Senate may move on bill to ban Net-access tax

A logjam in the U.S. Senate over legislation to permanently ban some Internet access taxes appears close to breaking, bringing a vote on the measure within reach after weeks of delays.

On Thursday, Senators jostled for position in the long-simmering debate, which pits technology companies against state and local governments that are eyeing access taxes as a rich source of untapped revenue. The previous ban on some types of access fees--covering dial-up and cable modems but not digital subscriber line (DSL) connections--expired on Nov. 1. The measure was expected to see quick passage in the Senate, but it stalled amid heated opposition over the fine print.

Senators on both sides of the issue now are trying alternatives to a direct vote on the bill, S.150. They're hoping to add an Internet tax rider to a mammoth "omnibus" bill designed to fund most of the federal government through 2004.

A temporary appropriations bill funding the government expires on Friday, and congressional leaders hope to finish the omnibus bill before Thanksgiving--making the omnibus measure a leading vehicle for bringing the tax moratorium to a vote before year's end.

As a result, the fate of the tax moratorium may now rest in the hands of one man: Sen. Ted Stevens, R-Alaska, the powerful chairman of the Senate's appropriations committee, who wields significant influence in approving any changes to the omnibus bill. Pro-tax and antitax moratorium senators are furiously lobbying Stevens to ensure that their version of the tax ban is included in the bill.

At least three versions of a tax-ban rider have been floated, including S.150 in its current form, and two competing measures that would extend more limited tax exemptions for Internet access providers for nine months and two years, respectively.

Negotiations on Capitol Hill continued behind closed doors Thursday evening, with aides remaining mum about what form the final omnibus bill might take. "We're not going to discuss what may or may not be in an omnibus appropriations bill until that bill is filed," a spokesman for Stevens said. "I know there are a lot of rumors out there, but I'm not in a position to substantiate any of them."

The last-minute maneuvers underscore heated and largely unexpected opposition to the moratorium on Net-access tax, from senators who are worried that potential loopholes in S.150 could unintentionally drain away billions of dollars in sorely needed state funds.

Complicating any attempt to insert a tax ban in Stevens' appropriations bill was a dramatic statement on Thursday from Sen. Tom Carper, D-Del., who told reporters he would block the measure if S.150 were included.

Proposal stalled
Resistance in the Senate marks a 180-degree turn from the measure's reception in the U.S. House of Representatives. Invoking a process designed for noncontroversial legislation, the House approved a permanent ban by a voice vote on Sept. 17.

Since then, however, state and local officials have managed to stall the same proposal in the Senate. Along with their allies in the Senate, they object to the House's decision to widen the original moratorium to prohibit taxes on DSL connections and the inclusion of vague language that could prohibit taxes on fast-growing new services, such as voice calls made over the Net and commercial online music stores.

Talks over S.150 have dragged on for three weeks with no visible progress so far. The National Governors Association (NGA) and its allies--including former governors-turned-senators Carper, Lamar Alexander, R-Tenn., George Voinovich, R-Ohio, Bob Graham, D-Fla.--have suggested diluting it by taxing only some DSL connections. Because bill sponsors George Allen, R-Va., and Ron Wyden, D-Ore., haven't agreed, the impasse continues.

Although the language of the expired moratorium was somewhat ambiguous, states typically interpreted it as permitting taxes on DSL connections but not dial-up or cable modem links. A report from the Center on Budget and Policy Priorities says 28 states currently tax DSL service.

To Internet service providers (ISPs), this is one of the most important congressional debates of the year. Dave McClure, president of the U.S. Internet Industry Association, wrote a pointed essay called "The Five Great Lies of Internet Taxation" that accused opponents of S.150 of "using filibusters, deceit and misdirection to mask their tax-and-spend agendas."

ISPs say states should not single out Internet access for tax purposes, arguing that it is an interstate communications medium that properly should be under the jurisdiction of Congress.

About the only thing both sides can agree on is that a lot of money is at stake. The Congressional Budget Office (CBO) has estimated that enacting the bill without changes 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."

The CBO also cautioned that the definition of Internet access could cover free content such as movies and music that are bundled with Internet access: "Such content is subject to sales and use taxes under current law but might increasingly be available at no charge as part of an Internet access package."

The spending process
If Stevens does insert a provision relating to taxing Internet access into the omnibus appropriations bill, Hill staffers said they did not know what form it would take. Because of Alaska's vast rural areas, Stevens has long favored "universal service" taxes on telecommunications services--in which city dwellers pay more to subsidize rural users--a view that could make him unsympathetic to a permanent tax ban.

One thing, though, is certain: If S.150 were included in Stevens' omnibus spending bill, which congressional leaders hope to finish before Thanksgiving, it won't be subject to further negotiations. But if the Senate approved a version of S.150 in a separate vote--something that Majority Leader Bill Frist is said to favor--that version might not be the same as the House bill. Negotiations then could stretch through 2004.

Citing the end-of-year shopping season, supporters of S.150 are urging the Senate to move swiftly and not modify the bill. "Come the holiday season, if some states and localities chose to do it, they can go out and tax e-mail," Wyden said in a floor speech Thursday evening. "They can go out and tax Internet services that are delivered via wireless devices and DSL because the United States Senate has not updated the law."

Proposals for a limited, 9-month extension were circulating in the Senate earlier in the day, prompting one of S.150's backers to dismiss that idea outright.

"An extension of current law for nine months is completely unacceptable and just another excuse to provide an opportunity for States to begin taxing Internet access especially broadband DSL," Allen said in a statement.

"As a matter of practicality, if we allow this debate to go on nine more months, the issue of Internet access will be held hostage by the SSTP debate, a presidential election, and other legislative matters. We should not make excuses, we should do our work and act now," he said.

A spokesman for Allen said that "negotiations are taking place on a number of levels" and he could not predict what the outcome would be.

A different proposal, suggested earlier this month by Carper and other foes of S.150, would extend the moratorium by two years and ban states from taxing people who use DSL--but not when DSL connections are used to link branch offices or to bridge networks.

David Quam, the National Governors Association's director of state-federal relations, called that proposed amendment to S.150 "an equitable solution that's good for solutions, good for industry and good for state and local governments."

"It tries to solve the industry's concerns," Quam said.

Debate over details
Stalling the original S.150 bill in the Senate is one highly contested phrase. It says that states may no longer tax telecommunications services such as telephones, cell phones, and pagers to the extent that "such services are used to provide Internet access."

The phrase is designed to update the original 1998 law, called the Internet Tax Freedom Act, to reflect the ways that Americans now access the Internet.

But opponents characterize it as an unfunded mandate on state and local governments, saying that S.150 could to exempt telephone and cable companies from state and local taxes.

To buttress that point, they convened a press conference on Thursday that featured senators Alexander, Voinovich and Carper; and governors Mike Huckabee, R-Ark., Edward Rendell, D-Penn., and Paul Patton, D-Ky. Joining them was a representative of the International Association of Firefighters.

"There is some news today that there may be a several-month extension of the current ban on Internet access tax," Alexander said. "For me, that would be welcome news. This train was racing down the track. If there was a temporary extension of the current ban, that would give us time to pull the train into the station, get on board, look it over and find out where it is going."

Alexander added: "This is not about the Internet. It's not about taxes. It's about governors, and mayors and legislators who can make their own decisions about what services to provide and what taxes to raise. And they'll either lay off firefighters, lay off teachers, (raise) the tax on food, medicine, water or income, if we come up here and tell them what they can't do."

Quam, of the NGA, also endorsed a 9-month extension. "If that comes to pass, it would be a recognition by Congress that there are two strong sides to this, and it's a complicated issue that cannot be done in a vacuum and cannot be done hastily," he said.

This debate is only limited to Internet access fees and does not affect sales taxes paid on purchases made over the Internet. 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 want to change current law, but are a long way from persuading Congress to do so.