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TAX FACTS: Democrats Face Chore Of Internet Access Renewal January 12, 2007

Posted by notapundit in Congress, Politics, US News.

WASHINGTON (Dow Jones)–One of the headaches congressional Democrats inherit involves renewing a ban on taxing Internet access services. The issue hasn’t become any easier with the power shift in the Capitol, experts say.

The 1998 “Internet Tax Freedom Act,” which bans taxes that target or “discriminate” against the Internet, is set to expire Nov. 1. The law, however, doesn’t address the broader issue of sales taxes on Internet commerce.

Renewing the ban, even on a temporary basis, can be difficult. Congress last renewed it in November 2004, but only after the ban lapsed for a full year due to an extended political fight.

Sens. Ron Wyden, D-Ore., John McCain, R-Ariz., and John Sununu, R-N.H., are sponsoring a bill to make permanent the Internet tax ban. Allowing the ban to expire could boost the cost of accessing the Internet by as much as 17%, Wyden said. He said businesses “would face a barrage of discriminatory taxes” without the tax ban.

“It’s unfair, anti-competitive and would greatly harm one of the booming sectors of our economy,” Wyden said in a statement last week.

The politics of the Internet tax ban cross party lines. Opponents of a permanent ban tend to be former governors, such as Sen. Lamar Alexander, R-Tenn., or ex-tax collectors, such as Sen. Byron Dorgan, D-N.D. They are concerned a federal ban pre-empts state taxing authority and might decimate the local revenue sources.

The Internet tax ban has passed as a temporary measure three times in the last eight years, and is generally popular with members of Congress once it comes to a vote.

Governors and mayors, however, closely follow the bill so that the definition of “Internet access” isn’t broadened to encompass other services and interfere on the ability of local governments to tax electronic commerce, Harley Duncan, executive director of the Federation of Tax Administrators, a group of local tax collectors, said Thursday.

While some temporary renewal of the Internet ban is likely, a permanent ban certainly isn’t any easier with Democrats in control, Duncan and others say.

“I would think it’s potentially harder,” said Duncan. Democrats, he said, would be “more reticent to pre-empt state and local governments.” Mark Nebergall, a longtime technology lobbyist with the Software Finance and Tax Executives Council, agreed with that view.

Congress passed the first Internet Tax Freedom Act in l998; the main authors were Wyden and former Rep. Christopher Cox, R-Calif., now the Securities and Exchange Commission chairman. In the fall of 2001, Congress extended the ban for two additional years. And in 2004, it was extended to Nov. 1, 2007.

The bill continues to have influential sponsors, such as McCain, a presidential hopeful.

“The Permanent Internet Tax Freedom Act would ensure that consumers never have to pay a toll when they access the Information Highway,” McCain said in a statement. “Keeping Internet access affordable to all Americans is a worthy policy goal.”

IRS Releases Rules On Multinational Tax Benefit

Tax experts hailed new IRS rules that interpret a 2006 tax law affecting U.S. multinationals operating financial services businesses overseas.

The rules, released Thursday, concern a part of the tax law that provides an exception from immediate taxation on active finance and insurance income of foreign units abroad. This is known as “subpart F” for active financing and insurance income, a tax break worth about $5 billion through 2011.

A 2006 tax law includes a new temporary exception from this international taxation for related party payments. The change essentially seeks to simplify ways companies can move money within an overseas group.

“The provision was intended as a taxpayer-favorable simplification of the subpart F rules and the notice certainly reflects that,” said Marc. J. Gerson, attorney at Miller & Chevalier and a former House Ways and Means Republican staff member.

The IRS rules also interpreted anti-abuse provisions passed by Congress, which were intended to prevent corporate transactions that eroded the U.S. income tax base.

By Rob Wells, Dow Jones Newswires


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