How Congress’ proposal for Internet taxation is flawed

In this newsletter, we’re taking a look at implications of the proposed Internet Tax Nondiscrimination Act, which purportedly will continue a moratorium on taxing Internet services without touching government’s ability to tax telecommunications services, as if the two were somehow inherently different.

By the way, according to the bill, the terms “Internet access” and “Internet Service” refer to a service “that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers.” However, the term “does not include telecommunications services.”

We’ll assume that the term “telecommunications” here means “telephony” or “voice communications.” But what about e-mail (explicitly allowed) that contains voice messages? Hmm. Getting kind of murky, isn’t it? Immediately, the entire law falls apart because of the lack of recognition that in modern data networks, it’s impossible to separate telecommunications from Internet services.

Even so, let’s assume that the distinction can be made between telecommunications – that is, phone calls – and data services. If you can tax the phone calls but not the “data” service, how do you determine which percentage of a bill is used for which?

In the days of TDM access and fractional T-1, you could almost make a reasonable determination. For instance, if you have 12 DS-0s carrying 12 voice channels of 64K bit/sec and the other 768K bit/sec is used for frame relay, then you might be able to argue that 50% of the price of the T-1 is taxable.

But what happens when this is used on a 15-year-old T-1 multiplexer that even with that semi-antiquated technology could dynamically assign bandwidth to voice or data depending on the instantaneous needs? Do you tax the minimum percentage ever used for voice – which might be none? Do you tax all, if all can potentially be used for voice? Do you somehow try to average?

The bottom line is that regardless of the intent, this is a scenario that cannot be taxed accurately and fairly. So what do we do? Next time, we’ll look at some “all or nothing” arguments.