Congress Mulls Net Access Tax Ban

By Caron Carlson  |  Posted 2003-04-01
A federal moratorium on Internet access taxes expires in November, and advocates of a permanent ban say Internet service providers await a myriad of state and local taxes—and Internet users await rising access costs—if Congress doesnt take action before the expiration.

At a time when states and cities are struggling to balance their budgets, the IT industry, ISPs and Internet retailers are trying to avoid becoming a target of the cash-strapped governments. At a hearing Tuesday of the House subcommittee on commercial and administrative law, the industry urged lawmakers to make the moratorium on access taxes and on multiple and discriminatory taxes permanent.

Congress established the three-year moratorium in 1998 and extended it another two years in 2001. Now pending is a bill, the Internet Tax Nondiscrimination Act, which would make the ban permanent.

The bills backers warn that without further action from Congress, ISPs could be flooded with new state and local taxes, and that e-commerce, and the IT industry itself, would be harmed. In testimony before the subcommittee, Harris Miller, president of the Information Technology Association of America in Washington, told lawmakers that the Internet shouldnt become the "tax piñata of 2003" for the revenue-starved cities and states.

Nine states were grandfathered under the 1998 law and are permitted to levy Internet access taxes, but the pending legislation would eliminate the grandfather clause. Taxing authorities are urging Congress not to eliminate the clause and not to extend the moratorium more than five years.

Harley Duncan, executive director of the Federation of Tax Administrators in Washington, told the subcommittee that the "fledgling industry" argument, which was put forth to support the original moratorium, is no longer relevant. Duncan said that Internet access in the states that levy access taxes has not been adversely affected.

The federation is also concerned that traditionally taxable services and content are being bundled into Internet access and dodging rightful state taxes. Congress must redefine Internet access or there could be an unintended erosion of the state tax base, Duncan said.

Also testifying was former Virginia government James Gilmore, who is now an attorney with the law firm of Kelley, Drye & Warren in Washington. Gilmore recommended that the moratorium on multiple and discriminatory taxes be extended through 2006 and the moratorium on access taxes be made permanent.

Without the prohibition, there would be a maze of overlapping state and local tax regulations, and small ISPs could have to file dozens or hundreds of tax returns annually, while large national ISPs could have to file as many as 50,000, Gilmore said.

The pending bill does not touch on sales and use taxes, which states are allowed to impose on Internet sales if the Internet retailer has a physical presence in the buyers state.

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