High-speed data customers in New Hampshire began paying about an extra $3 a month for service on Nov. 5 — but only if they link to the Internet via cable modem.
And cable operators think that the state's data tax is patently unfair, because it does not apply to dial-up, digital subscriber line or wireless data services. A lawsuit was considered but nixed as political suicide.
"We hope, after the election, we can get this overturned, but who knows what the outcome will be," said Terry Hicks, vice president and regional manager of MetroCast Cablevision, one of the state's smaller operators.
A tax on "two-way" services has been included in the state's cable franchises since the early 1990s. To avoid levies on cable video, operators agreed to a compromise with state officials that called for taxation of advanced services.
In 1997 — before high-speed-data services were broadly deployed — Congress passed the Internet Tax Freedom Act, which bans levies on data services. That federal law was recently extended until November of 2003.
Most operators believed U.S. law would prevent New Hampshire from taxing data-over-cable services, although AT&T Broadband has been paying the tax because it delivers both Internet and telephone services.
This year, MetroCast sought clarification as to operators' tax liability. Cable systems acknowledge that nine states, including New Hampshire, are exempt from the federal act because they had Internet tax schemes in place before Congress took action.
But operators argued the New Hampshire policy does not actually meet the two-pronged test to qualify for the exemption.
The state tax was not "generally imposed and actually enforced" before Oct. 1, 1998, companies have argued. And federal policy discourages "discriminatory" taxes on electronic commerce, they claimed.
Cable executives took their case to the New Hampshire House of Representatives' Science, Technology and Energy committee in an effort to kill the tax.
"The committee took the position the tax was not appropriate," said Bill Durand, executive vice president of the New England Cable Telecommunications Association. But then budget realities hit and legislators couldn't justify action that would cost the state $1.6 million in revenue this year.
Hicks said his 15,000 data customers will be assessed an extra $2.80 next month and MetroCast will wait to see the fallout.
"Any time there is a rate increase, there's attrition," he said.