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Judges: Net tax ban goes only so far

With both state and federal laws on the books claiming to shield Net access fees from taxation, shouldn't companies like Comcast--and subsequently, their subscribers--be immune from taxes on their cable modem offerings?

That's what the cable giant had argued in a lawsuit against the City of Seattle, but a three-judge panel from the Court of Appeals of Washington disagreed in a ruling issued this week.

Seattle is free to levy its 6-percent "telephone utility tax" on Comcast despite a state law that says "a city or town may not impose any new taxes or fees specific to internet service providers," the judges said in a Dec. 11 opinion. Comcast had argued that the statute prevented it from having to pay Seattle's tax and requested a refund.

That's because in addition to providing an "Internet service," Comcast also provides "data transmission" services, which are, in fact, eligible for taxation under a different portion of the law, the appeals court concluded. Comcast had argued that the two services couldn't be separated, but the judges sided with the city, which had argued that under Comcast's reasoning, any telephone company that also happens to provide e-mail and Internet services could also evade the utility tax.

As for the federal Internet Tax Freedom Act, which similarly prohibits taxes on Internet access, the judges ruled the congressional mandate did not trump Seattle's rules for a couple of reasons: First, a grandfather clause in the federal law allows rules existing before October 1, 1998 to stay in place. And second, the city tax doesn't discriminate against Internet businesses, which was a major goal of the federal legislation--instead, it applies uniformly to all businesses engaged in telephone and data transmission.

Comcast may still ask for review of the appeals court's decision. The King County Superior Court previously ruled in the company's favor, prompting the city attorneys to lodge an appeal.