Senate Begins Debate on Internet Access Tax Ban

Opponents of permanent ban vow to fight for two-year extension or require government to reimburse states for lost revenue.
Posted November 7, 2003

Roy Mark

Opposition to permanently extending the ban on Internet access taxes began to stiffen Thursday night as the U.S. Senate opened debate on the Internet Tax Non Discrimination Act (S. 150). The House of Representatives has already passed legislation to make the access tax ban, which expired last Saturday, permanent.

Debate will continue Friday morning and a vote is expected Friday afternoon or, possibly, as late as Monday as opponents to the legislation plan a series of amendments to limit the ban for only two more years or, in a new twist, require the federal government to reimburse the states for revenue lost to a permanent ban.

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, such as DSL. Opponents claim the new definitions of access are too broad and could cost the states as much as $9 billion annually in taxes.

"This amounts to another corporate giveaway," Sen. Frank Lautenberg (D.-N.J.) said. "I would support a ban, but only a temporary one. I would not and can not support a moratorium that is permanent based on such a vague definition of what is Internet access."

Sen. Lamar Alexander (R.-TN) said Thursday night he would substitute an amendment to make the moratorium temporary for another two years, allow states now taxing DSL service to continue to do so and for grandfathered states to continue taxing both dial-up and high-speed Internet access.

"I believe that is the prudent thing to do while we continue this debate on what is Internet access," Alexander said.

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

Alexander said the expanded definition of Internet access "is why I suppose we have begun to see the halls filled with lobbyists from the telecommunications industry as they anticipate the possibility that this Congress might be exempting them from some or maybe all of the taxes that state and local governments put on telecommunications."

Allen contended the expanded language was necessary since "states are circumventing the original intent of the law to tax portions of high-speed access by claiming it is a telecommunications service." He said the bill is only intended to extend the access tax ban to high-speed connections.

"Senator Allen and I have done everything but have a skywriter to write over the capital building, 'telecommunications services that are taxed today can and should be taxed in the future," Wyden stressed to his colleagues.

Wyden, who sponsored the original moratorium in 1998 and its extension for another two years in 2001, said he and Allen had agreed to five compromises in order to seek common ground with opponents to the bill.

"What has been offered in return are projections of vast sums of money lost. The projections always have language that say 'could,'" Wyden said.

Alexander also raised the possibility of offering another amendment he called the Unfunded Federal Mandate Reimbursement Act.

"Some of my colleagues have seemed surprised when I suggested the proposed ban on state and local Internet taxation is an unfunded federal mandate," Alexander said. "Let me say exactly in these remarks why the proposed ban on state and local ability to tax Internet access is an unfunded mandate, plainly in violation of the Unfunded Mandates Reform Act of 1995, which was passed by this body with 91 votes. And 63 senators who voted to ban unfunded federal mandates in 1995 are still members of this body."

According to Alexander, "If a majority of the Senate should decide that banning state and local taxation of the Internet is important enough to create an unfunded federal mandate, then my amendment would provide a way for Congress to pay the bill for that by authorizing our Department of the Treasury to reimburse Tennessee and Minnesota and other state and local governments each year for the cost of this new mandate."

Alexander said the Wyden-Allen bill amounts to an unfunded mandate because it would make it illegal for grandfathered states, which include Tennessee, to continue to collect state and local Internet access taxes. The Congressional Budget Office (CBO) estimates that these losses would amount to $80 million to $120 million a year.

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