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Legislation would prevent federal Internet tax
By Grant Gross

A U.S. senator announced Monday he will soon introduce a bill that would prevent Congress from extending a long-standing telecommunications tax to Internet access.

Senator George Allen, a Virginia Republican, said legislation is needed after Congress' Joint Committee on Taxation in January suggested an expansion of a 3 percent federal excise tax (FET) on telecommunications to Internet traffic, including e-mail and data services. Allen plans to introduce his bill, which would exempt Internet access from the FET, early this week.

The FET, first enacted in 1898 to fund the Spanish-American War, raises about US$6 billion a year for the U.S. government. At points during the last 107 years, the tax has been eliminated, reinstated, and raised to 25 percent. Congress made the tax, which applies to local and long-distance calls, permanent in 1990.

"We won the Spanish-American War over 100 years ago," Allen said at a press conference. "This tax represents an unnecessary service tax on consumers."

The Joint Committee on Taxation in January presented three options for the FET, one being the proposal to tax all Internet traffic. A second option would extend the FET just to voice traffic over the Internet, with a third option redefining how long-distance calls are taxed, with no taxes on Internet data or voice.

In November, Congress passed the Internet Tax Nondiscrimination Act, which extended a moratorium on new Internet-only taxes passed by state and local governments. But that bill, also sponsored by Allen, didn't apply to the existing FET, Allen said. Allen's new bill wouldn't prohibit taxes on VOIP (voice over Internet Protocol) that would be addressed under a separate bill likely to be introduced later.

The January report from the Joint Committee on Taxation noted that the growth of wireless voice services and the Internet have created confusion about how the FET should be applied. "The present communications excise tax provisions were enacted before the development of most modern technology -- the growth of computers and new electronic means of communication," the report said. "The proliferation of wireless communications technology and the Internet, and in particular broadband access, has blurred the lines between 'data' and 'voice' and between the functions of transmission and application. Consequently, service providers have found it increasingly difficult to determine which services are taxable communications services and which are nontaxable information services."

Asked why a bill was necessary to prevent a tax on Internet access that does not yet exist, Allen said it was important to head the idea off before it gains momentum. In addition to the Joint Committee on Taxation proposal, the U.S. Internal Revenue Service last July asked for public comments about whether VOIP should be subject to telephone taxes.

"It's very important to put your flag in the ground and say, 'we're staking this territory -- this hill will stay tax free'," Allen said.

The Internet is an important factor in the growth of the U.S. economy, and it's important to encourage its growth, said Allen and other speakers at the press conference, organized by the Computing Technology Industry Association (CompTIA). A 3 percent tax on Internet services will make it harder for Internet services reseller CTintegrators, based in Clifton, Virginia, to market its services to small businesses "slicing every penny," said company president Tony Lachick.

"I try to make payroll every week," Lachick said. "It's a little harder when you start to add the taxes to that."

Representatives of the Progressive Policy Institute, a liberal think tank, and Americans for Tax Reform, a conservative policy group, both endorsed Allen's efforts to exempt Internet access from the FET. Grover Norquist, president of Americans for Tax Reform, called the FET a "dishonest" tax that isn't separated out from other telecommunications taxes on customers' telephone bills. He called on Congress to eliminate the FET, and Allen said he'd support that.

Robert Atkinson, vice president of the Progressive Policy Institute, disagreed with the elimination of the FET during the U.S. government's current budget deficit. But an additional tax on Internet access could slow the U.S. economy and discourage IT investors, he said.

"I think we're a long way from maturity in the industry," he said. "One of the things that's made the Internet attractive [to investors] is the light tax burden."

Posted April 12, 2005 03:44 PM |