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October 31, 2007

Internet Free From Taxation For 7 More Years

by Brad Warbiany

God help us if Hillary is elected…

Congress approves Internet-tax moratorium

The House unanimously approved a seven-year extension of a moratorium on Internet-access taxes, which the Senate passed last week. The move cleared the way for President Bush to sign it before the current ban expires Thursday.

For consumers, the legislation largely maintains the status quo: No Internet-access taxes except in the nine states that were grandfathered when the ban was first put in place in 1998. California is not among them.

The legislation applies only to Internet-access taxes, not to sales taxes for online purchases. But it addresses a concern by many lawmakers, technology companies and Internet-service providers that consumers could see the same itemized taxes on their Net-access bills that now appear on their phone and TV cable bills. A monthly phone bill can include as much as $10 in taxes.

“This legislation will help keep the cost of Internet access down so that all individuals can continue to use the great informational tool that is the Internet,” Rep. Lamar Smith (R-Texas) said. He and other lawmakers said the legislation would give telecommunications companies the certainty they needed to continue investing in the infrastructure to extend high-speed Internet access throughout the country.

I suppose it’s needless to say that I’m happy about this development. It seems that the proponents of the moratorium were asking for a permanent ban, but even a 7 year extension is a victory, as the longest extension they’d previously secured was 4 years.

However, I saw one interesting piece of the puzzle here, that was, to reuse a word, quite puzzling:

For the young technology industry, the lengthy extension is a legislative victory that shows its clout has grown in Washington during the last decade. Still, the industry continues to have trouble when facing a formidable lobbying opponent.

In this case, it was state and local governments, which were concerned that they could lose the ability to tax phone and TV services as more consumers get them delivered over the Internet. Governors and local officials, who have strong ties to many members of Congress, successfully derailed the push for a permanent ban and got the definition of Internet access changed to make clear that phone and TV services delivered online are taxable. Many state and local governments depend on money from taxing those services.

Very interesting. One can likely make the argument was that the previous taxes on phone service and television lines were related in some way to the government granting monopolies to the providers of those services, and/or related to the infrastructure involved. I’m not sure of the whole history of how telephone and television service taxes arose, but I can’t see them being sold to the public as if using a telephone or watching television were– by themselves– taxable activities.

But that apparently is the argument that must be made to support such an exemption. The telephone service and television service, when provided through the internet, is clearly a component of internet access. To create this exemption, the Governors & states must be arguing that talking on the telephone or watching television– by themselves– are taxable activities regardless of the media over which the signals are delivered.

Let that sink in for a minute. I think the initial concern was the loss of an existing revenue stream to state governments. But in the long term, what are the implications of such an exemption?

Groups such as the National Governors Assn. and the California Assn. of Counties said they knew of no governments planning to tax Internet access, but they argued that a permanent ban would make it difficult to change the definition in the future to avoid exempting other taxable services.

In a change pushed by Sen. Ron Wyden (D-Ore.), the legislation also clarifies that services related to Internet access, such as instant messaging, e-mail and personal online storage, are not taxable.

Aha! Clearly this is the camel’s nose in the tent, a way to create the precedence for exemption of services and open the door to taxing them in the future. It may be such that “internet service” in the future remains tax-free, but I highly doubt that the services provided over the internet will remain free from taxation.

The internet tax is highly unpopular. After all, this is a service that we’ve all been enjoying tax-free for years, and for governments to all of a sudden offer to increase the price of the service through taxation is one that doesn’t go over too well in American homes and offices. But as long as something remains tax-free, politicians can’t sleep at night, and they’re constantly dreaming up ways to get their claws in. Call this a success in that the moratorium was extended, but keep a wary eye on where things go from here, or you’ll soon find that your “tax-free internet service” seems to involve sending a lot of money to your state capitol and to Washington DC.

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  • http://www.orderhotlunch.com Jeff Molby

    Good catch, Brad. Thanks.

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