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Ban on monthly Net access taxes faces obstacles

Senator behind proposal to curb state and local taxes on Internet access is trying to extend the ban again, but says he may not succeed.

WASHINGTON--A key U.S. senator said Tuesday that Congress may fail to renew a temporary ban on some state and local Internet access taxes that expires on November 1.

Sen. Ron Wyden (D-Ore.) said he fears that lobbyists for state and local governments and their powerful allies in Washington will stymie efforts by Internet and telecommunications companies and free-market groups to make the ban permanent--or even to renew it again.

"There remain a lot of officials in local government who are licking their lips at the prospect of going after this cash cow," Wyden said during a morning speech at the annual meeting here of the Computer and Communications Industry Association, whose members include Google, Yahoo, Microsoft and Oracle.

Ron Wyden Sen. Ron Wyden

If the tax moratorium expires, monthly bills for Internet access could come to resemble bills for telephone service, with a welter of confusing taxes, recovery fees, surcharges and administrative fees tacked on at the end. Those fees can raise a subscriber's total cost by 20 percent to 30 percent. (See CNET's guide to your cell phone bill.)

Wyden is one of the authors of the original 1998 law that prohibited taxes on Internet access charges. After tense negotiations, it was renewed temporarily in 2004. At the beginning of this year, the Oregon Democrat--along with Sens. John McCain (R-Ariz.) and John Sununu (R-N.H.)--proposed a bill that would attempt again to make the existing ban permanent.

The existing law says that local governments generally cannot tax Internet access, including DSL (digital subscriber line), cable modem and BlackBerry-type wireless transmission services. It also prohibits governments from taxing items sold online in a different manner than items sold at brick-and-mortar stores, but it does not deal with sales taxes on online shopping.

A separate battle is brewing over sales taxes. State legislators and the National Governors Association are pressing Congress to force out-of-state retailers to collect sales taxes on Internet shipments.

One worry among technology companies is that in the fall, the pro-tax forces may propose a deal: the Internet access tax ban will be renewed, but only if sales taxes on e-commerce are permitted. Steve DelBianco, executive director of the NetChoice coalition, said he's concerned about just that. The group, which opposes the sales tax plan, counts eBay, Yahoo and the Electronic Retailing Association as members.

State governments have historically opposed an unfettered ban. They argue that such a policy will deprive localities of billions of dollars in additional tax revenue that could pay for local services and would amount to an unfair subsidy for telecommunications companies.

A CNET News.com congressional scorecard from November 2006 summarizes politicians' votes on Internet access taxes. (See House and Senate votes, and the summary.)

Wyden said he's at a disadvantage because he's "one of the only people left who know much about this issue." He was referring to the departure of two vocal backers of a permanent tax ban in the past: former Virginia Sen. George Allen, a Republican who last fall, and former Republican Rep. Christopher Cox, who is now the chairman of the Securities and Exchange Commission.

It won't be easy to pass legislation that encounters resistance from an "NBA dream team" led by Sens. Byron Dorgan (D-N.D.), Lamar Alexander (R-Tenn.) and Tom Carper (D-Del.), Wyden said.

There is, however, also support for the effort in the House of Representatives. A companion bill, sponsored by Rep. Anna Eshoo (D-Calif.), currently enjoys 49 co-sponsors. Rep. John Campbell (R-Calif.) has introduced a similar bill that has 28 co-sponsors, some of whom overlap with sponsors of the other House bill.

Sununu, who spoke later at Tuesday's meeting, echoed his colleague's call for passing legislation that makes the ban permanent. He said he feared that new taxes would limit the investments Internet service providers are able to make in their networks and depress "economic activity in that space."

"You can't get away from the fact that the power to tax something is the power to destroy it," he said.

CNET News.com's Anne Broache reported from Washington. Declan McCullagh reported from San Francisco.