Extension forecast for Internet tax ban

As the deadline approaches for the Internet tax moratorium, many believe Congress will approve an extension.

By Keisha Lamothe, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- If the Senate follows the House's lead - and it's likely it will - many Internet users will benefit from another four years of tax-free Web surfing.

Late Tuesday, the House passed its own version of the extension on the Internet tax moratorium, which is also known as the Internet Tax Freedom Act. It was passed in 1998 and bans state and local taxes for accessing the Internet. But it does not prohibit a sales tax on goods brought over the Web.

The act has been extended twice and is set to expire Nov. 1. Congress originally approved the moratorium to ensure that Internet access is not subject to "multiple and discriminatory taxes."

"The moratorium helps create a climate to go out and invest in the Internet without hurting the demand for products," said Scott Mackey, partner at the government relations and consulting firm Kimbell Sherman Ellis in Vermont. Mackey said that the moratorium was created to ease concerns of high utilities prices when the Internet was an emerging industry.

Some lawmakers in both the House and the Senate have suggested a permanent ban on these taxes, but other legislators don't want to go that far. Critics of an extension say that it leaves the door open to possible taxes down the road.

"I think that the Senate will likely do the same [as the House], and it will be extended for another four years," said Rob Atkinson, president of the Information Technology and Innovation Foundation. "I think there is contention and the way to deal with that is to compromise."

"You don't always get what you want," Mackey said. "It's the nature of political compromise."

In the unlikely event that neither an extension or a permanent ban is supported by the Senate, and the moratorium was not extended, Internet users could be faced with an unwelcome surprise.

Subscribers could see multiple state and local tax charges added on to their Internet bills. With more fees for customers to pay, broadband providers could also see a drop in demand, said Ray Keating, chief economist for the Small Business & Entrepreneurship Council.

"You certainly could have a lot of startups, where the first year or two the owner doesn't take a salary, and imposing taxes could be the straw that breaks the camel's back," he said.

Nine states already charge taxes of from 4 to 8.9 percent on broadband subscription fees, according to Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities. The states include Hawaii, New Hampshire, Washington, New Mexico, North Dakota, South Dakota, Ohio, Texas, and Wisconsin.

The charge is also applied to cable bills and wireless services that offer some type of Internet service, including smartphones.

The nine states were a part of a political compromise back in 1998 when the moratorium was first enacted. They already charged a fee, but the moratorium prevents them from creating new taxes.

"I think Congress should generally let the states set their own policies and answer to their citizens if they tax too much," said Jonathan Zittrain, a visiting professor of Internet governance and regulation at Harvard University.

"The Internet may have needed a subsidy when it was an infant industry, but it is no longer so new," Zittrain said. "Even if the moratorium lapsed states won't be able to collect sales tax on purchases made by their citizens because the act only applies to taxes on Internet access itself."

Mazerov pointed out that in 2001 and in 2003, the moratorium lapsed for seven months and there was no evidence that any state implemented taxes on Internet access.

He expects that if an extension isn't passed before Nov. 1, the same thing could happen again. Top of page