Internet tax ban avoids critical VoIP issue

After a year of squabbling, Congress has finally reinstated its ban on states taxing Internet access. But the new freeze, which is due to last through 2007, ducks some of the most critical issues facing both states and telecommunications companies. The biggest unresolved dispute: Whether states can tax Internet-based telephone calls. That service, known as Voice-over Internet Protocol (VoIP) is expected to dominate the phone business in coming years.

House lawmakers had tried for a year to both make the ban on access taxes permanent and to bar states from taxing VoIP. But resistance from two key GOP senators who are also former governors, George Voinovich of Ohio and Lamar Alexander of Tennessee, scuttled those aggressive plans. As a result, the freeze only applies to dial-up and high-speed access purchased through Internet Service Providers, such as AOL or Verizon. The impact of the renewed freeze is expected to be minimal since no states ever moved to adopt such levies after the Congressional ban expired a year ago.

However, the states’ victory on VoIP may only have bought them time. Aggressive anti-tax lawmakers are likely to push for a ban on VoIP taxes well before 2007. And with a strong new GOP majority in the Senate, their chances of winning are improving. As a result, Alexander is urging governors, mayors and telecom execs to work out a solution. Governors warn that if they are barred from taxing VoIP phone calls, they will lose as much as $20 billion a year in revenues—money that will have to made up by boosting other taxes or by slashing popular programs such as education or health care.

While the tax moratorium debate is often confused with a separate squabble over online sales taxes, the freeze on Internet access taxes has no impact on those sales levies. That debate involves potentially hundreds of billions of dollars in revenues for state coffers. But states remain barred by a series of Supreme Court rulings from requiring out-of-state retailers to collect sales taxes owed by consumers who buy online or though catalogues.

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