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Taxing Questions For Congress
by David Hatch
For months, a coalition of communications companies and online retailers has sought a permanent continuation of the federal ban on taxing Internet access. But behind the scenes, the Don't Tax Our Web coalition cut a deal with House Judiciary Committee Chairman John Conyers to back legislation mandating a temporary extension.
The coalition blinked when Conyers, D-Mich., indicated that four years was all they would get, industry sources said. The measure, H.R. 3678, was unanimously approved by the panel Oct. 10 and could reach the House floor this week.
The developments are the latest twist in a legislative battle that pits technology companies worried about higher taxes against states and localities concerned about losing the authority to tax burgeoning services. The moratorium, adopted in 1998 and temporarily extended in 2001 and 2004, will expire Nov. 1 unless Congress acts.
The Push For A Permanent Ban
Democratic leaders currently are seeking to consider the Conyers bill under expedited procedures that would limit debate and prevent amendments but require a two-third's vote for passage.
Virginia Republican Bob Goodlatte, who co-chairs the Congressional Internet Caucus and supports a permanent ban, joined with GOP leaders and other Republicans on Friday in signing a letter to House Speaker Nancy Pelosi, D-Calif., requesting that amendments be permitted. "We're not going to be afforded that opportunity if it's brought up on suspension of the rules," he said.
Goodlatte opposes a temporary remedy because "that kind of uncertainty dramatically reduces the amount of investments that are made by these companies." Supporters of the ban also note the irony of Congress fostering high-speed Internet deployment in rural areas through subsidies while potentially raising costs with new taxes on accessing such services.
But states and localities want to retain the right to impose taxes down the road. The National Governors Association endorses Senate legislation introduced by Tom Carper, D-Del., and backed by Republicans Lamar Alexander of Tennessee and George Voinovich of Ohio, all former governors, that would grant a four-year extension. The measure, S. 1453, also would allow Internet access taxes in about seven states whose statutes pre-date the 1998 moratorium.
"This is a very rapidly changing part of the economy," David Quam, director of federal relations at the association, said in an interview. "Asking Congress to return to this bill every four years is not unreasonable. In this case, Congress is stepping on state and local toes."
The National League of Cities told members in a recent advisory that while municipalities "generally oppose federal interference with their ability to develop and manage their revenue systems," they support a temporary extension over a durable one.
In an Oct. 2 letter to Conyers, Don't Tax Our Web endorsed his approach while reiterating that it prefers a permanent fix. Members include Amazon.com, AT&T, the wireless association CTIA, Comcast, eBay, Google, the U.S. Telecom Association, Verizon Communications and Yahoo. The organization took the stance because it does not want the ban to lapse, Executive Director Broderick Johnson explained. It strongly backs specific provisions in the Conyers bill, including language to keep states from taxing wholesale purchases of Internet access by telecom carriers.
A second House measure, H.R. 743, would make the exemption permanent. Despite attracting 238 co-sponsors, sources said it is unlikely to move. "The Democratic leadership's refusal to bring this bill to the floor not only thwarts the will of a majority in the House, but it also is a clear sign that Democrats are not serious about keeping the Internet tax-free," House Minority Leader John Boehner, R-Ohio, complained in a statement.
The Looming Senate Showdown
Sen. John Sununu, R-N.H., is leading the charge in the upper chamber for a permanent ban with legislation he is seeking to move directly to the floor. But he conceded in an interview that one lawmaker's objection would derail the plan.
"I think if we were to have an open process, we would have the votes for a permanent ban," the senator said. "If [Democrats] are successful in preventing open consideration, and preventing any amendments or alternatives from ever being offered on the House or Senate floor, then sure, it's going to be much tougher."
Last month, the Senate Commerce Committee was poised to vote on an amended version of the Carper bill that contained a six-year timeframe. But Chairman Daniel Inouye, D-Hawaii, scrapped the vote due to opposition from Republicans who were planning to offer an amendment mandating permanency.
Sources expect Inouye to take a second shot at passing a revised bill. Inouye's office did not return calls.
FCC Chairman Kevin Martin, a Republican, told reporters last week that he wants the moratorium extended as long as possible. "The number one thing the government could do to try to facilitate and encourage the deployment of broadband infrastructure is to make sure that we're not taxing it," he said, adding that such fees deter investment.
A wildcard is the Senate Finance Committee, whose members include Ron Wyden, D-Ore., the author of a bill, S. 156, to make the ban permanent. Congressional and industry sources said the panel, headed by Max Baucus, D-Mont., might vote on its own Internet tax bill in the next week or two. "Chairman Baucus has not announced any plans on this particular issue," an aide said.
Details are murky, but a congressional source said a Finance bill could extend the moratorium by six to a dozen years. Language to leave some Internet services vulnerable to taxes, a move supported by telephone and cable companies, is unlikely to be included, the source said.
"I would suspect there would eventually be some sort of compromise extending the moratorium for at least four years, or maybe six or eight," said David Kaut, a telecommunications analyst at the investment firm Stifel Nicolaus.
An Opportunity Not To Be Missed
While Congress is widely expected to continue the ban, Kaut cautioned that lawmakers might miss the Nov. 1 deadline. Congress let the prohibition lapse by more than a year after it expired in October 2003.
"It would be very disappointing, knowing that we introduced legislation at the beginning of the session ... [if] we failed to bring up legislation anywhere in the Senate," Sununu said.
But Kaut noted that if the moratorium lapses again, Congress would not look favorably on states enacting new taxes during the window before lawmakers can act. He warned that such moves could spark a "congressional backlash."
Communications lobbyists emphasized the importance of legislative action. "It's very hard on our companies," complained Danielle Coffey, a lawyer and lobbyist at TIA, which represents equipment manufacturers like Cisco Systems, Intel and Microsoft. "People don't want to spend when they don't know what's going to happen in the marketplace."
Kara Calvert, director of government relations at the Information Technology Industry Council, agreed, noting that ITI member companies plan their business cycles over four-year periods. A longer extension would provide more certainty, though "permanence is always better than a short-term fix," she said.
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