Net Access: To Tax Or Not To Tax

First enacted in 1998 as the Internet Tax Freedom Act and reauthorized for two years in 2001 as the Internet Tax Nondiscrimination Act, the initial laws were aimed at helping a budding industry develop by barring state and local governments from taxing Internet access.

Former Virginia Governor James Gilmor, in endorsing the legislation, noted that the Internet and PCs have empowered individuals as citizens in a democracy, as consumers and as entrepreneurs in unprecedented fashion. "America can embrace these positive developments and promote more of it by keeping taxes and regulatory burdens on Internet access to a minimum, or it can thwart them by taxing Internet access," he testified before the House Judiciary Committee's Subcommittee on Commercial and Administrative Law.

But the executive director of the Federation of Tax Administrators said Tuesday that the Internet industry has quickly evolved. "The fledgling industry argument is no longer relevant," testified Harley Duncan. "Electronic commerce is becoming a mature and important part of the U.S. and international economy. In our estimation, there has been no showing that the purchase or supply of Internet access services in the states that tax the services has been adversely affected. Neither has there been a showing of an undue compliance burden on Internet service providers that would justify the preemption. Continuing the pre-emption simply provides a special position for this particular communications medium."

If Congress should reauthorize the tax ban, it should place a five-year limitation on it, said Duncan. Also, he said, jurisdictions that already tax Net access should be allowed to continue doing so.

Gilmor, who once chaired a Congressional advisory panel on e-commerce, said the fact that Congress twice banned such levies served notice on them that their grandfather protection would eventually be jettisoned from American law. "These grandfathered states faced a choice," Gilmore said. "They could either reverse their hasty decisions to tax Internet service or they could wait to see if Congress might change its mind."

Some states did just that, he said: Texas eliminated its tax on Internet access priced below $25 a month, and Connecticut opted to phase out its tax on Internet access altogether. Washington repealed the local tax on Internet access that the City of Tacoma had imposed. Still, nine states collect an estimated $50 million a year in Internet access tax.

Gilmor and other bill proponents worry that allowing local and state governments to tax Internet access could replicate the problem they say the telecommunications industry confronts with a labyrinthine maze of overlapping and disparate taxes. Duncan disagrees. "Just saying it doesn't make it so," he said, noting that Net access taxes are simple use taxes, such as those levied on other services, whereas most telecom taxes result from complex decisions made by state utility boards that regulate phone services.

Still, former congressman Jack Kemp, co-director of the conservative citizens group Empower America, suggested that Congress should go beyond banning Internet access taxes and take steps to limit the ability of states to collect taxes on purchases made online, such as a program known as the Streamlined Sales Tax Project, a consortium of states working to do just that. "The central issue in the Internet tax debate is not fairness as the NGA [National Governors Association] and some others would have us believe; it is taxation without representation," Kemp said. "States have been trying for more than three decades to tax people and businesses that are located out of state because politicians are acutely aware nonresidents can't vote them out of office."

Kemp said state tax authorities seek online taxation to help cash-strapped states balance their budgets. "But as we have seen, economic growth, not new forms of taxation, is the key to solving budget shortfalls, and we need to keep in mind that no government neither here nor abroad has ever taxed its way to prosperity," he said.

Duncan contends that states, for the most part, aren't looking to Net access taxes to balance their budgets. "While states have had to determine the manner in which existing taxes should be applied to Internet services and electronic commerce, there was no headlong rush to devise new schemes of taxation that in some fashion targeted the electronic-commerce industry," he said.

Because Congress twice has approved similar legislation, the bill--which has the backing of the Bush administration--is expected to be enacted. Thus, Duncan isn't putting his efforts into defeating the legislation but into tightening definitions so that ISPs, for instance, can't bundle Net access with other services that would normally be subjected to taxation to avoid any levy.

This story courtesy of Techweb.com.