Ban on Net access taxes extended to 2014

House approval means most consumers will continue receiving tax-free Net connection bills. President is expected to sign off before current law expires this week.

Anne Broache Staff Writer, CNET News.com
Anne Broache
covers Capitol Hill goings-on and technology policy from Washington, D.C.
Anne Broache
5 min read

Updated at 11:13 a.m. PDT: America's Internet access subscribers can breathe a sigh of relief: Congress isn't planning to allow taxes on your connection for another seven years.

With little debate, the U.S. House of Representatives on Tuesday voted 402-0 to pass an extension of an existing ban on Internet access taxes until 2014. The same proposal received unanimous approval in the Senate late last week.

The move comes just in the nick of time, as current law generally prohibiting state and local governments from levying the taxes was scheduled to expire Thursday.

The bill's next step is the president's desk, where it is expected to be signed swiftly into law. President Bush has long been an advocate of extending--or even making permanent--the ban.

House Speaker Nancy Pelosi (D-Calif.) touted the vote as granting the longest extension of the Internet tax moratorium in history, although just a few weeks ago, she and the bulk of her colleagues backed a four-year extension instead. "Unlike the Republican-controlled Congress, which allowed the moratorium on taxes on Internet access to expire for more than a year, the Democratic Congress voted today to extend the moratorium on time," she said in a statement.

Pelosi was referring to Congress' failure to reach agreement on a Net tax ban renewal bill in time to meet a 2003 expiration date, although it ultimately passed a retroactive four-year extension the next year.

House Republican Whip Roy Blunt (R-Mo.) said he was glad to see the seven-year ban but accused the Democrats of being "inconsistent" in their approach.

"When it comes to taxing the Internet, Republicans have not wavered in our belief that it ought not happen today, tomorrow, four years from now, or any time after that," he said in a statement. "Democrats in Congress have taken a far more 'nuanced' position on the matter, having decided that imposing new taxes on our digital economy right now is unpalatable, but that resurrecting the plan sometime in the future may hold greater promise."

Grandfathered in

Granted, not everyone is safe from taxes under the bill. States that already had Internet access taxes in place before the ban took effect several years ago would still be allowed to keep them through a grandfather clause in the bill. (Nine states--Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin--fall into that category, according to the National Conference of State Legislatures.) Officials can also tax Internet services, albeit more indirectly, if they had already enacted broad-based laws on their books that tax the gross income or receipts of a business.

The bill isn't a blanket ban on all Internet-related taxation, either. It bars states from taxing services that provide a connection to the Internet, such as cable, DSL, and wireless-type services. But governments are free to tax "voice, audio, or video programming" that charges consumers a fee--such as IPTV and subscription-based Internet phone services--and basically any other "products and services" delivered over the Internet and not specifically exempted by the bill. (The bill also does not deal with the separate question of sales tax on goods purchased online.)

The politicians did opt to carve out from the possibility of taxing the following services: "home page electronic mail and instant messaging (including voice--and video--capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access." That section was added at the last minute in response to concerns raised by Sen. Ron Wyden (D-Ore.), the original author of the tax ban, which dates back to 1998.

There has been little dispute among members of Congress this year over the need to extend the ban at least temporarily. But the weeks leading up to the bill's passage involved no shortage of largely partisan fighting--with the notable exception of Reps. Anna Eshoo and Zoe Lofgren, Democrats whose districts include Silicon Valley--over how long a renewed ban should last. Republicans continued pushing for a permanent moratorium, while Democrats said only a shorter ban could address concerns raised by state and local officials about the need to assess their tax bases amid changing technologies.

The House originally passed a four-year extension, but in the process, it denied other members the chance to offer amendments that would have made it longer. Republicans, particularly Rep. Bob Goodlatte (R-Va.), continued to grumble about the Democratic leadership's handling of the situation on the House floor. They argued that a permanent ban would have passed, had it been allowed for a vote, because a standalone bill proposing that policy has support from 242 politicians.

Not so simple
It may not have been quite that simple, as a number of the co-sponsors of that permanent ban voted against the proposal when the bill was being considered by the House Judiciary Committee a few weeks ago. In the end, the Democrats who previously put up a fight were willing to accept a longer extension of the ban.

"I am confident that the final product is good legislation that is pro-consumer, pro-innovation, and pro-technology," said Rep. John Conyers (D-Ill.), who led consideration of the House's four-year extension bill and previously resisted attempts by Republicans to make the ban lengthier than that.

Republicans in both chambers have vowed to continue pushing for a permanent ban on Internet access taxes.

"Today's vote is a temporary win for all Americans," said Rep. Lamar Smith (R-Texas). "The taxman has been delayed for seven more years. But he will come again. And when he does, I hope Congress will be prepared to make the Internet tax ban permanent."

The bill's approval drew accolades from telephone, cable, and Internet companies.

"This extension is a great bipartisan victory that will benefit millions of consumers and businesses," said Broderick Johnson, chairman of the Don't Tax Our Web Coalition, whose members range from Amazon.com and Google to Verizon Communications and T-Mobile USA . "Continuing the ban on Internet taxes will ensure that the gateway to the Internet remains tax-free in the vast majority of states and local jurisdictions."

State and local officials also greeted the bill's approval with praise. National Governors Association lobbyist David Quam said his organization would have preferred to see a four-year extension, but he said the bill "reflects a lot of our priorities." Namely, it's temporary, it "modernizes" the definition of what cannot be taxed (a reference to the provisions clarifying that VoIP and TV services transmitted over the Internet can be taxed), and it preserves the protections allowing states to keep their old taxes, he said.

"Overall," Quam told CNET News.com after the vote, "we've got a reasonable compromise."