Logjam In the Senate Over Web Taxes

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November 10, 2003 (9:27 AM EST)

The renewal of the ban on Internet taxes, once considered to be a given in Congress, is suddenly mired in a logjam, as U. S. Senators who had previously served as governors in their home states are holding up the legislation that would extend the ban.

Led by Senators Lamar Alexander (R-Tenn.) and George Voinovich (R-Ohio), the legislation is increasingly complicated by a host of new issues, including the tax status of VoIP. States and local governments--already under budgetary pressure at home--generally want to tax as much Internet business as they can. And, under additional stress over the loss of telephone taxes due to the growth of Internet telephoning, the once-simple issue of Web tax is beginning to resemble the proverbial can of worms.

"Virtually all of us [Senators] are willing to keep state and local governments from taxing Internet access," said Alexander in a statement. "The second principle is we don't want unfunded federal mandates. . . .We want to make sure states don't lose the bulk of their telecommunications revenues."

On the other side of the debate are Senator Ron Wyden (D-Ore.) and George Allen (R-Va.), who say legislation they have sponsored seeks to clarify what should--or shouldn't--be taxed. Wyden has accused states of wanting to tax all Internet traffic including email. "You've got mail," he said, will become, "you've got taxes."

As the issue became polarized in recent days, the debating senators met over the weekend and are continuing to meet this week, in an effort to reach a workable compromise. The legislation expired Nov. 1. The Multistate Tax Commission, a lobbying organization, claims states will lose billions of dollars in tax revenue if the tax ban is continued.

A few states that began taxing Internet access providers before the initial ban was passed five years ago are lobbying to continue taxing. The states currently taxing Web access are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin.

Lurking behind the debate is the whole issue of Internet telephone taxation by states, which currently derive substantial revenues by taxing telephone service. However, a federal judge in Minnesota last month ruled that phoning on the Web-VoIP--was an Internet data service and, as such, could not be taxed by the state. Since the ruling--although it isn't likely to be the last word on the issue--regional telephone companies and assorted VoIP firms have rushed to expand their Web-telephoning business.

Several Senators have also said they want to clarify the definition of "Internet access" to make it clear exactly what should be taxed. "You could see billions and billions of dollars lost," said Senator Byron Dorgan (D-N. D.) in a statement. "Definitions are everything."