The Senate on Tuesday declined to act on a bill to extend a federal ban on Internet access taxes -- potentially allowing cash-strapped states and cities to impose levies of their own.
A few states, including Montana, have passed laws authorizing new Internet taxes if the current 5-year-old federal Internet tax moratorium, which expired Nov. 1, is not renewed or made permanent.
State and local governments say they could raise millions of dollars annually by taxing service from Internet providers such as EarthLink Inc. and Time Warner Inc.'s America Online.
The federal ban prohibits access taxes similar to those already paid on telephone service. When first passed in 1998, the tax moratorium was intended to encourage people to connect to the Internet.
Critics of the ban say the Internet no longer needs special protection and should be taxed like cellular and traditional phone service.
The Senate will take up the matter again in 2004.
Momentum for eliminating Internet taxes had been increasing since a House vote Sept. 17. But senators were at loggerheads over efforts to expand the definition of banned Internet taxes to include the explosion of new digital subscriber lines and cable modems.
Proponents ran into opposition from Sens. Lamar Alexander (R-Tenn.), George Voinovich (R-Ohio) and other former governors. They said that other relatively new telecommunications services, such as cellular phones, can be freely taxed and asked what was different about the Internet.
"There is a strong case made that the Internet is no longer a fledgling industry that needs to be protected and underwritten by the federal government," said David Quan, director of state-federal relations for the National Governors Assn., which opposed the Senate bill banning Internet access taxes. "The Senate bill was going to undermine existing state and local revenues. I'm encouraged that the Senate will now take more time to look at a very difficult issue."
Phone giants such as AT&T; Corp. and technology interest groups argued that a federal ban on Internet access taxes would keep the Internet affordable and encourage more Americans to join the 30 million households that have signed up for high-speed Internet access.
"If, in fact, the more than 7,000 taxing jurisdictions in this country are allowed to take a bite out of the Internet ... I think that could derail the very impressive progress that we have seen in the technology sector in the last two months," Sen. Ron Wyden (D-Ore.) said.
Also Tuesday, the Senate approved an anti-spam bill nearly identical to a House measure that cracks down on people and companies that send unsolicited commercial e-mail. President Bush is expected to sign the bill, perhaps as early as next month.