Subcommittee Leaders Back Permanent Net Tax Ban

The sides still dispute treatment of “grandfathered” states that kept their pre-1998 taxes on access after the ban took effect. Legislators apparently are divided, too. A bill (HR-743) by Rep. Anna Eshoo, D-Calif., simply would make the moratorium permanent without affecting grandfathered states. But those states would be barred from imposing taxes under HR-1077 by Rep. John Campbell, R-Calif. The states have had nearly a decade to “wean” themselves from that tax revenue and have no excuse to keep taxing, said Ranking Member Chris Cannon, R-Utah.

“I think when you look at the data across the board, we were spot on” to ban access taxes, Eshoo told the subcommittee. Her bill would ban only an “entrance fee” to the Internet, she said. After the moratorium took effect, Internet use more than doubled, the Silicon Valley member said. “I wish the states had come up with a standard” in the late 1990s to stop thousands of jurisdictions from levying their own taxes, she said. “We'd be talking about a different situation,” but at least now they're resolving differences over “jargon and terminology” on their own, Eshoo said.

“The Internet has become largely free… and is going to become freer” as technology and business models advance, said Campbell. In his district, Anaheim is building a free Wi-Fi network, with revenue possible without subscriptions because “there’s a million people looking” at online ad-supported content, he said. Congress long ago rejected taxes on e-mail or on all Internet use, and Campbell’s bill tells states only not to be “discriminatory” by taxing online goods and services at rates higher than applied to their brick-and-mortar counterparts, he said.

Cannon asked whether VoIP and other new ways to deliver traditional service could be taxed under the bills. “As long as you're not taxing a bit and a byte” themselves, but the applications around them, taxation is fine, Campbell said. Cannon said he fears that the proposal to tax phone numbers to pay into the Universal Service Fund may be a loophole for Internet access taxes.

Some states have ignored congressional intent as shown in the moratorium’s 2004 renewal, by taxing Internet transport facilities, the “backbone,” said Meredith Garwood, Time Warner Cable vice president for tax policy. Taxation spurred class-action suits against telcos in those states, she said. None of the states were among those grandfathered, and they “put pressure on other states to sidestep the moratorium” themselves. The key point is that prices for subscribers go up whether connections or facilities are taxed, Garwood said.

“I hate to upset the apple cart,” but state and local governments want a “precise” definition of access, not a list of exceptions such as VoIP’s 2004 exclusion from the ban, said David Quam, director of federal relations of the National Governors Association. Otherwise telcos can evade taxes on services riding on the Internet but not essential to access, he said. “The fear is the next VoIP might be Internet Protocol television,” which could be made tax-free if bundled with Internet access service, he said.

Rep. Steve Cohen, D-Tenn., wanted to add basic cable TV to the access ban, because both bring news and information to consumers and broadcast TV was never taxed. “Is there any tax at all that the governors don’t like?” Quam replied that “raising taxes is just as difficult for governors as congressmen,” but states need freedom to run their own revenue systems. Noting that he was a state senator two decades, Cohen said the regrettable rule of thumb was “don’t tax me, don’t tax thee, tax that guy behind that tree,” leveling regressive taxes on the most vulnerable populations. “If you were progressive, as I am,” state officials “would be forced to have a more humane and progressive tax system.” Voters can deal with policies they don’t like in elections, Quam said. And messing with cable franchise fees could mean “running those governments into a cliff.”

Industry groups cheered the hearing and asked for further action. The House bills will help ensure that “all American wireless consumers have affordable access to the Internet,” CTIA said. The group said it’s open-minded on whether states should remain grandfathered and what the definition of access should include, and asked for a markup next week. Congress “must act now to bring stability and certainty to the Internet services market,” USTelecom President Walter McCormick said. Using language from net neutrality advocates, Monica McGuire, senior policy director of taxation for the National Association of Manufacturers, said access taxes amount to a “high-priced toll road” that will hurt manufacturers, the largest sector for business-to- business e-commerce. HR-743 must be passed by the subcommittee before the August recess, she said. Tax-free access “isn’t a luxury, but a necessity, for manufacturers.”