Senate OKs Web Tax Moratorium

The Senate voted overwhelmingly to restore a ban on taxing Internet connections for four years, stopping short of the permanent ban approved by the House.

The two chambers will try to work out their differences over an issue that pits a U.S. telecommunications industry trying to expand a range of services against state and local governments worried they could lose billions of dollars in tax revenue.

Congress first blocked state and local taxes on the services that connect consumers to the Internet in 1998. The ban lapsed while lawmakers tried to rewrite it and cover new high-speed and wireless connections, generally known as broadband.

The Senate settled its differences Thursday, voting 93-3 to restore the tax ban for 4 years.

"This bill will ensure that consumers will never have to pay a toll when they access the information highway," said Senate Commerce Committee John McCain, R-Ariz. "Plainly and simply, this is a pro-consumer, pro-innovation and pro-technology bill."

President Bush had asked Congress to permanently ban the levies. He said the Senate's action moved the nation closer to banning the taxes to "help make high-speed Internet services more affordable, increase the number of broadband users and enhance our nation's economic competitiveness."

Senators made multiple changes to ease concerns of some governors-turned-senators who worried the ban could drain billions in tax dollars from state and local governments.

One change clarified that the ban did not apply to state and local taxation of voice telecommunication services, including Voice Over Internet Protocol or VOIP. That technology allows consumers to use the Internet to make telephone calls.

Some senators had worried that without the change, telecommunications companies could evade virtually all taxes as they migrated their communication systems onto the Internet's backbone. Other senators wanted to ensure that states couldn't find loopholes to tax not-yet-imagined wireless and broadband connections.

Sen. George Allen, R-Va., said the strong consensus about the ban's technological scope settled Thursday could make it easier to negotiate for a ban longer than 4 years, but he added the House needs to accept the "reality" of some senators' unease with a permanent ban.

"We'll have to see," he said.

States that already had started taxing Internet connections before the 1998 ban preserve their right to continue collecting the payments under the Senate bill.

The Senate voted 59-37 to kill a proposal that would have extended the same rights to states that started taxing high-speed DSL connections after the 1998 tax ban. Those states imposed the taxes by arguing that DSL, which is delivered through a phone line, could be treated as telecommunications services like telephones.

Sen. Ron Wyden, D-Ore., said those DSL taxes violate the spirit of the 1998 law, which aimed to lower the cost of the Internet and speed its spread through all communities.

"They're the last cash cows in the pasture," Wyden said.

The 17 states with DSL taxes have two years to phase them out.

Voting against the Senate bill were Democratic Sens. Jeff Bingaman, N.M.; Bob Graham, Fla.; and Frank Lautenberg, N.J.

Four senators missed the vote: Bob Bennett, R-Utah; John Breaux, D-La.; Jim Bunning, R-Ky.; and John Kerry, D-Mass.

A Kerry spokeswoman said Kerry, who was campaigning, would have voted for the bill.