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Taxing the Internet

Sun, 05/31/1998 - 8:00pm
Jeffrey Krauss, Internet Surfer, Taxpayer and President of Telecommunications and Technology Policy
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By Jeffrey Krauss, Internet surfer, taxpayer and President of Telecommunications and Technology Policy

There are at least three kinds of taxes that come up when people talk about taxing the Internet. The first kind is state sales taxes on items purchased over the Internet. That's not an FCC issue, but it is a controversial issue that Congress will have to deal with.

A second kind of tax is telephone access charges. This is under the control of the FCC. Access charges are paid by long distance telephone companies to local telephone companies; they go to subsidize your local loop, which you use for both local phone service and long distance service. On every long distance call you make, you wind up paying a few cents per minute to the local phone company.

But you don't pay a few cents per minute when you dial into your local Internet Service Provider (ISP). That's a local phone call, not long distance. Even though you might wind up browsing Web sites that are all over the country, the current FCC policy is that it's still a local call. And the service you are receiving from your ISP is an information service, not a telecommunications service.

The third kind of tax is the Universal Service Fund (USF), which is a subsidy for high-cost areas and rural telephone companies. All commercial telecommunications operators pay into this fund, but cable companies do not pay into it, at least not yet.

ISPs don't typically own any transmission facilities. They pay the local phone company for the telephone ports that you dial into, they lease high-speed data lines into Internet gateways, and they pay the Internet backbone operators for the use of the network. ISPs don't provide telecom service — they provide information store-and-forward service, according to the FCC. They don't have to pay into the USF, but the commercial telecom companies that own and lease the data lines that make up the Internet do pay into the USF. In fact, it would be double taxation if both the network operators and the ISPs had to pay.

What if an ISP owns its own transmission lines? If there is no commercial transaction for telecommunications service, if the transmission lines are used only as part of an Internet access service, then they escape the USF. For now. The FCC does not know how to calculate the revenue associated with the transmission lines, and without a revenue, it can't calculate a tax. But it isn't much of a problem, because any ISPs that own large numbers of transmission lines usually operate them as a separate business, and they offer capacity not only to their own ISP, but to other customers as well. An example of this is ICG Communications, which owns an extensive fiber optic network, and leases capacity both to its subsidiary, Netcom, an ISP, and to other customers.

IP telephony and the USF

IP telephony is different than Internet access service, although some people confuse them. IP telephony is the use of packet switching to provide a long distance telephone service. Traditional long distance service uses circuit switching. Packet switching can make more efficient use of transmission lines, because packets are sent when you're talking, not when you're listening. In contrast, circuit switching ties up a two-way phone circuit for the duration of the call, even though half the time (on average) you're listening.

And IP telephony does not have to go over the Internet. This is a big point of confusion for some people. Software has been on the market to support telephone calls on the Internet, but the service quality is terrible. Packets get lost or delayed. The analog-to-digital voice coding is non-standard, so you have to use the same hardware at both ends (although that is changing). And you have to schedule calls in advance with e-mail, to make sure that the other party is also connected to the Internet at the proper time. This is "computer-to-computer" IP telephony, not "phone-to-phone."

We all know about Internet delays—the "world wide wait." Why not have a separate network, dedicated to an IP telephony service? That is what companies like Qwest, Level 3 and others plan to do. They'll provide a way to make a complete connection from caller to called party, using telephones, not computers. This is where the competitive threat will come from, and this is where the FCC will eventually have to impose USF taxes.

In its recent report to Congress on USF (www.fcc.gov/Bureaus/Common_Carrier/Reports/fcc98067.html), the FCC said that it would look at services like this case-by-case. I don't think it will have to look too hard. With senators from rural states looking over their shoulders, FCC commissioners will decide that IP telephony operators must pay the same taxes as circuit switched network operators. But because IP telephony services will be carried on separate networks, not on the Internet, we can all go back to worrying about sales taxes on Internet transactions.

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