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New taxes threaten local ISPs

A rising number of cities and states are pondering sales taxes on Internet services--and local ISPs say the practice is threatening to undermine their businesses.

Booming technology business has earned a new nickname for the Fort Collins area atop the Colorado Rockies: "Silicon Mountain." Business is also good for local Internet service providers, but the ISPs are crying foul about recent efforts by Fort Collins to impose a municipal sales tax on their services.

A rising number of local and state governments are pondering sales taxes on Net access as an opportunity to raise much-needed revenue, but companies complain that such proposals would stymie growth on the Net and possibly lead to other costly tariffs--which, they add, may have to be passed along to consumers. Accordingly, the fight is not limited to Fort Collins.

Earlier this year, Florida proposed extending its sales tax to ISPs but was met with vocal protests from businesses and organizations in the state that managed to postpone the tax. A European Community commission on telecommunications has proposed a similar "bit tax" on Net traffic.

But for the handful of small ISPs based in Fort Collins, the municipal sales tax on Internet access is especially alarming because it will make it even harder to compete with national heavyweights such as NetCom and AT&T, which the local providers say are not subject to the levy.

"We like the notion that [Fort Collins] could be a hotbed for [technology]," said Zachary Conger, a partner at Cumulus Internet Services, a Web consulting firm that plans to start an Internet access business. "We don't want to see that messed up. [The sales tax] gives the larger groups like NetCom and AT&T that much more advantage."

The local ISPs claim that Fort Collins practically sneaked the tax into existence, selectively notifying providers that they would be subject to an existing 3 percent city sales tax that covers goods and some services.

"They decided to reinterpret the existing code and say Internet services are taxable," said Brad Ward, vice president of Front Range Internet, a Fort Collins-based ISP that began paying the tax March 1. "They said, 'Oh, yeah, that's what [the tax] meant all along.' I don't even think they held a meeting. It was kind of cheesy."

Ward said the 3 percent tax hasn't noticeably affected his business, which has passed along the cost to its 1,400 customers. But he regards the tax as an alarming precedent that could make way for other, even more onerous government taxes. Furthermore, Ward and other ISPs argue, they are now being taxed twice for offering Internet services, once by the city and once by the telecommunications company from which they lease phone lines.

"We already pay sales tax on Internet access to the phone companies," Ward said. "It's definitely a duplicate tax."

One ISP, which has not yet been approached by Fort Collins tax authorities but fully expects to be, is prepared to fight the city in court on the grounds that it is already paying for a sales tax passed along by a regional telephone company.

"We are originating signals, not providing telecommunications service," said Mike Ossmann, operations manager for NetPlus, an ISP launched in February. "As far as we're aware, there is no valid justification for this tax. It's probably just a matter of time before the city approaches us."

Fort Collins officials say all network service providers are subject to the tax and always have been.

"This is nothing new," said Sherrie Temple, a financial analyst with Fort Collins. "Our interpretation has been that Internet service has always been taxable under our sales tax." But the city is not going to ask ISPs, many of which are less than a year old, to pay retroactive taxes.

It's still not clear, however, how the city could impose the tax on national service providers, unless the company maintains access equipment for accepting incoming local calls within city limits.

Related stories:
Florida high-tech tax war heats up
Universal Net access policy proposed
Huge protest greets Florida Net tax
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