The Senate yesterday voted 93 to 3 to extend a ban on taxing Internet access for four years, forging a compromise that telephone companies and other online providers said would give them incentive to deploy more high-speed Internet service.
The vote broke a months-long deadlock between those who wanted Internet access to be tax-free and many cash-strapped state and local government officials, who argued that they stood to lose millions of dollars a year in tax revenue as more telecommunications services migrate to the Internet.
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But another battle looms with the House, which last fall unanimously passed a much broader version that banned the taxes permanently. The House bill also allows for phone calls made via the Internet, a technology expected to be the future of telephone service, to be tax-free -- which could eventually cost states billions of dollars a year.
The Senate bill allows states to continue taxing telephone service regardless of technology.
The final bill passed after amendments by Sen. John McCain (R-Ariz.) attracted enough votes to end the logjam. The original bill, which mirrored the House version, was by George Allen (R-Va.) and Ron Wyden (D-Ore.). The Bush administration has indicated its support for extending a ban on Internet taxes.
Wyden said last night that it was too soon to know what might happen when the two bodies try to settle their differences, but said he was pleased with the Senate compromise.
"The bottom line is, the Senate passed a bill that will end technological discrimination" and save consumers millions of dollars, Wyden said.
Under a previous ban that expired in November, Internet service via cable-television lines was tax free, but high-speed service over telephone lines, known as DSL, could be taxed. That technology was not widely used when the original ban was imposed, and many states viewed it as an extension of telecommunications services, which are taxable.
Under the Senate bill, the 27 states that tax DSL service have two years to phase out their taxes, which will eventually cost them roughly $100 million a year, according to the Center on Budget and Policy Priorities. About 10 other states began taxing Internet access before the original ban was passed in 1998, and they will continue to be exempted from the ban.
Both bills also would ban taxing the Internet "backbone," the network that carries Internet traffic around the world. Many Internet providers have to purchase access to the backbone, and these transactions would be tax exempt at a likely cost to states of about $500 million a year, the budget center estimates.