Internet Tax Ban Uncertain

Tina Reilly
WASHINGTON, D.C. -- As the November deadline grows near for the renewal of a ban on Internet taxation, what first looked like a slam dunk for Congress has turned into a scuffle between state and local governments eager to recover billions of dollars in lost revenue.

In September, the U.S. House of Representatives took the heat off the Internet industry by passing a bill that will indefinitely extend the moratorium on Internet taxation and remove a grandfather clause that exempts certain states from the ban.

The bill was passed by voice vote in The House and applied to taxation on Internet access, taxation by multiple states on products purchased over the Internet, and taxes that treat Internet purchases differently from other types of sales.

Originally scribed by Representative Christopher Cox (R. Calif.) of Newport Beach and Senator Ron Wyden (D.-Ore.), the Internet Tax Freedom Act (ITFA) of 1998 has gone through several incarnations and unless extended, will expire on Nov. 1, 2003.

The crux of ITFA addresses the taxation of Internet use. In the early days of the Internet, most consumers got taxed for web access by their phone carrier and charged fees for use of a second phone line, although under the provisions of ITFA, no taxes could be directly levied against an Internet account.

The ITFA bill includes a provision that prohibits, and would continue to prohibit if renewed, states from taxing the DSL and dial-up access service that telephone companies often bundle with traditional voice services.

Opponents of the taxation ban claim that the broad wording of the bill threatens to ban telecommunications companies from all Internet taxation as carriers transfer their service from ordinary telephone services to next-generation Internet-based systems.

According to a report released in July, the taxation ban could result in "substantial revenue losses for states."

Rep. Cox has been quoted as saying that his main motivation in pushing the IFTA bill through The House was to make Internet access more affordable for consumers.

The states that were originally exempt from the reach of ITFA - Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington and Wisconsin - began collecting taxes on Internet access before the 1998 moratorium.

The Congressional Budget Office estimates that repealing the grandfather clause would result in revenue losses for those 10 states estimated somewhere between $80 million and $120 million annually.

If ITFA is renewed on Nov. 1, those states in particular stand to take a hit. For example, Internet providers that purchase online bandwidth from other large network providers would be exempt from charging taxes on those purchases.

According to ITFA supporters, the use of the Internet should not be subject to any additional taxes when consumers already pay an array of local and state taxes and fees for telephone and cable television services. ITFA backers contend that an extension of the ban will in no way affect telecommunications revenue and that detractors of the bill are merely trying to find a way to increase the taxation on Internet users that already exist.

In a speech on the Senate floor last week, Wyden reportedly accused states of wanting to tax all Internet activities, including email. If the states have their way, he was quoted as saying, the America Online slogan "You've got mail" could become: "You owe taxes."

In the meantime, a Washington think-tank is calling for Congress to make the ITFA extension temporary, not permanent, claiming it creates an uncertain revenue impact on states and an unfair tax advantage for those who can afford high-speed Internet service.

Supporters of ITFA have so far prevailed in the House. An identical bill has passed a Senate committee and could be put to the full Senate as early as this week.