The Tax Man has struck Internet service providers again, this time in Massachusetts.
Across the nation, state and city governments are taking a growing interest in taxing Internet access as a way of bracing their coffers. In Tacoma, Washington, and Florida, efforts to tax ISPs have met with fierce resistance from businesses and, in both cases, the taxes have been suspended as authorities evaluate their legitimacy.
But other states and cities are already sucessfully taxing ISPs. According to the Association of Online Professionals (AOP), Connecticut, the District of Columbia, New York, Ohio, and Pennsylvania are all taxing ISPs. In addition, ISP taxes are collected by the city governments of Austin, Texas; Fort Lauderdale, Florida; and Fort Collins, Colorado.
In many cases, it was unclear whether tax laws would apply to both locally-based ISPs and national providers, such as American Online and PSINet, which may offer service in one location but are headquartered in another city.
Now, it appears that small and national ISPs alike are being taxed. One of the largest commercial ISPs, Netcom, today confirmed that it was notified that it must pay taxes on Internet access in Massachusetts. Last month, Netcom began passing the tax along to its customers, charging the state's subscribers a five percent sales tax on their monthly bills, even though the company is based in California.
A Netcom spokesman said that the company is taxing subscribers in "several" other states as well, though he could not name the other states. Netcom officials did not comment on whether they would resist the state's move.
The principal objection to the sales tax among ISPs is that it amounts to a double tax on their services. ISPs already pay tariffs to telecommunications companies such as AT&T and MCI on the leased lines that make up their network.
The Net access taxes are typically extensions of existing sales taxes so the tariffs aren't subject to public discussion, according to David McClure, executive director for the AOP. In many cities and states, ISPs are avoiding paying sales taxes until they hear otherwise from taxing authorities.
"Most of the larger service providers will hold out for as long as they can until they're notified," said McClure. "Once they've been notified they have to start paying."