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Senate Delays Internet Access Tax Vote

U.S. Senate Majority Leader Bill Frist (R.-TN) said Friday a vote on extending or making permanent the Internet Access Tax Moratorium will not happen until at least late next week. The current temporary moratorium expires Saturday, but the ban has lapsed before for short periods without states taking any action.

Further precluding any state action is the fact the House of Representatives has already passed a bill to make the current moratorium permanent. The original moratorium was established by the Internet Tax Freedom Act (ITFA) enacted for three years in 1998 and renewed by Congress for another two years in 2001.

The Internet tax moratorium does not apply to sales taxes on Web transactions.

The Senate had hoped to vote on the issue before the act expired, but budget bills and a battle over greenhouse emissions backed up the chamber's agenda.

"We wanted to deal with it this week but members felt there should be adequate time to debate the issue," Frist said.

The Senate Commerce Committee passed a bill similar to the House legislation earlier this year, but since the House vote, 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.

The opposition prompted several senators to put a "hold" on the legislation.

The changes to current temporary moratorium include 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."

A number of states, led by the National Governors Association (NGA) are concerned the new definitions 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.

Last week, 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."

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."