Commission Warns Of Big Tab For Internet-Access Tax Ban

A report by the Multistate Tax Commission says the bill now before the Senate could give the telecom industry a blanket exemption from non-federal taxes, costing state and local governments billions of dollars.

A group of tax officials cautioned Wednesday that a House-passed bill now before the Senate and endorsed by President Bush to ban Internet-access taxes could cost state and local governments $4 billion to $8.75 billion a year by 2006--far greater than the $500 million estimated when such legislation was first proposed.

In a report, the Multistate Tax Commission, a consortium of 45 state governments that encourages states to adopt uniform tax laws, says the courts could interpret provisions in the legislation--HR 49--as providing a blanket exemption from non-federal taxes for the telecommunications industry, granting the sector an unprecedented churchlike status.

San Francisco controller Ed Harrington, president of the Government Finance Officers Association, says the House bill, passed last week, expanded the definition of Internet access to include telecommunications services, which could drastically curtail states and local governments' ability to collect utility, franchise, gross receipts, property, and other taxes from telecom companies. "All of this in a bill that has been touted as only making permanent the current temporary ban on taxes on Internet-access charges," said Harrington, who spoke at a commission briefing on the release of the study.

According to the commission, the annual losses in potential state tax revenue could be even higher than $8.75 billion because they don't include the full impact of services, information, and content that can be exempted from taxes by being bundled with Internet access or offered as a service over the Internet. However, the loss would be limited to $500 million if lawmakers amend the legislation to conform with Congress' intent of pre-empting sales taxes solely on Internet access.

"It doesn't matter if the legislation's proponents insist that was not their intention here; intention doesn't count in court when it comes to tax matters," Tennessee revenue commissioner Loren Chumley said at the briefing. "All that counts is what the bill says, and this bill provides a road map for the telecommunications industry to sidestep as much as $9 billion annually by 2006 in taxes and succeed in doing what no other industry has done--get Congress to relieve it of potentially all local and state taxes."

The study also points out the state and local consequences of losing such revenue. For instance, governments will spend $9 billion on more than 1 million public-school students or 180,000 firefighters in 2005, the commission says.

Proponents of the legislation, including the White House, have never contended the legislation would eliminate all telecommunications-related taxes. They say they support banning Internet-access taxes to encourage the growth of E-commerce.

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