Subcommittee Leaders Back Permanent Net Tax Ban

The sides still disagree about leaving alone the “grandfather” states, which 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., would simply make the moratorium permanent without affecting the grandfather 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 the 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, “because we'd be talking about a different situation,” but at least now they're resolving differences over “jargon and terminology” on their own.

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

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

Rep. Zoe Lofgren, D-Calif., also from Silicon Valley, said she’s open to various definitions of access, but “the broadest definition of access should be our guide,” to support the free flow of information. “I don’t think there’s a set recipe for this,” Eshoo said. Analyzed carefully, the House Democrats’ innovation agenda actually supports the moratorium, Lofgren said, and Eshoo seconded that. “It sounds like everybody’s in agreement, mostly,” on the moratorium itself, and “perhaps” on a permanent ban, said full Committee Chairman John Conyers, D-Mich.

Protecting the ‘Safety Net’ and Defining Terms

Some states have ignored congressional intent as displayed in the moratorium’s 2004 renewal, by taxing Internet transport facilities - the “backbone,” said Meredith Garwood, Time Warner Cable vice president for tax policy. The taxation led to class-action lawsuits 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 the connection or the 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 exclusion from the ban in 2004, said David Quam, director of federal relations of the National Governors Association. Otherwise telcos can evade taxes on services that ride on the Internet but aren’t 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.

The good news is that state and industry officials are near agreement on definitions that exclude backbone taxation and prevent bundling to avoid taxation, Quam said. But his group supports a four-year moratorium extension regardless, so Congress can “return to the issue and make sure we got it right” as technology changes. The grandfather clause is an “important safety net” for states and their most important authority, and through which they get $150 million in revenue each year, Quam said. S-1453 contains those provisions and also shelters “incidental” services like e-mail and instant messaging, so NGA supports it over the House bills, he said.

Cannon said he’s concerned about a “chilling of the larger environment” through Internet taxation. Brick-and-mortar companies in Utah are expanding business nationally through e-commerce, he said. The “bricks and clicks” phenomenon has been documented, Quam said, but federal and university studies have found no effect on broadband penetration from access taxes. “I don’t think that’s responsive to the question,” Cannon said, reiterating access taxation’s effect on e-commerce.

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.”

The revenue loss from an access ban pales in comparison to the estimated $22 billion to $34 billion lost each year from taxes’ not being levied on e-commerce transactions, said Rep. William Delahunt, D-Mass., citing a University of Tennessee study. He said subcommittee Chairman Linda Sanchez, D-Calif., promised him a hearing on his bill to follow through on the Streamlined Sales and Use Tax Agreement, a multistate effort to standardize e-commerce taxation (WID July 20 p6). Mom-and-pop shops are an “integral part of the fabric of the community” but can’t compete with tax-free online stores. The Don’t Tax Our Web coalition, which Garwood was also representing, disagrees on whether the sales tax agreement is a good idea, she said. Its main concern is the Nov. 1 deadline for renewing the access tax moratorium. “We ought not kill the golden goose” through e-commerce taxation, Cannon said, pointing to booming state revenue since 2004.

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.”