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Net firms: Don't tax Internet calling

A century-old tariff should not be extended to Internet phone calls, the companies say.

The largest U.S. Internet phone companies are asking the Internal Revenue Service not to slam them with a "temporary" tax created more than 100 years ago to pay for the Spanish-American War.

In a six-page letter to the IRS sent late Wednesday, the companies stressed that fledgling voice over Internet Protocol (VoIP) services should not be subject to the excise tax that President William McKinley signed into law in 1898.

"VoIP is having a profound and beneficial impact on the United States and the world in a way unimaginable in 1898," the letter said, urging the IRS to "refrain from any attempt to extend the excise tax to VoIP services."

The letter was sent by the VON Coalition, which represents AT&T, Covad, Intel, Level3, MCI, Microsoft, Pulver.com, Skype and Texas Instruments.

A notice that the IRS published in July says it is considering whether the 3 percent tax on phone calls should be reinterpreted "to reflect changes in technology" used in "telephonic or telephonic quality communications."

Greg Jenner, acting assistant secretary for tax policy at the Treasury Department, tried to quell alarm over the notice a few days after it appeared. "We are not considering taxing VoIP," Jenner said in a telephone interview at the time. "It simply is a request for comment. We can't conclude whether we're going to issue new regulations until we know what the industry has to say."

The VON Coalition argues that the text of the 1898 law does not apply to Internet-based phone calls because it covers "toll telephone services" with distance-based charges and that any changes to VoIP tax policy should originate with Congress, not the IRS.

The tax agency's notice has drawn fire from senior Republicans who had tried unsuccessfully to repeal the Spanish-American War tax in the past. (The House of Representatives voted 420-2 in May 2000 to eliminate it, but the Senate never acted.)

Rep. Chris Cox, R-Calif., has sent a letter to President Bush asking him to "direct the IRS immediately to affirm that this 100-year-old tax does not apply to the Internet, but only to traditional analog voice services."