Senate Delays Internet Tax Ban

Tina Reilly
WASHINGTON, D.C. – In what has proven to be a far more difficult issue to resolve than expected, the U.S. Senate failed to decide whether to permanently extend the ban on Internet taxation.

The original bill that was enacted in 1998 put a ban on Internet access, but also included a grandfather clause that exempted certain states from the ban. If the bill is made permanent, those states would no longer be exempt and could stand to lose an estimated $9 billion in yearly revenue.

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 since it was originally signed.

In September, the House of Representatives voted to make the tax ban permanent, although a likeminded resolution stalled out in the Senate and has led to lengthy and heated negotiations since the temporary ban expired on Nov. 1.

A final vote was expected today, but the U.S. Senate failed to endorse legislation that would have either extended the ban permanently or given individual states the right to levy taxes against users of dial-up and high-speed Internet access.

According to sources, negotiations will continue on through the weekend and might reach a resolution by Monday. There is some talk that a proviso might be agreed upon that would entail extending the bill for another two years.

Senator John McCain, chairman of the Commerce Committee, is one of the leaders who is brokering with Democratic and Republican Senators to reach a constructive resolution.

At the heart of the ITFA is 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 original bill was drafted long before the proliferation of many emerging technologies, including high-speed Internet access.

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.

Sen. Lamar Alexander (R.-TN) has been an outspoken advocate of altering the language of the 1998 bill and making it easier for states to tax wireless connections and other types of Internet access never considered by the original 1998 ban. His proposal includes extending the bill for another two years only.

"What we are proposing is a two-year extension of the current law with one exception: level the playing field between the phone companies and the cable companies," Alexander said. "This short term solution allows us to craft careful changes in a rapidly changing technological world."