Internet access tax ban in limbo

WASHINGTON (11/10/2003) - Internet users hoping for a permanent ban on access taxes will have to wait a little longer, as the U.S. Congress grapples with how to make it stick without cheating states out of telecommunications service revenue.

The Senate delayed a vote Friday amid concerns that the bill's wording would let telecommunications services avoid taxes that they already pay. Also at issue is whether the federal government can stop states from collecting taxes. The Internet tax moratorium, established five years ago, expired Nov. 1.

Opponents of the bill, led by Senator Lamar Alexander, a Tennessee Republican, and Senator Tom Carper, a Delaware Democrat, urge extending the tax moratorium for two more years. Their amendment would also narrow the definition of Internet access and specify what is exempt.

Concerns voiced

"No matter how you get your Internet access, you won't be taxed if you have a contract with an ISP," says Bill Ghent, a Carper spokesperson. "But the bill right now is too broad. It sweeps telecom services into the nontaxable ledger."

An extension gives the telecommunications industry and Congress time to study how to address emerging technology, Carper says in a statement. "We need to take a step back before we do anything rash," he said.

State and local governments worry about how the bill defines Internet access. It could exempt taxation on any proprietary content ISPs provide, says Michael Mazerov, a senior policy analyst with the Center for Budget and Policy Priorities.

"Read literally, ISPs can bundle dry cleaning with Internet access and exempt it from taxation," Mazerov says.

Emerging telecommunications services, such as voice over IP, would be exempt from taxes under the Internet Tax Freedom Act, which established the tax ban, Mazerov says.

The bill's supporters say they want to exempt only Internet access, and argue that the bill does not affect how states currently tax traditional voice and other telecommunications services.

As the debate continues, more senators are stepping in. Voicing concern Friday was Senator Dianne Feinstein, a California Democrat, who represents a state known for its high-tech innovations.

"As much as I love my high-tech companies...I believe (the bill) is premature," Feinstein says. "In my ten years in the Senate, I have never heard from more California cities, specifically 104 of them, indicating their concerns about what the underlying bill would do to the budgets of their cities. This issue has energized cities in my state like no other."

Compromise in the works

After the bill's sponsors pulled the bill from the floor early Friday, both sides began working through their differences in search of compromise.

Sponsor Ron Wyden, an Oregon Democrat, "decided to negotiate rather than force" a vote on the floor, a spokesperson says. Also, Wyden and Sen. George Allen, a Virginia Republican, the bill's other chief sponsor, may want a bill that has broad support.

Sources close to the negotiations say Wyden and Allen are open to a limited extension on the ban, but have not committed to narrowing the definition of Internet access--which opponents say is the biggest sticking point.

As recently as this week, Wyden and Allen had been optimistic about the bill's passage. The bill's supporters lost momentum as debate began late this week, however.

Another stumbling block came from the Congressional Budget Office, which issued a letter saying it lacks "sufficient information" to estimate how much revenue states will lose because of the tax ban. The CBO notes that states could lose revenue if they are unable to tax certain telecommunications services, or even if telecom companies bundle services.

"The big message from the CBO is 'we don't know what this means.' This gives people a lot of trepidation about this legislation," says Ghent, the Carper spokesperson.

What's next?

Although no one is predicting when the bill might go to a vote, Senate leader Bill Frist, a Tennessee Republican, wants both sides to cut a deal so the Senate can finish its business.

David Quam, director of the Office of State-Federal Relations for the National Governors Association, which has lobbied against the permanent tax ban, says the Senate is pretty evenly divided on this issue.

"We're cautiously optimistic that this is where we'll end up," Quam said of the amendment sponsored by Senator Carper and others.

But Matt Clark, federal affairs manager for Americans for Tax Reform says if a compromise bill clears the Senate, it isn't clear if the House will accept it. The House passed its bill calling for a permanent ban on Internet taxes in September.

Rita Chang writes for the Medill News Service.

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