19 Sep State and Feds Race to Stop Taxation of Internet Access
MADISON, WI – Even as the State Assembly Ways and Means Committee heard testimony on Assembly Bill 234 — a measure that would end state and local sales taxes on Internet connections — the U.S. House of Representatives was passing a measure that, if it becomes law, would make the state bill irrelevant.
The U.S. House Tuesday passed H.R. 49, which would permanently extend an existing moratorium on taxation of Internet connectivity. The bill would also terminate a grandfather clause that protected existing Internet connection taxes in several states – including Wisconsin. According to the Legislative Fiscal Bureau, repeal of the tax – whether mandated by the feds or by the state – would drain state coffers of $39.3 million in 2005, when the law would kick in. Counties and city districts would be hit to the tune of $2.6 million. The federal Congressional Budget Office estimates that the direct costs to states and local governments nationwide – should H.R. 49 become law — would probably total between $80 million and $120 million annually.
The state measure would have to come before a special tax exemption committee, — and further action is unlikely this year, but assembly sources say either the state of federal measure could pass in 2004. At the Madison committee hearing Tuesday morning, bill author Rep. Scott Jensen (R-Waukesha) and representatives of SBC, Inc., America Online, Inc. and NorthNet LLC – an Oshkosh-based Internet service SPprovider – railed against taxes levied on Internet connectivity services.
“This tax amounts to a toll on the information superhighway,” Jensen said. “People using dial-up service have to pay a tax on their phone bill – and then they have to pay another tax on their ISP.” Jensen first introduced a measure to repeal the tax in 1997, but after it passed both houses it was vetoed by Gov. Tommy Thompson. According to Jensen, Thompson erroneously thought the bill would repeal sales taxes on purchases made over the Internet. Jensen introduced the measure again in 1999, but it never made it out of the Assembly.
Jensen stressed that according to the Wisconsin Department of Revenue (DOR),DOR, only 50% of the tax was likely collected in the state – a situation that creates a liability under the equal protection clause of the constitution.
“I have heard from people that many of the smaller ISPs that are aware of the tax are paying it,” Jensen said. “Some smaller ISPs that are unaware have not paid. The larger companies – they continue to argue as to whether they (DOR) can collect this at all.”
“I could easily move to another state, purchase and resell wholesale access and have no presence in the State of Wisconsin,” NorthNet Director Frank Tower said. “Yet I could be providing service in the state of Wisconsin.”
But even location outside the state would not protect Tower and NorthNet from the tax. America Online is currently working towards a settlement with the Wisconsin Department of Revenue (DOR) to determine the Dulles, Va.-based company’s tax liability. The issue of determining nexus – physical location in the state for tax purposes – is difficult as data knows no boundries.
The fact that once an AOL customer is signed up, all AOL typically has access to is their credit card number, means the company legitimately may not know where the customer lives – and therefore whether sales tax is owed. Determining tax liability is even tougher, the AOL representative said, in instances where an ISP is simply reselling access to others’ servers and routers.
“AOL and other larger providers have significant equipment here,” America Online Assistant General Counsel Shawn Cox said. “Over time, however, we have seen migration away from provision of services by companies with a very clear nexus in the state.”
Either way, according to Cox, the challenge multi-state ISPs face – and the question to be answered in AOL’s dispute with DOR is determining “at what point we are in what jurisdiction?”
SBC Lobbyist Holly Reed spoke in favor of the assembly bill as well, stressing that in many cases, the sales tax is not collected. Out-of-state resellers can dodge the tax, while telecoms and companies that sell fixed wireless, cable and other services tied to a specific geographic location are bearing the full tax load. This results in unfair competition, and could create a problem given state constitutional provisions for equal treatment of individuals and companies under the tax code, she stressed.
“The DOR should take into consideration that regardless of the method of provision, that providers should be treated equally,” Reed said. DOR Executive Assistant Jason Helgerson was the sole opponent of the bill to come before the committee. Helgerson stressed that according to a Tennessee study, sales taxes on Internet connectivity were unlikely to deter people from connecting to the Web. But Tower cast doubt on the study results.
“We have customers who are very price sensitve, and saving one or two dollars per month is very significant to them,” Tower said. “Some services are available for $9.95 per month.” When asked if the additional cost added by sales tax would be more likely to help determine what ISP someone chooses versus disincenting them from connecting at all, Tower said “I could see it doing both.”
But determining what impact the sales tax has on the market may be an easy matter compared to determining what telecom services would or not be taxable if either the state or federal measures pass. Given the rapid convergence of media – including the growth of voice over IP – these questions may keep Madison lawyers and lobbyists busy well into the future.
“I think all these issues are going to bedevil us as the technology rapidly outpaces the law,” Jensen said. “When you are faced with a situation like that, the best answer is less regulation and less taxation. Right now, all the different pipelines are all taxed differently. At some point we will recognize that and unify the tax code.” But Tower said in the end, determining the difference between phone and Internet service might be manageable.
“For phone service, you have to be attaching to the real world through some type of telephone switch,” Tower said. “Otherwise, you can only talk to other people with voice over IP. So if at some point you are hitting a telephone switch, then it is truly a telephone service.”
Charles Rathmann is a freelance writer and contributor to Wisconsin Technology Network. He can be reached at email@example.com.