Governors: Keep Net Access Tax Ban Temporary

Governors gathering in Washington this week hope to convince Congress to keep any Internet access tax moratorium on electronic commerce and online services temporary. They also want federal lawmakers to keep open a loophole that allows some state and local governments to tax access, no matter what a national ban says.

The move comes after the most recent two-year ban on Internet connection taxes expired on Nov. 1 when the Senate was unable to agree on the duration and definitions of access for the next moratorium.

In September, the House passed legislation calling for a permanent moratorium that eliminates grandfathered states and broadens the definition of Internet access to include broadband connections from a variety of platforms. The recently expired moratorium, which dates back six years, mostly protected dial-up connections.

George Allen (R-VA) and Ron Wyden (D-OR), along with other veteran technology lawmakers such as Conrad Burns (R-MT) and Patrick Leahy (D-VT), championed the House vision in the Senate. By August, the Senate Commerce and Science Committee approved the measure.

Since then, though, Allen and his Senate allies have been unable to assuage the concerns colleagues have over the cost to the grandfathered states and the real or perceived state revenue losses under the expanded access definitions.

The Congressional Budget (CBO) estimates that repealing the grandfather clause will result in revenue losses of $80 million and $120 million annually beginning this year for about 10 states and for several local governments.

“We also estimate that the change in the definition of Internet access could affect tax revenues for many states and local governments, but we cannot estimate the magnitude or the timing of any such additional impacts at this time,” the CBO report states.

For the nation’s 50 chief executives attending the winter meeting of the National Governors Association, those are not comforting words. They are mobilizing, so far very successfully, to keep the next moratorium brief in length and narrow in definition.

“Given the rapidly changing technology in the communications industry, and with little time to negotiate an appropriate definition of Internet access, we encourage you to support a simple, temporary extension of current [now expired] law to allow Congress, industry, and state and local governments time to fashion a permanent moratorium that is thoughtful and fair,” Governors Brad Henry (D-OK) and Michael Rounds (R-SD) wrote in a September letter to the Senate leadership.”

It’s advice most likely to be heeded by lawmakers, House and Senate staff members closely associated with the moratorium legislation told

“At the end of the day, there will be a moratorium on Internet access taxes, it’s only a matter of how many years and what gets covered by the ban,” said one person familiar with the process.

The original Internet Tax Freedom Act was passed in 1998 for a three-year period. It was renewed in 2001 for another two years. The intent of the law was to spur Internet adoption rates by keeping access costs as low as possible.

While the 40 states not grandfathered by the legislation are barred by federal law from taxing Internet connections, some taxing authorities in those states are targeting high-speed connections bundled in telecommunications services, such as DSL.

In other states, like Texas, the first $25 charged for an Internet connection is tax free. Since high-speed access routinely costs more than the Texas ceiling, the state is, in effect, taxing broadband connections. There are other classification disputes over access through cable modems and satellites.

The governors, in their official policy statement, say the original moratorium “was made temporary in part because the Internet was still in its infancy and it was unclear how new technologies, including the emergence of broadband services, may impact the industry.”

Allen’s fellow Republican, Tennessee’s Lamar Alexander, is taking up the states’ cause in the Senate. “I have yet to run into a senator who really wants to tax Internet access,” Alexander said during last November’s debate on the Allen bill. “Virtually all of us are willing to keep state and local governments from taxing Internet access. ”

Alexander claims expanded access definitions would cost states the “bulk of their telecommunications revenues.” He has proposed extending a moratorium for another two years and making a change to “minimize discrimination” between telephone and cable company Internet connections. Grandfathered states would still be allowed to tax all Internet access.

“Our argument is that our two-year extension — with one adjustment to level the playing field between telephone companies and cable companies, is better for the country than a permanent installation of a very broad definition, so the issues are duration and definition,” Alexander said.

It’s a position lawmakers can expect to hear repeatedly from governors this week.

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