Internet access tax may not be dead

Thought you were free from paying new taxes on your Internet access, at least for the next four years? The Internet Tax Non-Discrimination Act was supposed to put a moratorium on new Net taxes. That, however, hasn’t stopped some in Washington from suggesting that old taxes might be applied in new ways.

A report released in late January by the Joint Committee on Taxation suggests that a modified version of a tax law written to fund the Spanish-American War could be used to tax Internet access. But applying any tax to Internet access would first require the repeal of the Internet Tax Non-Discrimination Act, which some lawmakers say is not likely.

Old law, new tricks.

The old law in question, called the Federal Excise Tax on Communications Services, was created in 1898, repealed in 1902, and later reenacted to create additional revenues for World War I. It’s used to tax local telephone services, toll telephone services, and teletypewriter exchange services, and has been expanded over the years to cover prepaid telephone cards.

In the report released in January, the Joint Committee on Taxation proposes that Congress take one of three actions to expand the tax to the Net. The most significant would expand the tax to all communications services to end users. That means Congress could add a 3 percent tax to the following:

— Voice over IP communications

— analog and digital cellular and satellite telephone services

— cable and satellite television services

— broadband and dial-up Net access services

— paging services

— bandwidth, provided as a service, lease, or sale of fiber optic cable.

The Federal Excise Tax on Communications Services has a long and controversial history. The tax was scheduled to be phased out in 1968, but that didn’t begin until 1973; at that time its rate was 9 percent. In 1983 the tax fell to 1 percent and stayed there until the Revenue Reconciliation Act of 1990 made the tax rate permanent at 3 percent.

In May of 2004 the House of Representatives voted, almost unanimously, to repeal the tax. The repeal of the tax, however, never made it through the Senate and so was never enacted.

The Internet Tax Non-Discrimination Act, signed into law by President George W. Bush in December 2004, should prevent new Net taxes from taking effect. Its purpose is to ban taxes on Net access, multiple taxation (such as state taxes) of goods bought or sold over the Net, and taxes that would treat Net purchases differently from other types of sales.

If Congress decides to implement the suggestions made by the tax committee, it would also have to repeal this law, which Carol Guthrie, a spokesperson for Senator Ron Wyden (D-Oregon) says is not likely. “It would seem that repealing the Internet tax ban would be a non-starter,” she says. Wyden is a cosponsor of the Internet Tax Non-Discrimination Act.

Reaction to report.

Last month, a group of mostly Republican representatives sent a letter to the Joint Committee on Taxation’s chief of staff criticizing the proposal to expand the tax.

The original request for the report was to learn how to reduce underreporting and underpayment by taxpayers, according to the letter.

“Consumers who now enjoy freedom from regressive taxes on Internet access are not tax cheats. Nor are Internet users benefiting from a ‘loophole’ simply because Congress has wisely rejected the transplantation of regressive, discriminatory, 1930s-era telephone taxes into the digital economy,” the letter says.

Possible surcharge funds wiretaps.

While the Joint Committee on Taxation is limited to making suggestions regarding taxes, there may be a way to charge for Net access without creating an actual tax. Working independently from Congress, the U.S. Federal Communications Committee is considering a possible surcharge on Internet access bills to pay for U.S. Federal Bureau of Investigation wiretaps of VOIP communications.

Last year, the FCC tentatively ruled that VOIP providers should be subject to the same rules as other communications providers under the Communications Assistance for Law Enforcement Act. The act requires that communications companies change their systems so that the FBI and other law enforcement agencies can monitor calls without being hindered by the requirements of emerging technologies.

Although the FCC does not have the authority to create new taxes, a published report in the Congressional Quarterly said that it is looking for alternative ways to fund these upgrades. In turn, the report says, it may be looking to high-speed Internet subscribers (including telephone, cable, wireless, or satellite) to foot the bill in the form of surcharges.

Geraldine Matisse, a spokesperson for the FCC, says that right now the prospect of new surcharges on Internet use is simply speculation and that the commission’s new director will set the upcoming agenda.

But in a notice of proposed rulemaking released March 3, the FCC says it will reimburse communications companies for these upgrades. The agency also asked for public comment on what costs carriers will expect to incur in their upgrades and what reimbursements they would expect to receive. Once they hear public comments, the FCC will weigh them and then write its final rule. It is not known when that might happen. Erin Biba writes for the Medill News Service.

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