Senators object to Internet tax bill

The U.S. Senate failed to vote on a bill that would permanently ban Internet-only taxes after several senators raised questions about whether the bill would take current tax revenues away from states and local governments.

A five-year-old Internet tax moratorium — banning Internet access taxes, multi-state taxes on Internet purchases, and prohibiting that Internet sales be taxed higher than other retail sales — expired Nov. 1. Senate Majority Leader Bill Frist, a Tennessee Republican, pushed the Senate to vote on the bill Friday. But a group of senators, led by four former state governors, objected to the definition of Internet access in the Internet Tax Non-discrimination Act of 2003 for fear it could prevent states and local governments from collecting taxes on other services besides traditional Internet access, including voice telecommunication services offered through Internet Protocol (IP).

Supporters of the bill, including co-sponsor Senator Ron Wyden, an Oregon Democrat, argued the tax ban is still needed to encourage more Internet subscribers and encourage growth in the Internet sector that’s just recently begin recovering from the dot-com bust.

“If, in fact, the more than 7,000 taxing jurisdictions in this country are allowed to take a bite out of the Internet … I think that could derail the very impressive progress that we have seen in the technology sector in the last two months,” Wyden said during debate on the bill late Thursday. “Let us not put in place a regime of multiple and discriminatory taxes on electronic commerce if for no other reason that it would send a horrendous message to this sector.”

The bill’s definition of Internet access could cause an “unfunded mandate” to states and local government, collectively costing between $4 billion and $9 billion in tax revenues each year, said Senator Lamar Alexander, a Tennessee Republican. The bill would violate the Unfunded Mandates Reform Act of 1995, which bans Congress from requiring states to take actions that the federal government doesn’t pay for.

Alexander and other opponents of the bill offered an amendment that would extend the current moratorium for two years while phasing out Internet access taxes in the 11 states that enacted those taxes before the 1998 moratorium was passed.

Alexander questioned whether the Internet should enjoy tax breaks that other technologies, such as television and telephone service, do not. “The Internet is no baby in the crib anymore,” he said.

Ohio could lose $150 million in state tax revenue over two years if the bill is passed, added Republican Senator George Voinovich, a former governor of the state. “If this permanent moratorium goes through with the current definition, there is no question states will lose money,” he said during debate on the Senate floor late Thursday.

Bill sponsors Wyden and George Allen, a Virginia Republican, tried to hammer out a new definition of “Internet access” with detractors Friday but weren’t able to do so. Senate staffs will work over the weekend to iron out differences, Alexander said.

The bill says that telecommunications services as defined in the Communications Act of 1934 are not considered Internet access, but opponents questioned whether that definition was narrow enough. “Senator Allen and I have done everything but hire a skywriter to fly over the Capitol and say that telecommunications services that can be taxed today should continue to be taxed,” Wyden said, defending the bill.

But Wyden argued the current moratorium leaves some question over whether states are allowed to tax access to DSL (digital subscriber line) Internet service, and Alexander said 16 states have begun to tax DSL. Senators not supporting the moratorium will allow state and local governments to raise taxes on Internet consumers, Wyden charged.

The House of Representatives passed a similar permanent Internet tax ban in mid-September.