Senate Mulls Internet Tax Ban

The debate over Internet access taxation pits states' rights against free access.

The U.S. Senate is slated to vote this week whether or not to renew a ban that keeps state and local governments from taxing Internet access. But Internet services, particularly VOIP, are likely to get snared in the debate as a potential tax target not to be covered by the ban.

The Internet access tax moratorium, first enacted in 1998, expired in the fall. As senators look to renew the ban, they have to consider the changes in broadband technology that have made high-speed access affordable to small and midsize businesses.

The U.S. House of Representatives last fall voted to ban taxes on Internet access permanently and limit discriminatory taxes on Internet services. The Senate, however, reached a stalemate when a small group of senators fought to protect states taxation rights. Sen. Lamar Alexander, R-Tenn., a former governor, was the most vocal champion for the states and is sponsoring a limited extension of the moratorium for two years.

This week, Alexander will press to reach a compromise, and a middle ground could be found in the area of voice over IP, an aide to the senator said. Although the technology industry and many policymakers view VOIP as a software application that should not be subject to traditional telecom regulation, states widely view it as a potential substitute for traditional telephony; such a stance could sap states of considerable revenue.

"Its the threat and the possibility that all of these services could migrate to the Internet," said Alexanders aide. "As services migrate to the Internet, you could bundle these services, and the telecom taxes that states currently collect they could no longer collect."

Earlier this month, bills were introduced in the House and Senate defining VOIP as an application rather than a telecommunications service, restricting state and local taxes, and exempting it from the cross-payment system carriers now use.

Advocates for a broad Internet access moratorium, including several consumer groups, argue that states are trying to profit from the Internet at the expense of innovation and e-commerce. More than a dozen states tax DSL services, but there is wide disagreement on whether that violates the now-expired federal moratorium.

"The only place were seeing taxes is where they sneak it in under the table by changing definitions," said U.S. Internet Industry Association President Dave McClure, in Washington. "We didnt know anything about broadband in 1998. The entire universe was dial-up Internet. Whats coming just around the corner that we dont know about?"

The access tax debate also often gets tied up with a separate debate over states rights to collect taxes on remote sales, including Internet sales. For several years, cash-strapped states have sought to streamline their tax structures as a prerequisite to collecting remote sales taxes.

A Supreme Court decision prevents them from requiring merchants to collect sales taxes unless the merchant has a physical presence in the state, but once they amend their tax structures, they can request congressional authorization to collect those taxes. Over the past year, the states have made progress on the sales tax initiative, making the topic ripe for congressional review.

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