Net Access Tax Ban Still Anyone’s Guess

One of the nation’s oldest Internet trade groups says the current U.S. Senate standoff over reviving the lapsed access tax ban is an election year power play by states to gain taxing authority over the Internet. The ban, which barred states from taxing Internet dial-up connections, expired Nov. 1.

The U.S. House of Representatives on Sept. 17 passed a bill to make the Internet access tax moratorium permanent, added language to extend the ban to high-speed connections and to eliminate the original grandfather clause that preserved state and local taxes on Internet access imposed and actually enforced prior to Oct. 1, 1998.

Senators Ron Wyden (D-OR) and George Allen (R-VA) introduced similar legislation in the Senate, where the bill has run into fierce opposition from a coalition of Republican and Democratic lawmakers who formerly served as state governors. Led by Lamar Alexander (R-TN), they say the House and Senate bills make substantive changes to the lapsed law that could eventually cost states as much as $9 billion annually in taxes.

Alexander has vowed to block the bill until the disputes over the duration of the next moratorium and the definitions of Internet access are resolved. He is proposing extending the language of the lapsed moratorium for another two years, preserving the grandfather clause for his and other exempted states.

“Sure, of course, they want to extend the current language,” Dave McClure, president and CEO of the U.S. Internet Industry Association (USIIA), told “They are already 29 states out there taxing high-speed Internet connections. By extending the language, the states will get rich taxing everything not covered by the original Act.”

Wyden and Allen have countered with a compromise package that keeps the expanded definitions but limits the duration of a new moratorium to 3 to 5 years. As of Tuesday, neither side was willing to accept the other’s compromise.

“Sen. Alexander has been willing to compromise and remains open to
compromise,” Alexander Press Secretary Alexis Poe said. “As more and more
senators look at it (Wyden-Allen), though, they view it as a big tax break for
the telecoms that sends the bill to state and local governments.”

Alexander enjoys the support of Senate Majority Leader Bill Frist, who is also from Tennessee. Under senate rules, Frist can keep any bill he disapproves of from coming to a vote.

“The majority of the Senate supports Wyden and Allen, but without the support of the leadership, there’s not going to be a vote,” McClure predicted, adding that lawmakers are facing a difficult election year choice.

In a recent USIIA white paper, McClure wrote, “Legislators risk on one hand losing the support of the state political organizations they need for re-election, and on the other hand the ire of consumers once they realize that the Congress has allowed massive new taxes. Which turn this will take in the new year is anyone’s guess, given the failure of Congress to act on this issue in 2003.”

McClure says his organization is not seeing a lot of support by consumers or businesses for the Wyden-Allen bill.

“There’s not a lot momentum out there for it right now. There’s a lot apathy,” McClure said. “Here’s a major Internet policy issue on the table that will probably double the cost of high speed connections and we don’t have a lot of traction.”

He predicted if the Senate does not resolve the issue, states will begin taxing Internet access in the spring.

“A lot of states have an automatic triggering device in their laws to tax access if the federal ban expires,” he said.

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