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Politicians weigh renewal of Net access tax ban

CNet News | May 23 2007
Anne Broache

WASHINGTON--With only months left on a moratorium restricting state governments from taxing Internet access, the U.S. House of Representatives on Tuesday began a debate over whether the ban should be made permanent or allowed to lapse.

At issue is the scheduled expiration on November 1 of a law, initially enacted in 1998, that says local governments generally cannot tax Internet access, including DSL (digital subscriber line), cable modem and BlackBerry-type wireless transmission services. The law also prohibits governments from taxing items sold online in a different manner than those sold at brick-and-mortar stores, but it does not deal with sales taxes on online shopping .

That's the way it should remain, some politicians said at a brief hearing here convened by a House of Representatives panel on commercial and administrative law.

"If we could liken the Internet to a mall, a place where you can go in and purchase goods and services, and also liken it to a library, a place where you can go and pull a book, pull a resource, and obtain some information, why would we tax a person upon entering a mall or why would we tax a person upon entering the library?" asked Rep. Hank Johnson, a Democrat from Georgia.

Industries that provide Internet access services have long backed making the ban permanent, and they already enjoy support from some members of Congress. In the House, Rep. Anna Eshoo, a California Democrat, has introduced such a measure , and senators have made similar moves .

But previous attempts at renewing the ban for more than two to four years have failed, in part because of resistance from state and local government lobby groups. State government representatives caution against making the moratorium permanent, saying it would deprive states indefinitely of vital revenue sources and that its original purpose--boosting the nascent Internet to commercial viability--has essentially been accomplished.

A 'slippery slope'
"If a moratorium is made permanent, there is a slippery slope where other industries will seek their own preemptions of state laws," said David Quam, director of federal relations for the National Governors Association.

The NGA supports the idea of extending the ban in a limited sense and for a defined time period, he added. He said reports by government auditors and the University of Tennessee have shown no statistical correlation between levels of broadband penetration and the existence of Internet access taxes.

Rep. Jim Jordan, an Ohio Republican and one of 66 House members who co-sponsored the permanent ban proposal, suggested he wasn't swayed by that argument. "Taxes always impact everything else in our economy," he said. "I would assume they've had a major impact in this area as well."

As a rule, economists dislike taxes that could discourage investment, but taxes that could hinder build-out of the Internet are especially problematic, argued Scott Mackey, an economist and partner at the law firm Kimbell Sherman Ellis. He spoke on behalf of a coalition of Internet service providers, "backbone" providers and application and content companies that support a permanent extension of the tax ban.

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"A permanent moratorium will send a strong, pro-investment signal to those entrepreneurs that are looking to improve communications and commerce over the Internet," he told the politicians.

A U.S. Senate committee is scheduled to weigh the issue at its own hearing scheduled for Wednesday.

A separate issue on one politician's mind was what to do about the collection of sales taxes on the Internet. State governments have long griped that they are losing revenue to booming e-commerce businesses that aren't required to collect taxes from customers in states where the businesses don't have a physical presence. Rep. Bill Delahunt, a Democrat from Massachusetts, said he was planning to try again at enacting a bill designed to address those concerns.

As for the Net tax ban, he said, "my own position is we ought to have a temporary moratorium until we finally resolve the issue of how the states are going to support public services with an eroding tax base predicated on the growth of e-commerce."

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