Senate extends Internet tax moratorium

After months of debate, the U.S. Senate has extended a moratorium on Internet access taxes, but it stopped short of permanently extending the ban on taxes specific to the Internet, which the U.S. House of Representatives did in September.

The Senate voted 93-3 on Thursday to extend the moratorium, which was passed in 1998 and expired in November, for another four years. The passage came about as part of a compromise between supporters and a group of senators who questioned how a permanent ban would affect state and local budgets. The senators objecting to the bill, mostly former governors and mayors, also questioned whether the language in the House version of the bill was broad enough to prohibit states from taxing voice-over-Internet Protocol (VoIP) services as major telephone carriers begin to shift more of their traffic to the Internet.

Opponents of the Internet Tax Non-discrimination Act, led by Sen. Lamar Alexander (R-Tenn.), estimated that the loss of telecommunications taxes could cost states up to $18 billion a year. But substitute legislation offered by Sen. John McCain (R-Ariz.) changed the language of the bill to exclude VoIP from the tax moratorium.

The Senate debated the bill in December and again for most of this week before working out the McCain compromise. Two energy-bill amendments were added to the bill but rejected.

In addition to the four-year moratorium, the Senate version of the bill allows a handful of states that began taxing Internet access before the 1998 moratorium to continue levying those taxes until Nov. 1, 2007, the same date as the moratorium expires. The McCain bill also allows 17 states that now tax Digital Subscriber Lines (DSL) to continue those taxes until November 2005, which the House bill didn't allow.

Sen. Dianne Feinstein (D-Calif.) offered an amendment to extend the grandfather clause for DSL taxes until November 2007, but senators voted 59-37 to reject her amendment. Internet companies would benefit, while states and local governments that tax DSL will lose millions of dollars in the two years between the McCain grandfather clause and her DSL proposal, Feinstein said.

"I can't understand why these [Internet] companies can't wait four years before socking it to the cities," Feinstein said during Senate floor debate.

McCain, chairman of the Senate Committee on Commerce, Science and Transportation, objected to Feinstein's amendment, saying states that approved DSL taxes after the 1998 moratorium were circumventing the original intent of the moratorium. "I'd like to be clear that a tax on DSL is a tax on Internet access," he said.

Alexander and other opponents of the original bill had sought a shorter moratorium but gave in after the McCain amendment addressed VOIP taxes and other concerns they had.

The legislation, which will now have to be reconciled with the House's permanent tax ban, would prohibit state and local governments from levying Internet-only taxes such as e-mail taxes and bandwidth taxes. President Bush has said he supports an Internet tax moratorium; he has to sign the bill before it becomes law.

Supporters of the Internet tax ban say the moratorium is an important way to encourage the growth of the Internet in the U.S. The moratorium doesn't specifically prohibit states from collecting sales taxes from e-commerce Web sites, but it does prohibit Internet-specific taxes. Currently, a U.S. Supreme Court ruling prohibits states from collecting sales taxes on out-of-state transactions such as catalog and e-commerce sales.

The Senate's passage of the bill will "ensure the Internet is healthy and vibrant for the future," said Sen. Ron Wyden (D-Ore.), sponsor of the original Internet Tax Non-discrimination Act.

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