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RealTime IT News

'Net Access Tax Debate Will Have to Wait

WASHINGTON -- A weary and battle-scarred 108th Congress straggled home for the Thanksgiving holidays Tuesday night without extending the Internet access tax ban that expired on Nov. 1.

But both sides remain confident a compromise will be reached and legislation extending the tax ban will be passed before the end of the year.

Although the current ban has expired, no state is likely to impose access taxes while federal legislation is pending. When the first three-year ban expired in 2001, the moratorium lapsed for a brief period before Congress extended it for another two years.

A dispute in the Senate over the tax bill combined with all-consuming debates over energy, health care, judicial nominations and unfinished spending bills left no time to for them to consider renewing the five-year-old federal prohibition of state and local levies on Internet connections.

The House of Representatives has already passed legislation to make the access tax ban permanent and to expand the bill language to phase out the grandfather clause in the original measure preserving state and local taxes on Internet access imposed and actually enforced prior to Oct. 1, 1998.

The most contentious portion of the House bill dividing the Senate seeks to expand the definition of Internet access to prevent states from taxing elements of bundled telecommunications services used to provide Internet access, particularly DSL. Some states have interpreted this as a service and open to taxation. Cable modem access is not taxed by states.

Negotiations over resolving the differences will resume in the second week of December when Congress, which hoped to go home for the year by Nov. 21, returns for another session. Any differences between the House and Senate versions will go to conference and then have to survive another vote in both chambers.

Cash-strapped states, startled by the expanded House language, are aggressively lobbying the Senate, contending the new access definitions are too broad, could cost them as much as $9 billion annually in taxes, and amounts to a corporate giveaway.

Further complicating the issue is Sen. Lamar Alexander (R.-TN), who derailed debate over the bill on Nov. 6 when he suggested voting for the bill would be a violation of the Unfunded Mandates Reform Act of 1995, a philosophical touchstone for the Republican-led Senate.

Alexander said the bill amounts to an unfunded mandate because it would make it illegal for grandfathered states, which include Tennessee, to continue to collect state and local Internet access taxes. The Congressional Budget Office (CBO) estimates that these losses would amount to $80 million to $120 million a year.

"If a majority of the Senate should decide that banning state and local taxation of the Internet is important enough to create an unfunded federal mandate," Alexander said on the Senate floor, "then my amendment would provide a way for Congress to pay the bill for that by authorizing our Department of the Treasury to reimburse Tennessee and Minnesota and other state and local governments each year for the cost of this new mandate."

Alexander then introduced an entirely different sort of amendment calling for a two-year extension of the just expired law with language that levels 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."

Bill co-sponsors Ron Wyden (D.-OR) and George Allen (R.-VA) shelved the call for a vote and began to negotiate. Wyden, who sponsored the original moratorium in 1998 and its extension for another two years in 2001, complained that he and Allen had already agreed to five compromises in order to get the legislation to the floor.