Proposed tax bill makes little sense

The applicability of taxes to services is an area of great confusion. Taxes are often levied on various products and services to encourage or discourage the consumption of items. From the “sin taxes” on tobacco and alcohol to tax-exempt incentives for Internet access, we live in a maze of tax regulations that are both mind-boggling and highly variable from state to state and country to country.

Unfortunately, these incentives are sometimes based on technology that is at least a couple of technological generations out of date. And the trend isn’t getting any better.

Take the Internet Tax Nondiscrimination Act, which was recently passed by the House of Representatives and is now before the Senate. On the surface, it certainly looks innocent enough. Maybe even a good idea. As reported by the Tech Law Journal, this bill “would permanently extend the moratorium on Internet access taxes and multiple and discriminatory Internet taxes that was created by the 1998 Internet Tax Freedom Act (ITFA). It would also eliminate the grandfather provision that allows states that had taxes in 1998 to continue those taxes.”

However, it was clarified (allegedly) by an amendment that further stated that telecommunications services are exempted “to the extent such services are used to provide Internet access.” OK. So let’s decipher this if we can.

1. The bill permanently prohibits any taxes on Internet services. But states and localities (and the feds) can continue to tax telecommunications services.

2. A previous provision that allowed taxation of Internet services by a handful of states under a “grandfather” provision is eliminated.

3. Telecommunications services can be taxed. Internet access services can’t.

The clarification was intended to protect “data” DSL services from taxation while preserving the taxation of DSL services when used for voice.

Excuse me? Maybe this made sense 10 – or better yet, 20 – years ago. But ever since the introduction of commercial T-1 services in the early 1980s voice and data have been inseparable. This didn’t get “invented” with the current excitement over VoIP.

Next time we’ll look at some of the possible implications.