The Internet might not be a freeport much longer

by Steve Blum • ,

Internet access service is largely exempt from taxes in the U.S., thanks to a bill passed back in 1998, and given a last minute, one year extension last year. That extension will expire in October, unless federal lawmakers agree on either another extension – for however long – or a permanent bill.

On the one hand, it’s pretty simple: we’ve built a revolutionary and explosively valuable economy over the past 17 years without directly taxing the service that’s made it possible. The Internet industry certainly pays taxes – income, capital gains and property taxes are top of the list – but what you don’t see on the bill from your ISP is the long list of taxes, often mislabeled as fees, that you see on your phone bill.

On the other hand, it’s complicated. The wrangle over Internet access taxes is linked to the debate over whether online retail purchases are subject to sales tax. That’s a murky issue. California tries to collect usage taxes – a sales tax by another name – directly from businesses and consumers who buy products on line. States and local governments don’t want any federal restrictions on their taxing authority, and are lobbying hard for exceptions to the ban, for example urging that sales tax levies approved by voters be allowed.

There has also been murmuring to rewrite federal definitions of broadband networks and Internet access. If done strictly in the context of the tax code, it’s not that big of a deal, except that it would serve as exhibit A for the case against the FCC’s decision to run the Internet according to common rules.

The prospect of taxes on Internet service/services was one of the black helicopters opponents warned about – probably correctly. Nearly everyone I’ve talked to about it – off the record – expects broadband taxes to arrive eventually. If nothing else, as a matter of equity universal service taxes will have to shift from being 100% telephone-funded to some mix of telephone and broadband. If the money is going to broadband, it follows (even to me) that the money should come from broadband.

But messing with the tax code is course of business in Washington and Sacramento, and the real deal making gets done at the last minute and behind closed doors. My prediction: no need to check back until September.