax Freedom Act, enacted in 1998, attempted to deal with this inequity by calling a halt to the access taxes. The act provided for a three-year moratorium on all new Internet access taxes, but allowed such taxes that were already being imposed to remain in force while the whole controversy could be sorted out.

Three years later, with no resolution in sight, the moratorium was extended for another two years. It expired on Nov. 1, 2003, and Congress is now scrambling to reach an agreement on how to proceed.

Revenue slipping away
State and local taxing authorities contend that the revenue lost from ending the taxes on Internet access would have a detrimental impact on available funds, while ISPs and legislators argue that the taxes are prohibitive to the ultimate goal of making Internet service accessible and affordable across the country.

A recent study performed by the New Millennium Research Council, a scholarly research organization based in Washington, showed that an increase in the cost of Internet access, which ISP providers would undoubtedly pass through to their subscribers and customers, would have the adverse effect of decreasing nationwide Internet pervasiveness. That would result in revenue losses to ISPs, job losses and a reduction in income taxes.

At present, nine states that were taxing dial-up Internet services before the Internet Freedom Act was first passed still have the right to assess those taxes because their right to continue taxing was grandfathered in with the 1998 legislation. The Senate bill would extend the rights of only these nine states (New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin) to continue taxing dial-up Internet services for four more years. After four years, all such taxes would be banned.

In addition, the Senate bill would allow 17 states that have been taxing high-speed Internet service just two more years to continue assessing the taxes, after which that taxation would come to an end, as well.

The House version of the bill is not so friendly.

Last fall, the House unanimously voted to end all taxation of Internet access. The House bill also prevents taxation of the relatively new Voice Over Internet Protocol technology that supports Internet-based phone calls. The Senate bill allows taxation of VoIP.

The two legislative chambers appear to be in a stalemate. The House is unlikely to yield to a temporary moratorium, and there are senators who oppose the permanent ban on Internet access taxes.

President George W. Bush has indicated that he supports the House version of the bill. Just before the Senate vote in April, he repeated his goal to make broadband Internet access available throughout the country by 2007. In a speech in Minneapolis, he stated, “We must not tax broadband access.” The president emphatically added, “Congress must ban taxes on access.”

Rumbling beneath the surface of Internet access taxation is a deeper concern of the state and local taxing authorities. The assumption and fear of these tax collectors is that, ultimately, all telecommunications services will be moved to the Internet, resulting in the loss of a large source of tax revenue.

Whereas the Congressional Budget Office estimates that the Internet access taxes at issue in the current legislation to be in the range of $80 million to $120 million annually, a report on telecommunications taxes estimates the loss of revenue to state and local governments from taxes on all telecommunications services could exceed $18 billion per year if the House bill becomes law and a permanent ban that includes VoIP services is put in place.

The Senate has sent its version of the tax moratorium bill to the House, hoping that the two chambers can come to some agreement on a compromise bill.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access