New Net taxes could arrive in November

At the moment, a handful of bills in both chambers of Congress propose competing approaches, ranging from making the moratorium permanent to extending it for another four years. Earlier this summer, supporters and opponents of a permanent ban indicated they had reached a compromise that would involve extending the ban for another finite period of time and redefining the concept of Internet access to close perceived loopholes.

But no votes have happened, and the proposals are still stuck in the quagmire of congressional subcommittees. The process is being held up because "there are some issues that probably don't belong in this bill that have sort of arisen," Michone Johnson, counsel to the U.S. House of Representatives Judiciary subcommittee, said on Friday. The subcommittee has control over when a preliminary vote would occur on bills in that chamber.

Johnson, who spoke at an event here sponsored by the Federal Communications Bar Association, said subcommittee chairwoman Rep. Linda Sanchez (D-Calif.) was still "reviewing" a compromise draft. Admitting surprise that action hadn't occurred before now, she said she hoped a new bill would emerge "weeks before the deadline."

The outlook is murkier on the Senate side. Mike O'Reilly, legislative director for Sen. John Sununu (R-N.H.), one of the primary sponsors of a permanent tax ban in that chamber, said the Senate was keeping an eye on the House action but wasn't sure when it would act.

Although Sununu is one of the more ardent low-tax advocates in the Senate, his colleagues may not be as committed. "If there are members that seek to delay," O'Reilly warned, "I believe either they'll face embarrassment or political pain from constituents for doing so."

If the moratorium is allowed to expire, states would be allowed to levy discriminatory taxes on digital subscriber line, cable modem, wireless and even BlackBerry-type data services. First enacted in 1998 and renewed after some debate in 2004, the existing law prevents state and local governments from taxing "a service that enables users to access content, information, electronic mail or other services offered over the Internet."

Each time the bill has come up for renewal, state and local officials have opposed making the ban permanent, arguing it's best for the policy to stay flexible so states can re-evaluate whether collecting such taxes is necessary for their operations. So far, they've won over politicians on that front.

States also don't like the idea of taking away the so-called "grandfather" provision of the law, which allows states that were already collecting taxes on Internet access before the federal law took effect to continue doing so. (Currently seven states fall into that category, according to David Quam, a lobbyist for the National Governors Association.)

Another sticking point has involved the definition of Internet access. Organizations like the NGA have voiced concern that companies are using the law to skirt collection of required taxes on services often bundled with Internet access, such as phone or cable. They also don't want the existing definition to suggest voice over Internet Protocol (VoIP) service is immune to taxation. Meanwhile, Internet access providers have complained that the existing law's definition could create a loophole allowing Internet backbone providers to be taxed. The groups have said they were able to craft language that addresses those concerns and would be satisfied to see it in the proposal's final version.

As for the "other matters" complicating introduction of a revised bill, one issue apparently concerns a push by some to tack on a ban on satellite television taxes, participants at Friday's event suggested. Another is the question of what to do about the handful of states that have reworked their tax systems and put into place what are known as "gross receipts" taxes. That type of tax involves a set fee on a company's total revenue, which could potentially complicate matters for firms offering Internet access. Quam said the NGA hasn't yet taken a position on how to handle that scenario.

Although some measure of common ground seems to exist among the major lobbying forces involved in this debate, it's unclear whether they'll be able to eke out an agreement in time.

On one hand, Broderick Johnson, a spokesman for the Don't Tax Our Web Coalition, which is composed of major phone, cable and Internet companies, predicted during Friday's event that the consequences of failure to pass a bill in time would be "dramatic," with Internet service providers forced to collect between 5 percent and 14 percent in taxes. However, he only named one state-- Montana--that has an Internet access tax poised to kick in immediately if Congress doesn't act.

That statement drew visible eye rolling from the NGA's Quam, who claimed when the ban expired for a year in the past, "nothing happened." Besides, he said, some states, such as Colorado, already have their own prohibitions on Internet access taxes.

"Companies may have to prepare, but they're not going to start collecting," he said. "We've been down this road before--when you have all parties agreeing there can be moratorium, it can go retroactive."

CNET News.com's Declan McCullagh contributed to this report