Netizens may get a brief tax break

WASHINGTON (11/21/2003) - The ban on Internet access taxes is likely to get a temporary extension, as time runs out in the current congressional session.

A coalition of senators wants to extend the Internet access tax ban moratorium bill for another two years, rather than making the ban permanent. The Internet access tax ban has already been extended since originally enacted five years ago. It expired on November 1.

Their amendment would exempt DSL services from taxation for the next two years, as well as sparing other Internet commodities. Some states now tax DSL because it is considered a telecommunications service rather than an Internet access service.

Besides extending the tax moratorium, the amendment would limit the bill's scope by defining telecommunications services that deliver Internet access to end-users as Internet access only. Whether telecommunications services are considered tax-exempt Internet access is a sticking point for many of the bill's opponents.

Caution urged

The amendment's authors urge more time to study the ramifications of a permanent Internet access tax ban, given the rapid pace of technology.

"We can't be locked into a permanent definition of Internet access, given how quickly technology is changing," says Senator Thomas Carper (D-Delaware), one of the amendment's sponsors. The authors say states suffer economically when they can't collect taxes on telecommunications services. Without that revenue, states would have to cut basic community programs and services, they say.

Senate Majority Leader Bill Frist (R-Tennessee) has offered to extend the moratorium for nine months, and sources say the bill's opponents would accept that. The bill's chief sponsor, Senator George Allen (R-Virginia), however, is said to be negotiating a longer extension.

"Extending the current law for nine months is like punting from the 20-yard line right before half time," Allen says in a statement. "This is another excuse to provide an opportunity for States to begin taxing the Internet, especially broadband DSL."

Spare the states

However, that's unlikely to occur since most state legislatures are not in session. Besides, "state and local officials know that Congress can retroactively disallow any taxes that have been enacted," says Michael Mazerov, senior policy analyst with the Center on Budget and Policy Priorities.

The proposed amendment would exempt only consumers from Internet access tax, according to an Allen aide. ISPs that are not paying taxes on telecommunications services in their backend Internet operations would have to pay taxes under state laws. Only some states tax these services.

As former governors, Carper, Senators Lamar Alexander (R-Tennessee) and George Voinovich (R-Ohio) say the definition of Internet access tax under the moratorium bill is too broad and would exempt telecommunications services that states can now tax.

They argue that exempting telecommunications services would devastate state treasuries, which count on telecommunication taxes as a vital revenue source.

Clock's ticking

There is virtually no chance Congress will consider the bill on the floor before the imminent holiday recess, both sides note. Some speculate that Congress will address the matter only through the omnibus bill, a catchall that wraps up loose ends of various pieces of legislation.

If the moratorium bill does get attached to the year-end omnibus bill, the politics of the matter could get complicated. Senator Ted Stevens (R-Alaska), manager of the Senate omnibus bill, is one of the amendment's sponsors, thus raising the stakes.

House leaders are considering including the Internet access tax moratorium bill in the House version of the omnibus bill, according to Representative Chris Cox (R-California). He sponsored the House version of the tax moratorium, which passed unanimously in the House in September.

"We're in constant communication with the Senate leadership" on the omnibus bill, Cox says. " Frist is not going to put something in there that he knows isn't going to pass."

Still negotiating

Action on the bill has been delayed for weeks, as senators on both sides of the debate have been at an impasse over the definition of Internet access. Both sides say they have made key concessions.

Besides changing the bill to give only end-user Internet access the break from as telecommunications service taxes, the bill has several new provisions.

One requires ISPs to identify the taxable portions of their bundled products and services sold as an entire Internet access package. Unless ISPs break out the taxable parts, such as movies and telephony services, they will not receive any tax exemption.

Meanwhile, opponents say banning taxes on DSL services is a big concession to the bill's supporters.

"I have no confidence today," says Senator John McCain (R-Arizona), the bill's manager. "There's still great distance between the two sides."

Calling the Alexander-Carper-Voinovich amendment a "non-starter," Cox says he is "optimistic that we'll get this done and won't go naked without protection against Internet taxes."

Rita Chang writes for the Medill News Service.

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