The Senate is facing an 11th hour decision to extend the Internet tax ban, but new language in the proposed moratorium could mean new taxes on common online services such as e-mail.
The House last week voted, 405-2, for a four-year extension to the tax ban, which began in 1998, and expires Nov. 1. The ban keeps most states from imposing taxes on Internet access.
The Senate, which had been considering a permanent ban, is now expected to approve the four year extension as well.
But according to a report by the nonpartisan Congressional Research Service, changes to the language in the new tax ban approved by the House have exposed many online services to local taxation.
According to the CRS report released Thursday, the previous tax ban defined Internet access as, "any service that enables users to access content, information, electronic mail, or other services offered over the Internet."
But the new moratorium covers only the actual Internet connection and services directly delivered by the Internet Service Provider. Users that use a paid e-mail service from a vendor other than their ISP, such as Yahoo's premium e-mail, could face new taxes, the CRS report concludes.
The updated ban would also specifically exclude "voice, audio or video programming, or other products and services," leaving many new Internet services open to local taxes.
"I know no member of the U.S. Senate who wishes to see that happen," Sen. Ron Wyden, D-Ore., tells CNet. Wyden crafted the original tax ban in 1998.
The Bush administration and a large majority of House members support a permanent ban, but House leaders believed the Senate would be unwilling to support such a move, so they went for the four-year extension instead, according to sources familiar with the issue.
The Senate rejected a permanent ban the last time the moratorium had to be renewed in 2004.
"Congress seems to like to keep measures temporary, even if the administration wants something permanent," Alan Viard, resident scholar at the American Enterprise Institute in Washington tells Newsmax. "That's certainly true for federal tax provision. This issue is likely off the table for four years."
But Michael Mazerov, senior fellow at the Center on Budget & Policy Priorities in Washington notes that Sen. John Sununu, R-N.H., introduced an amendment earlier this week that would make the ban permanent.
"It's unclear what the Senate will do," Mazerov tells Newsmax.
Nine states that adopted Internet access taxes before the ban in 1998 still have them, having been grandfathered under the initial ban and renewals in 2001 and 2004.
The fault line on the issue extends between telecommunications and Internet companies on one side, which want the ban made permanent, and state governments on the other, which prefer only a temporary extension.
Companies, including Google, AT&T, and Time Warner formed a coalition dubbed "Don't Tax Our Web" to lobby for a permanent ban. They and their allies in Congress argue that such a step is necessary to insure that telecommunications companies can invest the billions of dollars necessary to extend high-speed Internet access throughout the country.
The nine states that have the tax – Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Wisconsin and Washington -- charge taxes between 4 percent and 8.5 percent of monthly Internet access bills. The levies take in some $150 million per year for the states, Mazerov says.
"It's clearly not significant in the scope of total taxes, but it can be for certain cities and states. New Hampshire, for example, has no income or property tax, so for New Hampshire, the loss would be significant." The House bill extends the grandfather clause, but the Senate bill may not, Mazerov says.
Proponents of a permanent ban point to the fact that 14 industrialized nations are ahead of the U.S. in broadband penetration. But Mazerov and others point out that all 14 of those nations charge an Internet access tax. Denmark, which tops the list, has a 25 percent tax, Mazerov says.
"Taxes have nothing to do with how good a country's broadband policy is," he says.
Governors, of course, fear a loss of revenue if the tax is permanently banned.
"States raise a lot of revenue by taxing phone calls, DVDs and audio CDs," Mazerov says. "As these goods and services shift to the Internet, if states are prevented from taxing them, they lose revenue. Internet access can be substituted for a bundle of services that many states currently tax."
Most governors and state legislatures wouldn't implement an Internet access tax even if they could, Mazerov says. Several states that were grandfathered under the original ban already have eliminated their access taxes on their own, he notes.
As for the next presidential administration, assuming the moratorium is soon extended for four years, experts don't expect much to happen until that time expires.
"The pattern since the law was originally passed about ten years ago is for Congress to do nothing until the moratorium is off the table," Viard says. "I wouldn't expect big changes under a Democratic administration."
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