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Uncle Sam Watching the Web Internet Taxes Considered, Again
Janet Novack Forbes.com
Special to ABCNEWS.com

W A S H I N G T O N, Feb. 3 — The five-year-old federal moratorium on taxing Internet access officially expired Nov. 1, 2003. But don't panic. You aren't likely to get a new tax bill for your Internet access — at least not anytime soon.

In fact, proponents of permanently banning local and state Internet-access taxes would like nothing better than for some wayward state or locality to slap on a stiff new Internet levy, says Bartlett Cleland, associate general counsel of the Information Technology Association of America, which represents technology and Internet heavyweights such as IBM, Microsoft, Time Warner's AOL and Yahoo!

Local tax officials "will do something stupid," he says. "It's just a matter of time." Cleland hopes for a new tax because it might give proponents of a permanent ban the momentum to break the current logjam in the Senate.

And what a jam it is. Arguing that this is foremost an issue of states' rights, Sen. Lamar Alexander, R-Tenn., has blocked efforts by Sen. George Allen, R-Va., and Sen. Ron Wyden, D-Ore., to make the moratorium permanent and to expand the Internet services it explicitly protects from tax. The question, says Alexander, "is whether Congress should give a big tax break to the telecommunications industry and then send the bill for it to the states.''

Shortly before Congress adjourned last year, he and Senate allies such as Sens. George V. Voinovich, R-Ohio, Tom Carper, D-Del., and Bob Graham, D-Fla., offered up a simple two-year extension of the old moratorium as a compromise.

But with Congress now back in town, Frank Cavaliere, George Allen's deputy legislative director, doesn't see much chance for a deal. "It's difficult to negotiate when the negotiating position on the other side is nothing,'' he sniffs. So Allen is pushing his own bill again this year. Cavaliere predicts a vote some time before Congress' Easter recess in April, but it's unclear if Allen has the votes to pass his version of the bill.

Opposing Interests Online

It wasn't supposed to be like this. Last summer, the states seemed resigned to a permanent moratorium. But then the telecommunications industry and antitax forces in Congress gambled they could get even more tax relief. That stirred up simmering opposition from state and local officials, who now collect $20 billion a year from taxes on telecommunications services.

Allen and his telecom allies are adamant on two points. One is that the bill should clearly exempt broadband access, as well as dial-up service, from tax. According to the Congressional Budget Office, states that haven't treated certain DSL service as covered by the old moratorium will collect at least $40 million in tax on DSL this year. Another $80 million to $120 million of Internet access taxes already in place before the 1998 moratorium were "grandfathered," or still allowed. Allen's bill would knock out all grandfathered taxes after three years, while the House-passed bill would end them right away.

The second, far more controversial point is that Allen wants to make the infrastructure of the Internet tax-free too. Wholesale telecommunications and Internet backbone services purchased by Internet service providers would be exempt from tax. Many states now impose either a telecommunications sales or excise tax on such purchases.

"If you get to tax the wholesale piece, the provider is just going to pass it on to the customer. It's not a telecommunications windfall, it's a pass-through tax,'' says Mark Beshears, vice president of state and local tax for Sprint, a major backbone provider.

The provision could mean a big revenue hit to the states. Harley Duncan, executive director of the Federation of Tax Administrators, figures it would cost state and local governments roughly $500 million in annual tax revenue, based on the $15 billion to $20 billion a year ISPs already spend to purchase telecom services.

And that number can only grow. For example, a coalition of wireless providers, including AT&T Wireless Services, Verizon Communications and Nextel Communications, is lobbying to make sure that the Internet services they buy from land line companies for resale to their own customers won't be taxed.

Meanwhile, the Senate standoff has given Internet consumers a bonus: Until the access tax issue is resolved, Congress is unlikely to move on a bill that would make it easier for states to collect sales taxes on purchases made through Internet-only retailers like Amazon.com. "With this clogging up the agenda, I'm hard-pressed to see how it can be done,'' Duncan acknowledges.

 

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