A Permanent Ban On Internet Taxes?

WASHINGTON, D.C. -

By all accounts, it's fairly safe to say that Congress is not going to allow state and local taxes on Internet service, at least for the next several years.

A bill proposed by Sens. Tom Carper, D-Del., Lamar Alexander, R-Tenn., and others would extend the current tax ban until at least 2011. Other bills in both the House of Representatives and Senate, including a measure sponsored by Sen. Ron Wyden, D-Ore., would make the moratorium permanent. Previously, there had been some speculation that Congress would let the current ban expire on Nov. 1, but with so many bills in play, that no longer seems to be the case.

However, when lawmakers return from their summer recess next month, Capitol Hill will be abuzz with a debate over whether to keep the Web indefinitely tax free--and it boils down to a good old-fashioned American debate over states' rights.

Traditionally, Congress has steered away from interfering with the ability of states and localities to tax their constituents. One notable exception was the 1998 Internet Tax Freedom Act, which prevented localities from imposing new taxes on Internet service providers. (Several states already had Web taxes in place, and Congress left them alone.) Since then, the law has been renewed several times.

But organizations such as the National Governors Association (NGA) and the U.S. Conference of Mayors are worried that the changing nature of the Internet prevents states and municipalities from collecting revenue that's due to them.

"The original moratorium was supposed to be temporary," says David Quam, director of federal relations for the NGA. "Any time that Washington interferes with state and local revenues, it harms the state's ability to control its own destiny."

The groups are especially concerned about the definition of "Internet access," which determines whether a technology can be taxed locally. Telecommunications services have been subject to taxes; other services, like e-mail, remain tax free. But NGA believes that companies have found a loophole in the law by bundling together their services and then offering them over the Net in order to avoid taxes.    [Read more]