Editor’s note: Linda Markus Daniels is a founder of and principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.On Nov. 19, Congress finally acted to extend the federal ban on the imposition by state governments on taxes on access to the Internet, and President Bush signed the bill into law on Dec. 3. While the House would not vote to make the ban permanent, it is now in effect through Oct, 31, 2007.

House Policy Committee Chairman Cox delivered the following statement on the floor of the House of Representatives just prior to passage of the bill: “Republicans and Democrats have come together to say that no matter how we might choose to fund government services, we all agree the worst way to do it would be to create new taxes on the Internet. That would be harmful to consumers, destructive to technological innovation, and bad for our economy.”

Law doesn’t apply to over-bet commerce

To be clear, this is NOT a ban on taxes related to commerce undertaken over the Internet. While the legislation does bar taxation by two or more states for the same online transaction and prohibits discriminatory levies that treat Internet purchases differently from other types of sales, the thrust of the new law is to preclude any type of state or local taxation of Internet connections, whether for high-speed broadband or simple dial-up services.

In general it covers the monthly access fee on providers such as AOL or Earthlink. Those states which had taxes in effect prior to the original moratorium put in place in 1998 were grandfathered at that time and have been again – except for Wisconsin where the ban will take effect in 2006 (at the request of House Judiciary Committee Chairman James Sensenbrenner (R-Wis)).

The original 1998 ban did not include the relatively new DSL lines now being used, and which some states have elected to tax. The new legislation, however, covers DSL and those states which now tax such connections are required to phase out this taxation. The new legislation also protects BlackBerry wireless email access from taxation.

Internet call debate

Specifically excluded from last week’s legislation, however, is VOIP.

In fact, much of the delay in passing the extension of the Internet tax ban resulted from a debate over whether the ban should cover Internet telephone calls. State and local governments which rely on existing telecommunications taxes are very concerned about a loss of revenue…especially if there is a continuing and rapid shift to the Internet and away from traditional telephone service…and of course they are hoping for a new source of revenue. States have long sought to tax all Internet as well as telecommunication connections as a source of additional revenue.

There will be a large push to make the moratorium permanent next year, and clearly this will be to the benefit of consumers and the economy in general. Whether this can pass, however, will be dependent on how intertwined the legislation becomes with the VOIP issue. It’s likely that other issues will be added on as well, such as state taxes on Internet sales. The more that is added the more bogged down the process of making the ban permanent will become.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Linda Markus Daniels concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, technology and international matters. Comments or questions can be sent to ldaniels@d2vlaw.com