January 28, 2005 3:50 PM PST

Congress proposes tax on all Net, data connections

An influential congressional committee has dropped a political bombshell by suggesting that a tax originally created to pay for the Spanish American War could be extended to all Internet and data connections this year.

The committee, deeply involved in writing U.S. tax laws, unexpectedly said in a report Thursday that the 3 percent telecommunications tax could be revised to cover "all data communications services to end users," including broadband; dial-up; fiber; cable modems; cellular; and DSL, or digital subscriber line, links.

Currently, the 3 percent excise tax applies only to traditional telephone service. But because of technological convergence and the dropping popularity of landlines, the Joint Committee on Taxation concluded in its review of tax law reforms that it might make sense to extend the 100-year old levy to new technologies. The committee did not take a position on whether Congress should approve such an extension and simply listed it as an "option."

"We need to avoid starting down a path of overtaxing nascent forms of communication."
--Jonathan Zuck, president, Association for Competitive Technology

"Cellular phones are being manufactured that may operate using VoIP through Wi-Fi access, as well as through more traditional means," the tax committee's report says. "As voice phone service migrates to using Internet Protocol, there may be no way to distinguish 'packets' of voice and 'packets' of data." VoIP refers to voice over Internet Protocol, or making telephone calls through a broadband connection.

The congressional report comes not long after the Internal Revenue Service and Treasury Department said they were considering how the Spanish American War tax should be reinterpreted "to reflect changes in technology" used in "telephonic or telephonic quality communications." Tech companies including Microsoft, Intel and Skype slammed that idea in a September letter, asking the IRS to "refrain from any attempt to extend the excise tax to VoIP services."

The discussion in the tax committee's report, however, ventures far beyond VoIP. "Extending the tax to all communications requires taxing Internet access, bandwidth capacity, and the transmission of cable and satellite television," it says.

Technology trade associations were instantly critical. "We need to be careful in trying to stretch a taxation system this old to be a catchall for all modern technology," said Jonathan Zuck, president of the Association for Competitive Technology. "We need to avoid starting down a path of overtaxing nascent forms of communication."

Congress enacted the so-called "luxury" excise tax at 1 cent a phone call to pay for the Spanish American War back in 1898, when only a few thousand phone lines existed in the country. It was repealed in 1902, but was reimposed at 1 cent a call in 1914 to pay for World War I and eventually became permanent at a rate of 3 percent in 1990.

Thursday's report, titled "Options to Improve Tax Compliance and Reform Tax Expenditures," is a broad review of tax law and proposes a number of ways--such as reforming the taxation of overseas corporations--to boost the federal government's bottom line by up to about $400 billion over the next decade.

It lists three different telecommunications tax options, one of which would cover all data communications. A second choice would extend the excise tax to cell phones and perhaps VoIP. The third would clearly levy the charge on VoIP, including Internet-only phone calls using services such as Skype that do not touch the public telephone network. "It is not necessary that the voice communications service provide" that capability, the report says.

James Maule, who teaches tax law at Villanova University and edits a related blog, said the more extreme taxation option may be a way for committee members to make the others "look a bit more palatable. There's some psychology going on."

"The odds of something happening in 2005 that amends the tax law is extremely high," Maule said, referring to President Bush's promise to revise the tax code. "I suspect that (one of these options) is going to be tacked on."

A few years ago, the U.S. House of Representatives voted overwhelmingly to repeal the excise tax, but the Senate never acted on the measure.

Members of the Joint Committee on Taxation include Sens. Charles Grassley, R-Iowa; Orrin Hatch, R-Utah; Max Baucus, D-Mont.; John Rockefeller, D-W.Va.; and representatives Bill Thomas, R-Calif.; and Charles Rangel, D-N.Y.

17 comments

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Congress looks into our pockets again
Most of congressmen have never been taught by their parents how to save money because they likely are from rich family. BUT THEY ARE THE BEST-KNOWN SPENDER IN HISTORY. They wasted tons of money for pleasure of war and now look for new sources of money again. It will be a mistake to tax internet at such early stage of development.
Posted by (9 comments )
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The Internet is in an early stage of development?
News to me.
Posted by katamari (310 comments )
Link Flag
Ingenuity Will Prevail
Smart people will always figure out ways to circumvent dumb governments. In the 1990's people invented international callback to circumvent foreign governments' excessively high taxes on international calls.

In this case, I expect that if yet more burdensome taxes go into effect, smart people will offer an alternative to U.S. based ISP service. Here's my business plan:

Enduring Freedom ISP Corp. (EFIC) is based offshore, away from the long arm of taxation. The broadband service is offered to consumers through satellite dish. The transmisison is encrypted, and offers anonymity through a non-traceable IP. VoIP is available for fixed location customers. EFIC buys its bandwidth cheaply in bulk from countries like India, China, and Russia. EFIC service costs $40 USD per month, Paypal accepted. There are no taxes levied whatsoever, no TDD, no 911, no number portability, no wireline charges. The price is the price. Customer bandwidth is metered at 500 kbps. Customers are free to share their bandwidth or re-sell it, since EFIC only cares about exchanging 500 kbps for $40.

P.S. Overlooked in the above article is the issue of double and triple taxation. The consumer is already paying tax on the voice line that provides the conduit for DSL. A triple-play would be: tax the voice line, tax the DSL service, and tax the VoIP over the DSL link. That's 3% + 3% + 3% = 9%. Pretty slick. Oh, and that 3% will go up, we're just getting stared. Need to make up that budget defict somehow.


Keith
www.techcando.com
Posted by Stating (869 comments )
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Not A Smart Decision
While some think a tax for data transfer may be a good idea i however feel it would be a huge mistake. Most people's internet bills are high enough as it is, if you start increasing that how many people are going to stop using the internet because prices get too high. People who watch streaming video or listen to radio stations online, they are going to be taxed hard because it takes up a lot of bandwidth. Also think about the radio stations and other companies that will have to pay the tax on the data to begin with. I know as a web developer i generally use a lot of bandwidth with the files to and from ftp.

bottom line. Taxation of data transfer for internet users will be a bad thing, i could understand the VoIP and service such as www.vonage.com but for the everyday internet user i dont think it would be a wise decision.
Posted by codebowl (1 comment )
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Yet another Republican tax
They say they are for lower taxes and then this comes up. Are they or are they not against taxes? Perhaps this will be remembered next election.
Posted by GrandpaN1947 (187 comments )
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re: Yet another Republican tax
It's just more of the political shell game that has been going on for years. I'll give you $1 more to put in your Left pocket. Now give me $2 from your Right pocket.

Regarding this specific proposal, it amounts to a national sales tax. Politicians won't admit we already have national sales taxes on things like gasoline, phone service, tobacco, liquor, airline tickets, etc. These are "hidden" taxes, in that most people don't think about them, or even know they exist.

The reality is that government spending is running so far ahead of revenue that there will be a juggernaut to increase taxation. To make it pallitable to the public, it will come as "trojan horse" type fees and excise taxes. It's politically dishonest, because while the personal income tax may be reduced, total tax burden will increase. It also shows a lack of vision and foresight. It would be far better if politicians concentrated on increasing revenues by growing the economy, particularly by supporting technological developments, than by trying to squash them with antiquated notions about taxation.
Posted by Stating (869 comments )
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Taxes are Bi-Partisan, don't ya' know...
As in this quote from the article:

"Members of the Joint Committee on Taxation include Sens. Charles Grassley, R-Iowa; Orrin Hatch, R-Utah; Max Baucus, D-Mont.; John Rockefeller, D-W.Va.; and representatives Bill Thomas, R-Calif.; and Charles Rangel, D-N.Y."

I count as many D's as R's...;)

Besides, you don't really think any of these men is smart enough (or dumb enough, depending on your point of view) to come up with a proposal like this, do you? I'll bet it was something clever cooked up by their *staffers* and I'll wager few of these politicians have even read the fine print as of the moment...;)

Brrrrr-r-r-r-r...I get chills thinking about how the country is run by a sea of faceless, nameless bureaucrats who were never elected to anything by vote, and whose sole job in life is making their elected bosses look good, or bad, as the case may be.

As to the invasion of the government into technology in the form of taxes, regulation, control and domination--that became an inevitability several years ago, the moment SUN and Netscape made the choice to carry their industry gripes to Washington in the hopes that Washington would do for them what they could not do in the marketplace within the practice of free enterprise and competition. Now, I suspect, they know better--but alas, it's far too late as the die has been cast. M$--move over! Compared to the new kid on the block--the US government in the form of superstitious and technically challenged Congressmen--you are a 98-lb. weakling.
Posted by Walt Connery (89 comments )
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What???! This is supposed to pay for a war from over a century ago??
Okay....This tax was originally intended to help pat for the Spanish-American War right? Well if that war isn't paid for by fickin' now then I'm looking for the war going on right now to never be paid for. I hope Uncle Sam is enjoying himself living high on the hog while us peasants are paying taxes to his greedy highness.
Posted by PCCRomeo (432 comments )
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Yep it is
Yeah the Spanish-American war was paid for years ago.. or would have been if the tax had been applied to our debt. But it was just an excuse for a tax in the first place and someone, of course, found a way to spend the income long ago. Since they are still spending it they need to keep the tax in place now.

As for the war.. it just got tacked onto the national debt as a write off decades ago.
Posted by Fray9 (547 comments )
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This is an Outrage
Could you give us the names of the Congressional Committee members and their affiliations? We are all sick and tired of being taxed to death. I am an educator and this type of tax on bandwidth and Internet connections will limit access to creative means of educating students who cannot afford to come to class (e.g., those seriously ill, pregnant teenagers, the elderly, the physically disabled). Why don't you tax corporations at the rate they ought to be taxed? Why are we being continuously oppressed by new taxes that destroy access to a technology that we, the taxpayers of this country, helped fund from the very start? Why don't we ask our legislators and representatives to cut back on their salaries and on defense spending so as to avoid this travesty of justice.
Posted by (1 comment )
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Names of committee members
I mentioned some committee members in the article but you can find a complete list (and some staff members' names) here: <a href="http://www.house.gov/jct/tableofcnts.html">http://www.house.gov/jct/tableofcnts.html</a>
Posted by declan00 (848 comments )
Link Flag
Internet Tax
Be happy if you live in the US and they only tack on 3%. We already pay a lot more than that here. Be brave, people - it could be a lot worse.
Posted by gavin.burgess (27 comments )
Reply Link Flag
Thars Gold In Dem Thar Hills of Cyber-Utility Bills
Grab your wallets, Webizens! Imposition of an added Internet Cyber-Hose Tax is only a Matter of Time, and 2005 might be the time.

My cyber-hose is already taxed and feeed, with federal, state and local-municipal tax-fees, but to a politician-bureaucrat&Thars Gold In Dem Thar Hills of Cyber-Utility Bills!

Im a plank-owning Internet Free-Webber whose mantra is and has been, Free-Web for All, Web-Freedom for All, but its like Edgar Allen Poes Pit and the Pendulum. Each year, under the political cover of some influential congressional committee, the pendulous Tax Blade swishes closer&ever closer to our wallets.

Quote the cyber-Raven: NEVERMORE. Quote the cyber-Catgic: NO INTERNET TAXES!
Posted by Catgic (106 comments )
Reply Link Flag
tell bush to stop taking vacations and congress do not need raises
We are footing the bills for bush and others for spending money unwisely. If us familys have to live on a balance budget with limited or fixed income then bush and team should learn to live a like us. Also, we should stop paying for other peoples problem when we have our own!
Posted by (1 comment )
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