• Forbes, Tuesday, August 28, 2007 10:32 AM

Congress may be mulling over the matter, but the federal government is unlikely to allow state and local taxes on Internet service--at least for a while. While speculation in Washington was rife that Congress would let the current Internet tax ban expire on Nov. 1, a glut of new bills on the horizon make that unthinkable. One new bill proposed by Senators Tom Carper (D-Del.) and Lamar Alexander (R-Tenn.) aims to extend the measure through 2011. Others would suspend the issue indefinitely.

It boils down to a state's-rights issue. Congress has often taken a hands-off approach to state and local taxation, though the Internet Tax Freedom Act of 1998 was one exception, and has since been renewed on several occasions.

The states, of course, disagree-they think the government is keeping them from collecting revenue. David Quam, a director of the National Governors' Association, argues that the definition of "Internet access" is at issue. Right now, access from local ISPs is not taxable per the 1998 law. The telecoms that built and maintain the infrastructure are taxed, but certain ISPs that offer bundled Web service packages are not. And these companies have some powerful allies (Google, Amazon), with big-time lobbying dollars to help defend their position.

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