A report from a Debate between Senators Allen and Alexander
at the Heritage Foundation

ALLEN: VoIP SERVICE COULD BE EXCLUDED FROM INTERNET TAX MORATORIUM BILL
by John Curran, Technology Daily
February 12, 2004

Sen. George Allen (R., Va.) today said he might agree to exclude voice-over-Internet protocol (VoIP) services from a bill he has introduced that would impose a permanent moratorium on the taxation of many Internet-related services. He indicated some willingness to bend on the VoIP issue during a debate with Sen. Lamar Alexander (R., Tenn.), sponsor of a competing measure that would place a two- year ban on new taxation of Internet services. The Washington-based Heritage Foundation sponsored the debate.

The bill sponsored by Sen. Allen (S 150) would make permanent a ban on taxation of Internet service that expired last November. That measure is being countered by a proposal from Sens. Alexander and Thomas Carper (D., Del.) that would extend the moratorium for two years. An analysis of the Alexander-Carper proposal by the Center on Budget and Policy Priorities argues that it would restore neutral tax treatment between various forms of broadband Internet access and would "preserve taxes on Internet-related telecommunications services not used to provide basic Internet access to end users." That same analysis also argues that VoIP services would qualify as tax-exempt under S 150 and migration of traditional phone customers to VoIP services would severely erode tax streams that state and local governments now collect on telecom services.

Sen. Allen disputed the assertion that his bill would provide tax exemption for VoIP services. "Our bill does not adjudicate that," he said. "My bill does not dispose of the issue as to whether VoIP is a telecom service or not."

Nevertheless, he said he might be willing to include language in the measure that would satisfy opponents' concerns in that area. "I understand the concerns on VoIP. Maybe we'll have to put in a line that says VoIP will not be affected," Sen. Allen said after responding to a question from Sen. Alexander regarding whether or not VoIP services would be tax-exempt. "Some light was shed on my bill, and that was helpful," Sen. Allen added.

"The biggest difference between us," Sen. Alexander said, is that Sen. Allen's bill "creates substantial risk that when telephone service moves to the Internet, states and localities won't be able to tax phone services." He suggested that if VoIP services were to be left untaxed, the senators could "sit down and work on an agreement that way."

According to Sen. Alexander, states and localities now collect as much as $20 billion per year in taxes on telecom services but only about $100 million per year in taxes on Internet access. The Allen bill, Sen. Alexander said, would remove $12 billion to $13 billion of those state and local tax revenues.

"The taxes on Internet access are peanuts," he said. "The Allen bill creates risk that all phone taxes, if placed on the Internet, could be removed." If Congress wished to subsidize broadband services, it should directly appropriate money to do so rather than creating a system that would require states to refrain from levying taxes. Such a system, he argued, would amount to an "unfunded federal mandate" of the type he said was made illegal under federal laws passed in 1995.

Sen. Alexander argued that Sen. Allen's bill would give a "big subsidy to the telecommunications industry" by depriving states and localities of the ability to tax some telecom services. He questioned whether broadband service providers needed more help from the government. The Internet, he said, "is growing quite rapidly. It's as healthy as a hog."

He also argued that a permanent Internet tax ban would be unwise given the rapid pace of technological change and the fact that Congress and the FCC were involved in a "major relook at telecommunications regulations." He predicted that Congress would tackle a possible rewrite of the 1996 Telecommunications Act by 2005 and argued that a temporary tax moratorium would better serve those interests. "We are not yet wise enough to foresee the development of the Internet. . . . We need two years to think about it."

Sen. Allen said he viewed the Internet as "the greatest invention since the Gutenberg press for disseminating information to individuals," and argued that "taxation is hardly conducive to promoting growth" of the Internet. "The issue is not tax breaks for phone companies. . . . The issue has to do with people, families, small-business owners."

"The reality is that the other side wants to tax the Internet. They see new pockets to put their hands in," Sen. Allen said, stressing that Internet taxation would exacerbate the "digital divide" and stifle service providers' plans to build out broadband services in rural areas.
- John Curran, jcurran@tr.com