Internet tax moratorium stalls in the Senate

A U.S. Senate committee has postponed action on a bill that would extend an Internet tax moratorium after it expires Nov. 1.

Senate Commerce, Science and Transportation Committee chairman Daniel Inouye, a Hawaii Democrat, yanked the Internet Tax Freedom Extension Act from a list of bills scheduled to be amended and approved Thursday. Inouye, in a statement, said “further negotiations are warranted.”

Inouye called for senators to work out a reasonable compromise so that the committee “will be able to take swift action in the future.”

There are disagreements in the Senate about how long the moratorium on access taxes and other taxes unique to the Internet should be extended. A group of senators, including Sen. John McCain, an Arizona Republican, want the moratorium, in effect since 1998, made permanent.

Another group of senators, many of whom have opposed any extension of the moratorium in the past, have proposed a four-year extension. The Internet Tax Freedom Extension Act, sponsored by Sens. Thomas Carper, a Delaware Democrat, Lamar Alexander, a Tennessee Republican, and others, would extend the moratorium until late 2011.

Opponents of a permanent moratorium say a temporary extension keeps ISPs from attempting to sneak other services such as VoIP into the tax ban. Some senators have also argued the tax ban hurts states’ ability to raise revenue.

The moratorium prohibits state and local governments from creating new Internet-based taxes. Governments are not prohibited from imposing taxes that companies or customers face offline, such as property tax or sales tax.

There also continues to be disagreement about changing definitions in the tax ban intended to separate traditionally taxed voice services from Internet services, said a Democratic Senate staffer familiar with the discussions. A group of senators are more interested in pushing a permanent ban than coming to a compromise that will pass the Senate, the staffer said.

“The worst of all worlds is for something so extreme to pass [through the committee], that it will not get done,” the staffer said.

Sen. John Sununu, New Hampshire Republican, blasted the committee for stalling the tax ban.

“The Democratic Leadership in the Senate appears uninterested in protecting Internet users from higher taxes,” he said in a prepared statement. “We introduced a bill to permanently ban Internet access taxes back in January. I just don’t understand the continued delay in action. The clock continues to tick, placing Internet tax freedom in real jeopardy.”

But the Democratic staffer noted that the tax ban lapsed for more than a year before it was last extended in 2004. “As far as I can tell, the world didn’t stop spinning,” he said.