2007-10-26

Monthly Internet bills are safe from fees for now after the Senate late Thursday approved a compromise bill that would extend the ban on Internet access taxes for an additional seven years.

Senators approved the measure by voice vote after several weeks of legislative wrangling over how long the ban should last.

At issue is the Internet Tax Freedom Act (ITFA), a bill enacted in 1998 that temporarily prevented states and localities from imposing taxes on Internet service. The law was renewed in 2001 and 2004, but is set to expire once again on Nov. 1, 2007.

The bill approved by the Senate was introduced in the House in late September and extended the ban for four years. Efforts by House Republicans to make that ban permanent failed in committee, as did subsequent efforts to extend the ban for six or eight years. The House passed H.R. 3678 with a four-year ban last week by a vote of 405 to 2.

In addition to extending the tax ban, the bill also provides an updated definition of Internet access. At the request of Sen. Ron Wyden, D-Ore., the Congressional Research Service (CRS) on Wednesday released an assessment of the bill's definition and said that it was potentially "restrictive.

Using the phrase "enables users to connect" in the bill text means that the moratorium could possibly be limited to providers that literally connect users, the CRS said. For example, if a user used one provider to connect to the Internet but another provider to access e-mail services, the e-mail provider might not be covered by the ban since under the bill's terminology it was not technically enabling that user "to connect". The CRS also warned that the definition could open up products and services currently exempted from the ban to taxation.

To rectify the issues raised by CRS, the Senate added an amendment that specified that home pages, e-mail, instant messages, video clips and electronic storage services not packaged with Internet access would not be subject to taxation.

These ancillary services – as well as those that have not yet been developed – are one of the reasons Democrats have been loathe to support a permanent ban on Internet taxes.

"Making this tax permanent would eliminate any possibility that Congress would be able to re-visit the issue and make adjustments to the moratorium if necessary as innovation has and will occur in the high-tech industry," Rep. John Conyers (D-MI), chairman of the House Judiciary Committee and the author of H.R. 3678, said during a hearing on the bill earlier this month.

Republicans argue that the Internet has proven to be a viable marketplace and should not be subjected to the burden of taxation. Revisiting the issue every four years is a time waster that opens up the possibility of onerous fees, according to supporters of the permanent ban.

A permanent ban was on the table once again Thursday when Sen. John Sununu (R-NH) introduced an amendment to an unrelated Amtrak reauthorization bill that would make the moratorium permanent. Democratic Sen. Tom Carper of Delaware (D-DE), who opposes the permanent ban, had filed an amendment in support of the four-year extension.

Sununu and Carper agreed to compromise on the issue, which resulted in the final seven-year moratorium agreed to by the Senate.

Sununu said in a statement that "a permanent ban would have been optimum, and I will continue that fight" but acknowledged that his agreement with Carper was "real progress in the name of Internet tax freedom."

"This agreement is a common sense victory," Carper said.

The bill will now be sent back to the House for its approval on the amendments added by the senators.

Earlier this week, the National Republican Senatorial Committee (NRSC) released a video on its Web site that urged Republicans to sign a petition that pushes for the permanent ban.

The clip features a countdown set to ominous music that calls on Republicans to "stop the Democrats from taxing the Internet before it's too late."

The NRSC also released a video that attacked Sen. Mary Landrieu (D-LA) for opposing the permanent ban during a recent floor debate.

Landrieu fired back, accusing the NRSC in a statement of trying "to distort my record". The senator said she would support a five- or ten-year ban on Web taxes, but "in a policy area so affected by rapidly changing technologies, Congress should review its Internet policies at least once a decade," she said.

The National Cable and Telecommunications Association (NCTA) applauded the Senate for passing the bill. It will "protect consumers and small businesses from new and burdensome state and local taxes on Internet access," the group said in a statement.

The bill also addresses a technical taxation issue that allows the handful of states with gross receipt taxes to substitute these gross receipt taxes for state corporate income taxes that do not apply to Internet access.

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