A Nov. 18 Business article about a bill that would ban Internet access taxes mischaracterized changes sought by Rep. F. James Sensenbrenner Jr. (R-Wis.). Sensenbrenner sought to reduce the time Wisconsin could continue to collect such taxes before the ban would take effect. (Published 11/20/04)
Congress yesterday cleared the way to keep access to the Internet largely free from taxes for the next three years, breaking a year-long deadlock.
In a compromise, the Senate tweaked provisions of a bill it passed in April that reflected concerns by state and local governments that they could lose billions of dollars in tax revenue as more and more voice communication migrates to the Internet.
The House, which had approved a broader, permanent tax ban last year, agreed to replace it with the Senate version, according to a spokesman for Rep. Christopher Cox (R-Calif.), one of the House bill's sponsors. He said he expects the House to vote on the measure today, and the White House has already signaled that President Bush would sign it.
"The Internet makes American workers and companies more productive," Cox said in a statement. "By protecting consumers from new taxes, the new law will keep Internet access affordable."
The often-stormy dispute pitted some lawmakers, including former governors from cash-strapped states, against others who favor less taxes across the board. Many industry groups supported the permanent ban, arguing that the certainty of no taxes would encourage electronic commerce and spur more people to switch to high-speed Internet service, which is more expensive than dial-up telephone access.
Most consumers already are free from such taxes as a result of a three-year moratorium that expired last year. The law meant that states could not impose taxes on the monthly fees charged by Internet service providers, a tax that is often passed on to consumers.
But the original law was written before there was widespread use of high-speed Internet access over telephone lines, known as DSL. As a result, several states, which have authority to regulate and tax telecommunications services, were collecting taxes on DSL service.
Similar taxes were not being collected for Internet service over cable lines, which is not classified as a telecommunications service by the federal government. And some states had begun collecting taxes before the original moratorium took effect and had been allowed to continue.
The new bill would ban Internet access taxes, regardless of technology, until November 2007. It also ensures that products bought over the Internet cannot be taxed by more than one state and prohibits discriminatory taxes that treat Internet purchases differently than other types of sales.
But state officials, whose concerns were spearheaded by Sens. Lamar Alexander (R-Tenn.) and Thomas R. Carper (D-Del.), won important concessions that softened what they said would amount to a giveaway to telecommunications and Internet companies.
States that collect Internet taxes have up to three years to end their collections. The changes made yesterday gave Wisconsin and Texas more time to end their tax regimes, satisfying some House members from those states, including Judiciary Committee Chairman F. James Sensenbrenner Jr. (R-Wis.).
The revisions also make clear that any service that results in a telephone call, regardless of the technology behind it, can continue to be taxed.
Some states were concerned that phone companies might try to argue that their regular phone services would be exempt from taxes because the calls spend part of their trip on networks that increasingly use the Internet.
Similarly, calls made via a technology known as voice-over-Internet protocol (VoIP), which originate on high-speed Internet networks, can be taxed.
Among other things, state officials argued that they rely on telecommunications taxes to help fund consumer-protection enforcement and to ensure that the poor have access to basic phone service.
By some estimates, states could have lost as much as $10 billion a year if all telephone service were exempt from taxes.
"More than a year ago, the Senate was prepared to pass legislation that would have done irrevocable harm to state and local governments," Carper, a former governor, said in a statement. "But the compromise we worked out will do minimal harm to states, while also protecting consumers from taxes on their monthly Internet bills."
Alexander, also a former governor, said the compromise balanced states' rights with the need to foster free markets.
Sen. George Allen (R-Va.), who along with Sen. Ron Wyden (D-Ore.) had pushed for a permanent and more extensive ban on taxes, also said he is pleased by the compromise.
"Today, we have made sure that the avaricious tax commissars from every county, city and state in America cannot continue conniving new ways to tax the Internet and the people who use it," he said in a statement.
Wyden said the result ensures a brighter, more secure future for the Internet and Web commerce.