Internet Access Tax Ban: Temporary or Permanent?

To ban or not to ban?

State and local governments support the moratorium on Internet connection taxes, but only on a temporary basis. The benefits of broadband deployment, they admit, offset the revenue loss to state and local governments.

But a permanent ban? Not so good, they said Thursday. Contrast that with technology executives and consumer and public policy advocates who have long contended the ban should be made permanent.

"The National Governors Association is calling for an extension [of the moratorium]," David Quam, the NGA's director of federal relations, told an overflow lunchtime crowd of Senate and House staffers. "A temporary answer is better than a bad solution."

Added Jeff Arnold of the National Association of Counties, "No one wants to tax Internet access."

Quam and Arnold support the four-year extension proposed by Republican Senators Lamar Alexander of Tennessee and Tom Carper of Delaware. More important than the length of the extension, Quam and Arnold contended, is the bill's definition of Internet access.

The current ban is limited to three types of taxes: Internet connections; double taxation of a product or service bought over the Internet; and discriminatory taxes that treat Internet purchases differently from other types of sales. The moratorium covers dial-up, DSL, cable modem and wireless Internet connections.

"NGA believes that the unlimited ability of providers to bundle together content and 'other services' into a single, tax-free offering represents a loophole," Quam told a House panel last month.

Alexander and Carper claim their legislation fixes that loophole.

"Our bill would ensure that consumers continue to enjoy tax-free access to the Internet, including e-mail and instant-messaging," Carper said in a statement. "In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments."

The technology sector is supporting behind legislation proposed by Senators Ron Wyden (D-Ore.) and John McCain (R-Ariz.), which would make the ban permanent. Similar legislation is pending in the U.S. House.

"It would be good if we could just make it permanent," said Broderick Johnson of Bryan Cave Strategies and the DontTaxOurWeb.org. "We previously debated whether there should be a tax at all, but that debate is now over."

Brian Bieron, eBay's senior director of federal affairs, said he found it "ironic" that state and local governments want only a temporary extension when state and local government revenues "are at an all time high."

What Johnson and Bieron do not like about any of the proposals is the continuation of a grandfather clause that allows the nine states taxing Internet connections prior to 1998 to continue to do so.

"The grandfather clause should end. Those states have had ample opportunity to adjust," Johnson said.

But with that proposal not on the table and the states not opposed to a connection tax moratorium, the only choice before Congress is a temporary or permanent ban.

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