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New fight in battle over Net-access tax

Four U.S. senators are trying to derail a permanent ban on Internet access taxes by breathing new life into a recently expired moratorium.

Four U.S. senators are trying to derail a permanent ban on Internet access taxes by breathing new life into a recently expired moratorium.

The legislators, including Lamar Alexander, R-Tenn., and Dianne Feinstein, D-Calif., on Wednesday threw their support behind a two-year extension of the moratorium, which expired in November and had only temporarily prevented state governments from slapping new taxes on DSL (digital subscriber line), cable modem and dial-up Internet connections.

Wednesday's announcement, which included support from Tom Carper, D-Del., and Kay Bailey Hutchinson, R-Texas, renews a debate that has been quietly simmering since the House of Representatives approved a permanent tax ban last fall, but the Senate did not. Since the moratorium expired, state and local governments have been free to enact taxes that single out Internet access.

Lobbyists for those governments and their supporters in Congress reluctantly support another temporary ban but remain steadfastly opposed to a permanent one, arguing that the Internet does not deserve special treatment and that any ban would shrink crucial tax revenues. In a letter to Alexander and Carper on Wednesday, the National League of Cities said the two-year extension would "give Congress, the Federal Communications Commission, state and local governments, and participants in the marketplace, time to identify and define new technologies and address how they should be treated with regard to current taxation laws."

The Senate's Republican High Tech Task Force on Wednesday reacted to the new legislation by reiterating its commitment to enacting the permanent ban the Internet Tax Non-discrimination Act contains. Although the task force nominally has 15 members, one of them is Hutchinson, who supports the competing proposal.

"The Internet has flourished, largely because government has stayed out of the way and allowed private enterprise to drive it economically," Sen. John Ensign of Nevada, the task force's chairman, said in a statement. "It should not be looked upon as a new crop to be harvested by governments looking for additional tax revenue."

Complicating the debate is wording in the permanent ban that says states may no longer tax telecommunications services (such as those for telephones, cell phones and pagers), if such services are used to provide Internet access. If emerging technologies like VoIP (voice over Internet Protocol) and Wi-Fi telephones gain acceptance, or if more and more handheld devices include Internet access features, that could gradually make more telecommunications services tax-free.

In a letter last November, the Congressional Budget Office estimated that the definitions used in the permanent proposal would cost states that tax DSL access "at least $40 million in sales and use taxes on DSL services in 2004, and at least $75 million by 2008."

This debate is only limited to Internet access fees and will not affect sales taxes paid on purchases made online. In general, e-commerce retailers are required to collect sales taxes only if a buyer lives in a state where the business has a physical presence, such as an office or a retail outlet. State legislators hope to change current law but remain a long way from persuading Congress to do so.

Dispute over details
Alexander aide Alexia Poe said a copy of the final bill was not available as of Wednesday evening.

A draft of the bill seen by CNET News.com, however, shows that it is not a straightforward extension of the lapsed moratorium. States could continue to collect taxes if they were enacted between Nov. 1, 2003, and the date President Bush signs the bill, and it shrinks what kind of "Internet access services" would be immune from taxes. A third change appears to clarify that states may single out VoIP services for additional taxes.

Those changes have alarmed Internet providers, which predict that states will rush to enact new taxes over the next few months while the Congress is debating the matter--and those taxes would become permanent.

The bill "is a hoax," said Dave McClure, president of the U.S. Internet Industry Association. "While purporting to be a moratorium on Internet taxes, this bill instead opens the door to billions of dollars in new, multiple and discriminatory taxes on the Internet. This is not the Internet tax bill Americans want and need. With the United States trailing in eighth place behind other nations in broadband deployment, this bill is a crippling blow to America's economy and future growth."