Congress to Vote on Internet Tax Ban

After more than a year of leaving the threat of new state- and city-levied taxes looming over Internet access providers and online merchants, Congress is poised to reimpose a moratorium on taxing Internet access.

The House and the Senate reached a standoff months ago on how to prohibit taxes that could dampen e-commerce. The House approved a permanent moratorium last year covering a broad range of Internet-based services, while the Senate passed a temporary moratorium authored by Sens. Ron Wyden, D-Ore., and George Allen, R-Va. A group of House members led by representatives from high-tech districts are expected to vote Thursday on the Senates approach.

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"Although we prefer the permanent extension, . . . we believe it is time to resolve this issue," said Zoe Lofgren, D-Calif., upon calling for a compromise. "For over one year, ISPs and consumers have had to deal with the very real possibility that all 50 states could tax Internet access. We cannot continue to allow this uncertainty to harm the future of the Internet."

The Senates opposition to the House-passed permanent moratorium was fueled by states that were worried about losing telecommunications tax revenue as voice traffic moves to the Internet. A handful of states have imposed taxes on digital subscriber line services, deeming it a telecom service. Some other states began taxing Internet access before Congress imposed the original moratorium in 1998.

Click here to read about the growing tug of war in Congress over how VOIP fits into the traditional telecommunications regulation and taxation schemes.

States had strong allies in former governors-turned-senators, including Tom Carper, D-Del., and Lamar Alexander, R-Tenn., who fought the moratorium on the grounds that the Internet is no longer a nascent technology that merits protection from Congress. The Congressional Budget Office estimated that a permanent access ban would cost states between $80 million and $120 million a year, beginning in 2007.

Both camps dug their heels in for the past year, but this week, much of the telecommunications industry joined with online giants such as Amazon and eBay to urge Congress to break the gridlock during this years lame-duck session, warning that some states and cities were preparing to impose taxes as high as 15 percent per month.

The compromise reached gives states already collecting Internet taxes two or four years to phase them out. It also clarifies that the moratorium does not apply to state or local taxes on telecom services.

"This compromise balances well two important principles: federalism and free markets," Alexander said. "It temporarily bans state and local taxes on Internet access while doing minimal harm to state and local governments."

President Bush was expected to sign the legislation once passed.

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