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Government study: VoIP, video can be taxed

Federal auditors review the tax laws and say state and local governments have leeway to levy Net taxes.

State and local governments may be able to tax certain aspects of Internet use under an existing federal law designed to ban such fees, government auditors said this week.

The comments came in a new Government Accountability Office study (click here for PDF) commissioned by Congress to examine a law known as the Internet Tax Freedom Act.

First passed in 1998 and renewed after some debate in 2004, the 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."

Services like voice over Internet Protocol (VoIP), traditional telephone service and video offerings by Internet service providers remain fair game for taxation under the law, the GAO said. The scope of the moratorium has nothing to do with sales taxes for Internet purchases.

At issue is the auditors' finding that the tax ban doesn't apply to "acquired services"--in short, the actual wires, cables, fibers and other hardware used to carry Internet traffic to customers. That means an Internet service provider that leases fiber from a telecommunications company for its network could theoretically be subject to taxes during that "wholesale" transaction.

"We acknowledge that others have different views about the scope of the moratorium," the report said. "Congress could, of course, deal with this issue by amending the statute to explicitly address the tax status of acquired services."

The report drew criticism from Sen. Ron Wyden, an Oregon Democrat, and Sen. George Allen, a Virginia Republican. Both were heavily involved in drafting the law and said they intended it to provide broader relief.

"The plain language of the statute, as well as the relevant legislative history, reflect a clear legislative intent to ban Internet access taxes at both the retail and wholesale level," said Allen, who, along with Wyden and seven others, has proposed a bill that would make the Internet access tax moratorium permanent. For now, it is set to expire on Nov. 1, 2007.

In a joint letter, representatives from about a dozen telecommunications companies and Internet service providers, including BellSouth, America Online, Comcast and Verizon Communications, also expressed reservations about the GAO's interpretation, saying that senators' remarks during floor debates and language in the final law itself indicated a contrary position. They said they worried that allowing such a practice could promote discriminatory practices among those in the business of providing the infrastructure for Net access.

The practical implications of the GAO's opinion are less clear. Of the eight states surveyed for the report, California, North Dakota, Texas and Virginia said they aren't currently collecting taxes on "acquired services" anyway, and Kansas, Mississippi, Ohio and Rhode Island stopped collecting such taxes as of Nov. 1, 2005.