Legislation that prohibits states and localities from taxing the fee a user pays to an Internet Service Provider (ISP) to connect to the Internet expired Nov. 1, 2003.

There is considerable confusion about the Internet tax ban: it has nothing to do with charging a tax on purchases made over the Internet, or charging a tax every time someone dials into the Internet. It is a prohibition against taxing the charges a user pays to an ISP to connect to the Internet, as well as taxes that would discriminatorily apply only to Internet technology and use.

In contrast to the prohibition of taxes on Internet service, charges a user pays to a company for telephone service are taxed, and have been since the federal tax was first imposed as an "excise" or "luxury" tax during the Spanish-American War. That tax on telecommunications services has also become an important source of revenue for state and local governments, amounting to more than $20 billion a year in revenues.

The underlying reason for banning taxation of Internet access was to encourage the growth of the Internet and to prohibit "discriminatory" taxes that single out the Internet for special taxation. Some have suggested that banning the tax also makes it easier for low-income people to access Internet services.

"The Internet Tax Non-Discrimination Act of 1998" has already been temporarily extended once. Even though the ban has already expired, it is considered unlikely that there will be a rush to impose taxes on Internet access. A vote in the Senate to extend the moratorium on Internet access (S. 150) scheduled for Friday, Nov. 7 was postponed. Congressional action on extending the ban will probably take place this week. There is general agreement that an extension of the moratorium on taxing access to the Internet should be extended. There are currently two major points to this argument:

• The proposed legislation would not just extend the moratorium, but make it permanent.
• As it is worded, the proposed legislation broadens the definition of Internet access to possibly include the underlying telecommunications services used to supply Internet access.

The rapid development of alternative forms of telecommunications, like DSL, broadband, cable, satellite and wireless means that broadening the ban on Internet access taxes could extend to traditionally taxable telecommunications, if those services include Internet access. For instance, if a consumer gets both telephone service and Internet access through a DSL line, the argument could be made that neither could be taxed. Broadening the ban to extend to new technologies could lower state and local revenues to almost $9 billion a year by 2006, according to the Multistate Tax Commission.

Since Internet access has become more complicated than the original "dial-up" connection, and the technology for Internet and telephone access is rapidly changing, a permanent ban on taxation of Internet access, without more careful study and consideration, is a bad idea. Care should be taken to exempt from taxation only the Internet service provision. The possibility of depriving states and localities of long-standing telecommunications revenue, especially given the fiscal crises in most states, by broadening the definition of Internet access, is not a good idea.

Consideration over whether taxes on Internet access really would inhibit growth of the Internet, and exacerbate the so-called "digital divide" must ensue. Why should telephone service be taxed, and Internet service not? Perhaps there should be a tax on Internet service with the proceeds going to efforts extending Internet access (the monthly charges themselves are likely prohibitive to many) to low-income families and schools?