Stripping Taxes From Web Access


The debate brewing in Congress over whether to permanently ban taxes on Internet access will likely see Senate action in the next few weeks.

Sen. George Allen (R-Va.) sponsored a bill (S. 150) to make permanent the Internet-access tax moratorium that was passed by Congress in 1998, renewed in 2001 and expired last November. The Senate is expected to take it for debate and a possible vote the week of April 26.

The measure cleared the Senate Commerce Committee last September.

In addition to making the tax ban permanent, the bill would eliminate discriminatory taxes on digital subscriber line (DSL) service by banning states from taxing Internet access, regardless of the technology used. The House version (H.R. 49) also passed last September.

The debate has been shaped by a competing bill (S. 2084) introduced by Sen. Lamar Alexander (R-Tenn.), who argues that banning taxation would deprive states of billions of dollars in much-needed revenue.


Cable, whose Internet product is not taxed, has taken a back seat on the issue. The National Cable & Telecommunications Association supports Allen’s bill, but has yet to take a position on Alexander’s alternative.

In principle, cable supports a tax ban, but an NCTA spokesman would not comment on whether states should be able to continue to tax DSL.

The Internet Tax Freedom Act of 1998 prohibited states from taxing Internet access in order to give the medium space to grow. The handful of states already taxing Internet access were grandfathered in.

But, many states started taxing DSL because they interpreted it as a telecommunications service.

Allen has argued that taxes have impeded the Internet’s growth, and that state taxation of telco-delivered Internet access is discriminatory and hurts consumers.

“I am concerned that if this Congress were to allow new, discriminatory taxes on Internet access it would be allowing states and localities to contribute to the economic 'digital divide,’ ” Allen said in a floor speech introducing his bill in January 2003. “For every dollar added to the cost of Internet access, we can expect to see lost utilization of the Internet by thousands of lower income American families nationwide.”

The bill was debated in the Senate last November, but did not come to a vote.


Allen’s bill, co-sponsored by Sen. Ron Wyden (D-Ore.), would prohibit states’ ability to raise any revenue from Internet access, including business-to-business transactions. States originally grandfathered in 1998 would be allowed to continue taxing for three years but states currently taxing DSL would have to stop and no new taxes could be imposed in the future.

Allen’s bill is endorsed by the government watchdog group Citizens for a Sound Economy and the U.S. Internet Industry Association, as well as many telecommunications companies and associations.

Alexander’s bill, co-sponsored by Sen. Thomas Carper (D-Del.), seeks to extend the original moratorium for two years and “level the playing field” so that DSL and cable are treated equally.

The Alexander-Carper bill would allow the states that are currently taxing Internet access — both those originally grandfathered and states currently taxing DSL — to keep collecting revenue, effectively freezing the tax laws at the status quo and coming back to evaluate the situation in two years.

At present, roughly 26 states tax DSL service, including eight that did so prior to the 1998 ban, according to estimates by Michael Mazerov, a senior fellow at the Center for Budget and Policy Priorities, a nonpartisan fiscal policy research group.

Alexander spokeswoman Alexia Poe said the impetus for the bill was a phone call from Tennessee Gov. Phil Bredesen, a Democrat, who complained that banning the taxes would leave his state even more cash-strapped.

“The governor said it’s not Congress’s place to tell state and local governments what they cannot tax,” said Poe.


Alexander equates the Internet tax moratorium to a tax break for the telecommunications industry.

“The proposal on the other side is to create a much broader definition of what we mean by Internet access, which would create a huge unfunded federal mandate that would take away billions of dollars from state and local governments’ tax bases that would cause them to cut services or raise taxes on many other things and make it permanent,” he said in the floor debate last November.

Many states and localities have voiced support for Alexander’s bill. The National Governors Association also backs it.

The Alexander bill never got to committee. But when Allen’s measure goes to the floor, Alexander’s bill will likely be offered as an amendment, according to Poe.

“Our hope would be that our bill would be able to be voted on as well,” Poe said.

Allen is anticipating the amendment and plans to vote against it, according to his spokesman John Reid. Both bills are bipartisan, but the majority of Alexander’s co-sponsors are Democrats, while the majority of Allen’s are Republicans.

Staffers for Alexander and Allen are talking and would like to resolve the issue prior to formal debate, but Reid said he’s not sure what can be accomplished.


The Alexander bill “only extends the tax moratorium by two years, but someone starting a new company needs to know that they’re not going to be taxed out of existence in 24 months,” said Reid.

Alexander’s main objection to the moratorium is the $20 billion in revenue it would take away from states, according to Poe.

As a former governor of Virginia, Allen understands the financial strains faced by states more than most, said Reid.

On the other hand, “he believes taxes are repressive and while they might raise some money in the short term, they will squash the recovery we’re seeing now,” by burdening Internet-related endeavors.

Senate Majority Leader Bill Frist (R-Tenn.) reportedly has scheduled debate on the Internet tax moratorium for the last week in April.

States News Service