January 22, 1997 11:45 AM PST

Alabama may tax ISPs

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The Alabama government is weighing a plan to levy taxes on ISPs but users could end up paying the price.

The state Department of Revenue ruled last fall that a utility tax applies to ISPs. If a law is adopted based on the ruling, ISPs would pay a four percent public utilities tax for services such as electric, water, and gas. Access providers would likely pass the tax on to consumers just as telephone companies do.

Taxing the Net has become a big topic for legislatures and regulatory agencies. Across the country states are deciding how to apply taxes; whom to tax; and on the flip side, how to give appealing tax incentives that will lure the budding ISP industry to their area.

On November 22, H.E. Monroe Jr., commissioner of the state Revenue Department, ruled that Alabama ISPs were subject to pay the four percent utilities sales tax. The ruling states: "[ISPs] flat-rate monthly charge and the hourly-usage fee would be subject to the tax."

Monroe's ruling has no effect on ISPs until it is enacted into law. However, the ruling appears to be the basis for expected legislation to declare ISPs utilities, said Jerry Baxley who is executive director of the Internet Service Providers and Users Association based in Montgomery, Alabama.

Baxley's group will feverishly lobby against efforts to declare the state's approximately 51 independent ISPs public utilities.

"We know that there is going to be legislation taxing the Internet on February 4 when the legislation opens. Representatives and Senators in the Alabama legislature have told me that there is going to be a bill introduced to declare ISPs a utility. If it is passed, we're going to charge the tax to the users."

Other states treating ISPs very differently.

On January 11, New York Gov. George E. Pataki directed the State Department of Taxation and Finance to follow a state report that recommends sales tax exemptions for Internet access providers. Unlike Alabama's plan, New York now classifies Net access as an information service, not a public utility like the telephone.

The New York plan was proposed just two days after two Congressmen said they plan to introduce federal legislation to keep the Net tax-free. Sen. Ron Wyden (D-Oregon) and Rep. Chris Cox (R-California) argued their bill would prohibit new state and local sales and usage taxes for the Net.

The Big Apple is trying to lure ISPs that are being threatened in other states with new taxes on Net access, in addition to the telecommunications taxes they already pay.

But the potential Alabama plan is different because it will tax users.

Alabama's plan echoes an Interactive Services Association report in November, which concluded that the only type of tax that could be applied effectively to Net access would be a "transaction tax" imposed on subscribers, not the ISP. Such taxes might be applied to subscriber fees and to services and products sold over the Net.

The ISA represents 150 members including national ISPs such as America Online, AT&T, CompuServe, Microsoft, IBM, and Netcom.

Customers in Alabama and elsewhere are sure to be irked by the idea of paying more for access just as ISP prices are beginning to drop nationwide.

In other states, individual cities have tried to individually set up ISP taxing systems.

Fort Collins, Colorado, already applies a municipal sales tax to local ISPs based within city limits. While Tacoma, Washington, dropped its plan last fall to tax all ISPs that offer access within the city limits, including national providers. Florida also proposed extending its sales tax to ISPs last year but was met with fierce protest and managed to postpone the tax.

 

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