Senate Scraps Internet Access Tax Ban Vote

After a morning of backroom negotiating that failed to find common ground, the U.S. Senate backed away Friday from voting on legislation that proposes to permanently extend the ban on taxing Internet access.

Led by a coalition of Republican and Democratic senators who formerly served as governors of their states, opponents to the bill are seeking another two-year temporary extension.

Negotiations are expected to continue throughout the weekend with Sen. John McCain (R.-AZ), chairman of the Commerce Committee, working to broker a compromise that could be voted on Monday.

The House of Representatives has already passed legislation to make the access tax ban, which expired last Saturday, permanent.

The legislation, sponsored by Senators Ron Wyden (D.-OR) and George Allen (R.-VA), is similar to the House bill and not only makes taxes on Internet access permanent but also phases out the grandfather clause that preserves state and local taxes on Internet access imposed and actually enforced prior to Oct. 1, 1998.

The bill also expands the definition of Internet access to prevent states from taxing telecommunications services used to provide Internet access, particularly DSL, which some states have interpreted as a telecommunications service and open to taxation. Cable modem access is not taxed by states.

Opponents claim the new definitions of access are too broad and could cost the states as much as $9 billion annually in taxes. A number of states contend the new definitions would exempt not only certain telecommunications services used for Internet access, but would also expand the pre-emption to include bundled telecom services that offer high-speed connections and local and long distance telephone service in one package.

The cash-strapped states’ concerns prompted Sen. Lamar Alexander (R.-TN) to introduce an amendment to extend the language of the just expired access tax moratorium for another two years.

“What we are proposing is a two-year extension of the current law with one exception: level 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.”

Wyden said the Alexander amendment would make it easier for states to tax wireless connections and other types of Internet access never contemplated by the original 1998 ban on access taxes. Wyden said he and Allen offered to compromise by extending the ban for only five years but with the new language included. The compromise failed.

Sen. Fritz Hollings (D.-S.C.) said, “Under the present (proposed) language, the bill extends the exemption not just to the last connection to the consumer but all the way down the pipeline. That is not the intent of Congress at all. We’ve invaded the taxing authority of the states and that’s not right.”

Hollings added, “We like the present law. We don’t want to give corporations a tax cut, we want to give consumers a tax break.”

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