The Senate has approved a seven-year extension of the Internet tax ban and has adjusted the moratorium’s language to protect online services such as e-mail from taxation.
The Senate voice vote comes one week after the House passed a bill calling for a four-year moratorium. The ban, which prevents state and local authorities from taxing Internet access and related services, was first approved in 1998, and was set to expire Nov. 1.
Tax ban proponents had been seeking a permanent ban, but most had conceded that four years was the best-case scenario. The seven-year ban approved by the Senate came as an 11th-hour surprise, according to those familiar with the issue.
"By keeping the Internet tax-free and affordable, Congress can encourage Internet use for distance learning, telemedicine, commerce and other important services," Sen. Ted Stevens, R-Alaska, said in a statement.
Sens. Tom Carper, D-Del., and Lamar Alexander, R-Tenn., in a joint statement called the agreement "a commonsense victory both for Internet users and for state and local governments."
The bill must now go back to the House for approval of the Senate’s new terms before the tax ban can be sent to the White House for President Bush's signature.
In recent days, technology experts had become increasingly concerned not only about the tax ban’s expiration, but about new language in the House version that would have exposed common online services such as e-mail to taxation by state and local governments.
According to a report by the nonpartisan Congressional Research Service, changes to the language in the tax ban approved by the House exposed many online services to local taxation.
According to the CRS report released Thursday, the expiring tax ban defined Internet access as, "a service that enables users to access content, information, electronic mail, or other services offered over the Internet."
But the House moratorium covered 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, might have faced new taxes, the CRS report concludes.
The Senate version approved today, however, specifically protects "home page electronic mail and instant messaging (including voice — and video — capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access."
Like the House version, the Senate’s seven-year tax moratorium does exclude "voice, audio or video programming, or other products and services," which could still mean taxes on new Internet services such as IPTV and voice-over-IP phone services.
The Bush administration and a large majority of House members supported 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 insiders.
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. "
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.
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.
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