ALEXANDER-CARPER BILL WOULD EXTEND INTERNET TAX MORATORIUM 2 YEARS

“The Internet Access Tax Ban Extension and Improvement Act” proposed by Alexander and Carper would: (1) Extend the current moratorium for 2 years, including a ban on discriminatory Internet taxes and Internet access taxes. (2) Ensure DSL transmissions directly to consumers would be explicitly excluded from taxation by states and municipalities. However, DSL transfers on the Internet backbone and backhaul transfers would be subject to taxation. That was the language in an Alexander-Carper amendment to S- 150 that the senators intended to introduce during the Senate floor debate, but Senate Majority Leader Frist (R-Tenn.) declined to hold a vote when the level of disagreement became clear. Weeks of negotiations last fall failed to result in a compromise.

The Alexander-Carper bill also would preserve grandfathering for the 10 states and D.C. that had Internet taxes before the Oct. 1998 adoption of the first moratorium. Allen’s bill would eliminate grandfathering after 3 years, and an S-150 opponent told us that extending the grandfathering for 2 years wasn’t any different than Allen’s bill. The House bill would eliminate the grandfathering immediately. The preservation of the pre-Oct. 1998 taxes is in Sec. 1104(a), and Sec. 1104(b) would grandfather all states, such as Tex., currently taxing DSL. We're told that that addition of new states under the grandfathering provision would increase to 27 the number of states permitted some sort of Internet taxation otherwise banned under the moratorium.

Some of the provisions of the Alexander-Carper bill mirror language in a manager’s amendment added to S-150 by Allen. They include Sec. 1106, which says DSL is subject to taxation when part of a telecom service if the access provider is unable to break out the DSL charges separately. Sec. 1107, also reflected in the manager’s amendment, ensures that nothing in the bill interferes with the collection of Universal Service Fund fees or E-911 fees. NARUC is neutral on S-150 and hasn’t yet examined the Alexander-Carper bill, Legislative Dir. Brian Adkins told us, but NARUC was supportive of Allen’s manager’s amendment.

The moratorium on discriminatory Internet taxes and access taxes expired Nov. 1. Allen’s bill, like HR-49 by Rep. Cox (R-Cal.) that passed the House, would make the moratorium permanent. Alexander and Carper plan a news conference today (Wed.) to announce the legislation, joined by Sens. Feinstein (D-Cal.) and Hutchison (R-Tex.). Hutchison is new to the debate, but her state is one of the 10 grandfathered under the current moratorium and is one of the states that taxes DSL. Absent from the news conference will be prominent S-150 opponent Sen. Voinovich (R-O.). His spokeswoman hadn’t commented by our deadline. Senate Commerce Committee ranking Democrat Hollings (S.C.) is expected to be a co-sponsor.

“This is a bill that puts taxes on consumers,” said Frank Cavaliere, Allen’s deputy legislative dir. “Their intentions are clear -- they want to apply a telephone tax base on the Internet.” Sen. Wyden (D-Ore.) authored the original moratorium bill and strongly supports S-150. His spokeswoman told us the Alexander-Carper bill “is not so much a sensible solution [but rather] a collection of loopholes to be codified into law.”

The crux of the disagreement between the 2 camps has been the definition of Internet access. Last fall, Alexander said he would be willing to give up the grandfathering from 1998 if his language on access were adopted. Allen and Wyden were willing to accept a temporary extension of the moratorium if their access language was adopted. S-150 foes argue that the bill’s access language, added as an amendment in the Senate Commerce Committee, would shut off legitimate tax avenues for states and municipalities. S-150 proponents say that they want technological neutrality and that it isn’t fair to have portions of DSL subject to taxation when other access technologies aren’t taxed.

The legislative summary of the Alexander-Carper bill argues that S-150 doesn’t simply extend the existing moratorium but “dramatically expands the existing moratorium to provide a huge tax giveaway to the telecommunications industry, at the expense of state and local taxpayers.” The authors say the moratorium shouldn’t be made permanent because “many technologies will be migrating to the Internet -- including phone service, music and movies.”

A 2-year extension would “give Congress the opportunity to assess emerging trends in technology,” Alexander and Carper contend. Several of their supporters we spoke with Tues. raised the issue of Voice-over-IP (VoIP) service, which could end up being exempt from taxation under the new language in S-150. The same issue was raised at a House Judiciary Commercial and Administrative Law Subcommittee hearing last year when new language identical to the S-150 language was added to HR-49. However, one S-150 supporter told us that VoIP wasn’t affected by S-150 because VoIP was a service provided over the Internet, not an access service to the Internet.

Alexander and Carper also address concerns by the Congressional Budget Office (CBO) that it can’t estimate the losses to states and localities under S-150 other than to say “we believe they could grow to be large.” In their legislative summary, Alexander and Carper say that their bill “sticks closely to established rules and definitions,” although it isn’t clear whether they have submitted the draft language to CBO to assess its impact on state revenue. They also took issue with a criticism by supporters of S-150 insisting that “the usual political rhetoric aside, the Alexander-Carper bill does not allow for taxes on e-mail or Internet access” (underline in original).