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The Web: Access taxes in the offing?

By GENE J. KOPROWSKI, UPI Technology News   |   March 24, 2004 at 1:00 PM   |   Comments

A weekly UPI series examining the global telecommunications phenomenon known as the World Wide Web.

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CHICAGO, March 24 (UPI) -- Is there a tollbooth in prospect for the information super-highway? That is what worries anti-tax activists and e-commerce advocates.

The legislative moratorium that had kept the Internet a tax-free zone expired last fall. Now, some six months later, Congress has not yet passed a new law, either to extend the moratorium or to allow taxation of Web-based commerce.

Still, the Senate is being pressed by state governments to end the tax moratorium.

"They will start loading down the Internet with taxes, if the door is left open," said Grover Norquist, president for Americans for Tax Reform, a grassroots lobbying group in Washington, D.C.

"There is a great deal of gnashing of teeth for 'magic money.' The states have an exaggerated sense of the resources they can generate with these taxes," Norquist said in a teleconference with United Press International and other journalists.

Many state and local lawmakers, desperate for cash to fund programs started during the booming economic times of the 1990s, are looking to the Web as a potential revenue source -- and are worried about losing existing revenues if millions of consumers start using the Internet to place telephone calls.

The impact of such a prospect would be major, because consumers no doubt would prefer to make calls over a medium free from the telecommunications and excise taxes that currently appear on phone bills.

"Telecommunications taxation is one of the major sources of revenue for state and local governments," Jon Abolins, vice president of government affairs at Taxware of Salem, Mass., an online tax payment provider, told UPI.

Another concern to the states involves new technologies, such as high-speed digital subscriber lines -- also known as DSLs -- and cable modems, which enable Internet providers to allow their customers to be both online and on the phone simultaneously. The former requires only one dedicated line, thereby reducing tax revenues. The latter skips phone lines altogether.

"States are concerned that their tax base may be completely eroded," Susan Haffield, a partner with PricewaterhouseCoopers, a consulting firm in Minneapolis, told UPI.

The states' argument has acquired some powerful backers in Congress.

"If Congress wants to give a big tax subsidy to the high-speed Internet access business, Congress should pay for it and not send the bill to states," Senator Lamar Alexander, R-Tenn., said in a statement in response to a query by UPI.

Norquist and his allies want to ensure DSLs and cable modems are included in the technological definition of Internet access in any bill passed by the Senate this spring. The legal definition of Internet access could have huge tax consequences for the states.

Without a permanent, statutory definition of Internet access that includes wiggle room for newer, emerging technologies, Congress "could leave the door open to letting localities tax the Internet in the future," Norquist said. "The reason we want a ban on discriminatory taxes on the Internet is that we do not want to have every town, city, or water district, putting taxes on electrons that run through their district."

Permitting these states and localities to enact a matrix of new taxes would damage economic growth and "increase the digital divide between Americans who have Internet access and those who don't," said John Berthoud, president of the National Taxpayers Union, another Washington advocacy group, during a teleconference with UPI.

A study by the NTU indicates the average American already pays $2400 in so-called hidden taxes per year on services, including communications services. "If the prices go up, the people blame the companies," Berthoud said. "There is no accountability to the public by the politicians."

Norquist took direct issue with Alexander's position.

"Alexander still thinks he's a governor," said Norquist, referring to the senator's earlier career as governor of Tennessee. "He thinks his job is to make sure it is easy for governors to tax things in their states. He has George Wallace's understanding of state's rights, rather than Ronald Reagan's. He thinks governors should be allowed to beat up anybody they want to, and no one should complain. Reagan thought there should be competition among the states, and that states shouldn't tax in a discriminatory method."

Alexander responded that voting for his alternative proposal -- a temporary extension of the Internet moratorium, rather than a permanent one -- was a "conservative position."

Back in the boom days of the late 1990s, Congress passed the first Internet tax moratorium, crafted by Sen. Ron Wyden, D-Ore., attorney J. "Pat" Powers, with the law firm of Baker & McKenzie in Palo Alto, Calif., told UPI.

That legislation has kept Internet access tax-free for the better part of a decade.

Powers sees state governments "getting more active" on taxation issues, especially in the aftermath of the economic slowdown, which ended eight quarters ago. The slowdown forced many states to rethink programs launched in the 1990s, when they were flush with revenues from the era of economic prosperity.

"State and local tax officials are salivating at the prospect of sinking their fangs into the Internet, one of the last remaining outlets of tax freedom in this country," Adam Thierer, director of telecommunications studies at the Cato Institute, a libertarian think tank in Washington, told UPI.

No one knows for sure which type of bill will emerge -- a permanent moratorium or a temporary one -- or whether it will all Internet access tax-free.

The White House backs a permanent ban on taxes, and the issue might become more politicized during this year's election campaign involving President George W. Bush and, presumably, Sen. John F. Kerry, D-Mass.

"I'm not sure how John Kerry would vote on this -- he'd probably be both for and against it," said Norquist, in response to a question by UPI.

One leading Washington tax lawyer, noting that most tax bills are temporary -- for example, the Bush tax cuts -- predicts some sort of compromise will emerge in the end, and elements of the permanent ban and temporary ban will be cobbled together.

"I think we're going to get a compromise that will be a two-year long extension," Ken Silverberg, an e-commerce specialist with Nixon Peabody in Washington, told UPI.

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Gene Koprowski covers telecommunications issues for UPI Science News. E-mail sciencemail@upi.com

© 2004 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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