Congress proposes tax on all Net, data connections

R.A. Hettinga rah at
Mon Jan 31 10:43:35 PST 2005



 Congress proposes tax on all Net, data connections

 By Declan McCullagh

 Story last modified Fri Jan 28 15:50:00 PST 2005

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
 --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

 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

 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,

R. A. Hettinga <mailto: rah at>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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