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Governors Oppose Permanent Internet Access Tax Exemption

The National Governors Association (NGA) Thursday called on Congress to extend the existing moratorium on Internet access taxes that expires on Nov. 1, but cautioned lawmakers from broadening the ban to include telecommunications servicces.

The U.S. House of Representatives on Sept. 17 passed a bill to make the current moratorium permanent, and similar legislation in the Senate may be voted on as early as next week. The original moratorium was established by the Internet Tax Freedom Act (ITFA) for three years in 1998 and renewed by Congress for another two years in 2001.

Opponents to a permanent ban say the House and Senate bills make substantive changes to the current law that could eventually cost states as much as $9 billion annually in taxes, including eliminating a grandfather clause that preserves state and local taxes on Internet access "imposed and actually enforced prior to October 1, 1998," and an expanded definition of "Internet access" to prevent states from taxing telecommunications services used to provide Internet access.

The NGA's concerns are over the new definition that they contend would exempt not only certain telecommunications services, but would also expand the pre-emption beyond sales taxes to include some income, property and other business taxes.

On Tuesday, Sens. Charles Grassley (R-IA), John Ensign (R-NV), John Sununu (R-NH), Gordon Smith (R-OR), and George Allen (R-VA) offered what they called a compromise to fix the broadened definition terms, but the governors claim it isn't enough.

In an NGA letter to Senate leadership, Oklahoma Gov. Brad Henry and South Dakota Gov. Mike Rounds, chair and vice chair of the group's economic development and commerce committee, said, "With little time to negotiate an appropriate definition of Internet access, we encourage you to support a simple, temporary extension of current law to allow Congress, industry, and state and local governments time to fashion a permanent moratorium that is thoughtful and fair."

In addition to NGA's letter, individual governors have been writing to senators urging them to fix the legislation by clarifying that the moratorium applies only to access.

In a letter to Sen. Charles Grassley (R-IA), chairman of the Senate Finance Committee, Ohio Gov. Bob Taft wrote, "I urge you to continue working with your Senate colleagues to narrow the preemption language to its original intent so as to affect Internet access only."

State and local government groups including NGA also wrote to House and Senate leaders Sept. 17 to voice their concerns about the legislation.

The Center on Budget and Policy Priorities, a Washington policy group, issued a report earlier this week claiming no state or local government would be permitted to tax DSL service in the future under the language changes in the proposed bills.

As a result of this prohibition, the report states, consumers who choose to lease a second regular voice telephone line to access the Internet would be subject to all applicable state and local taxes, while those who purchase more expensive DSL service, which permits simultaneous use of the Internet and a voice telephone, would not be subject to taxes.

The Congressional Budget Office (CBO) was unable to estimate the amount state and local revenue losses that would result from this change because telecommunications companies are not required to maintain records categorizing their sales by type of customer, making it impossible to distinguish sales of high-speed telephone lines to Internet access providers from sales of similar services to other business customers.

However, the CBO did state, "Depending on how the language altering the definition of what telecommunications services are taxable is interpreted, that language also could result in substantial revenue losses for states and local governments."