Senate Likely to Extend Net Access Tax Ban

Urged by President Bush to permanently ban connection taxes, lawmakers are likely to extend new ban.
Posted April 27, 2004

Roy Mark

The United States Senate voted Monday night to revive debate on legislation to permanently exempt Internet connections from federal, state and local taxes.

The moratorium on access taxes aimed at dial-up connections, first passed by Congress in 1998 and extended in 2000, expired last November.

The renewed Senate interest in the long-stalled measure came on the same day that President Bush said in a campaign speech, "We must not tax broadband access. If you want broadband access throughout the society, Congress must ban taxes on access."

The House of Representatives in September obliged Bush by passing a bill to make the connection tax ban permanent, expand the access definitions to specifically include broadband connections and to phase out a grandfather clause for the 10 states already taxing access in 1998. A similar bill passed the Senate Science and Commerce committee in August.

Since then, debate on the bill has been blocked by senators worried over the cost to grandfathered states losing their exemptions and the real or perceived state revenue losses under the expanded access definitions.

Monday's 74-11 vote forces the issue to the Senate floor, where it is likely to be the target of a number of amendments designed to keep access tax laws temporary and narrow in definition.

Calling the cloture vote a "positive first step," bill sponsor George Allen (R-Va.) said, "Now, the Senate has the opportunity to make sure that access to the Internet remains tax free and is thereby as accessible as possible to all people, in all parts of the country."

The floor debate is expected to begin Tuesday afternoon. Senators Lamar Alexander (R-Tenn.) and Tom Carper (D-Del.) have already introduced an amendment to keep any new ban limited to two years and narrowly expand the access definition to include DSL connections. Senator John McCain (R-Ariz.) plans to introduce an amendment with a four-year term and expanded definitions.

"The prospects for legislative action might have been different this year if the House of Representatives had sent to the Senate a different piece of legislation to begin with instead of sending legislation for a permanent ban," Alexander said on the Senate floor Monday. "It's really more than that. It broadened the definition of Internet access. Whether intentional or unintentional, this train got on the wrong track and started running completely out of control."

Alexander said he supports an access tax ban, but the "assumption in my mind was that as the Internet grew, it would pay taxes like everyone else." He added that the best way to go is a two-year extension. "We did it in 1998. Congress did in 2000 and Congress can do it again in 2004," he said.

Senate insiders have long predicted the final version of the access ban would not be permanent and Allen admitted as much in a March interview with when he said duration is a "negotiable issue as far as I'm concerned. That's just horse trading. The definition is the key."

The original moratorium specifically covered dial-up connections but was vague about other types of connections. As Alexander said Monday, "In 1998 when the moratorium was passed, I'd be willing to bet no one in the United States Senate knew what high-speed Internet access meant."

Even when the access tax moratorium was in place, some state and local authorities began taxing DSL, the broadband service offered by incumbent telephone companies. Cable broadband connections have been beyond the reach of state and local tax boards since the Federal Communications Commission ruled cable modems were an information service and not subject to the same regulations as telecommunications services such Verizon and Bell South .

That decision was called into question last October when a federal appeals court ruled the FCC erred in its ruling and that cable modems did have a telecommunications factor to it. Cable companies are expected to press the matter on to the Supreme Court. Both the House version and Allen's bill would exempt both DSL and cable broadband connections from access taxes.

"All of the pro-tax arguments and misleading accusations presented by the opposition are unrelated distractions aimed at confusing senators and stalling consideration of this measure," Allen said.

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