Net Tax Ban Nears

The U.S. Senate has voted 93-3 to extend a ban on state and local taxation of Internet access, including cable-modem service and DSL for four years, but the bill does not prevent local governments from taxing Internet-based phone service. The Senate must work out differences with the U.S. House of Representatives, which passed a bill last year that would permanently ban Internet access taxes.

The Senate’s Internet Tax Non-Discrimination Act does not affect state and local taxation of voice services, including voice over the Internet, nor does it prevent the collection of fees to support the Universal Service Fund. The bill includes an accounting rule that specifies an Internet access provider bundling other services must separate the package to show what is taxable; otherwise, the entire package is subject to taxes.

Like the House, the Senate also introduced a bill permanently banning taxation of Internet access. However, it faced opposition from two former governors turned senators - Lamar Alexander (R-Tenn.) and Tom Carper (D-Del.), among others. Carper expressed concern the permanent ban would give the telecom industry an unfair tax break while hurting the revenue base of state and local governments.

The senate bill S. 150 includes two grandfather clauses, including a stipulation that states that taxed Internet access prior to 1998 can do so for another four years. Carol Guthrie, a spokeswoman for Sen. Ron Wyden (D-Ore.), who was the primary sponsor of the bill, along with Sen. George Allen (RVa.), says seven states are covered under the grandfather clause.

Under a separate grandfather clause, states taxing DSL access would have two years to stop the practice. According to a Senate estimate, up to 12 states are taxing DSL access because it is classified as a telecommunications service.

Up to $6 consumers pay each month for DSL is earmarked for taxes in some states, says Tom Tauke, senior vice president of public policy and external affairs with Verizon Communications Inc. Congress passed a temporary moratorium in 1998 restricting taxation of Internet access, but the language was restricted to cable-modem service, according to Verizon.

When the House takes up the Senate bill, it could pass or defeat the measure, go to conference with the Senate to reconcile differences, or pass the Senate bill with modifications. That action also would require a conference.

“This bill will ensure that consumers will never have to pay a toll when they access the information highway. Plainly and simply, this is a pro-consumer, pro-innovation and pro-technology bill,” says Sen. John McCain (R-Ariz.).

Alexander says S. 150 marks a “huge improvement” over the House bill because it calls for a temporary ban on Internet access taxes, allows states already collecting taxes to continue the practice for two or four years, and “most importantly, it makes clear that states and cities can continue to collect taxes on telephone services, even if telephone calls are made over the Internet.”

BUSH SAYS NO

President Bush has indicated support for a ban on Internet access taxes.

“Broadband technology must be affordable. In order to make sure it gets spread to all corners of the country, it must be affordable. We must not tax broadband access,” the president said April 26 during a speech before the American Association of Community Colleges Annual Convention in Minneapolis, Minn.

“If you want broadband access throughout the society, Congress must ban taxes on access.” The president reaffirmed a goal to bring highspeed Internet access to every part of the country by 2007. He said the number of broadband customers has tripled since 2000, yet the U.S. ranks 10th among industrialized countries in the availability of high-speed Internet service.

The federal government is trying to make a difference. Through the 2002 Farm Bill – and an amendment in an appropriations bill passed this year - the Rural Utilities Service within the U.S. Department of Agriculture has made $2.2 billion in loans and loan guarantees available for broadband development in rural areas. Most of the funds are still sitting in government coffers.

During his speech, Bush also supported the FCCs decision to deregulate the broadband market. He said the government should make more wireless spectrum available for free public use, endorsed increased access to federal land for fiber-optic cables and transmission towers and advocated new technical standards to make possible broadband technologies, such as highspeed Internet access over power lines.

“Broadband is going to spread because it’s going to make sense for private sector companies to spread it so long as the regulatory burden is reduced,” the president said. “In other words, so long as policy at the government level encourages people to invest, not discourages investment.”

Analysts and academics say the Bush Administration has steered clear of telecommunications policies. Adam Thierer, director of telecommunications studies with the Cato Institute, wrote the president finally has outlined a concrete broadband plan. “President Bush deserves some credit for finally getting at least a little more serious about broadband and Internet policy. However, one hopes this is not the end of it but just the beginning,” Thierer wrote. “While broadband reform will never make for a good stump speech or a bumper sticker slogan, it is still vitally important to the future of our information age economy.”

Democratic presidential hopeful John Kerry has outlined some telecom-related objectives designed to improve the economy.

The Massachusetts senator plans to work to make more spectrum available with new technologies. Kerry says the federal government could reallocate spectrum and make it available for 3G wireless networks.

“Wi-Fi networks at home are becoming cheaper, a Wi-Fi phone has been developed, and schools nationwide are setting up Wi-Fi hot spots to connect their students to the Internet. The potential for this and other technologies that could operate in unlicensed spectrum is limitless,” according to the senator’s Web site, www.johnkerry.com.

Kerry also advocates making high-speed Internet access available throughout the country and supports providing a tax credit to telecom companies building broadband access in rural and underserved areas.

“Several generations ago the Rural Electric Administration brought isolated areas out of the darkness. Similarly a visionary federal government will build a bridge across the digital divide and bring the promise of broadband technology to rural and urban America.”