States fear tax effects of voice-over-Net services

WASHINGTON — States, long concerned about shoppers using the Internet to dodge local sales taxes, now have a new worry: Over-the-Internet telephone services may soon be taking away billions a year in local phone taxes, as well.

Rep. Chris Cannon , R-Utah, who for years has tried to block taxes on Internet access because he says they would stifle its growth, is among those looking at the controversy.

And he believes in protecting the emerging Internet phone services.

Cannon, chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, notes that several states are already attempting to regulate and possibly tax them. But, he said, "I call into question whether VoIP" — shorthand for "Voice over Internet Protocol" — "should be subject to state taxation."

He added, "Prompt action is necessary to promote rather than to undermine the development of this technology."

During a hearing on Capitol Hill, chaired by Cannon, Internet phone service companies agreed with that stance — but the states protested.

Stephen M. Cordi, assistant comptroller of Maryland representing an association of the 50 states' tax administrators, said, "It is expected that up to one-third of traditional voice traffic would migrate to VoIP within five years."

With that, he said states, counties and cities could see their current $10 billion a year in telephone taxes drop by "upwards of $3 billion annually by that time" if Congress exempts such services from local taxes.

He said that "would have a substantial detrimental revenue impact on states and political subdivisions. It would, in fact, constitute a de facto repeal by the Congress of an entire category of taxes on which states and localities have long relied."

Cordi also such an exemption "would discriminate against other providers of voice communications services using technologies that are subject to tax."

But John J. Langhauser, chief counsel of AT&T's consumer services group, which has launched an Internet phone service called AT&T CallVantage, said, "Imposing today's inflated access charges on nascent VoIP providers would severely impede growth." He called for light-handed regulation.

However, he said the companies realize they still "must meet important social policies. Providing access for the disabled, enabling public safety (911) response and cooperating with lawful requests for information from law enforcement are issues that the industry can and is working to resolve."

James Kirkland, senior vice president of Covad Communications, said Internet phone services could offer revolutionary improvements, if regulation does not interfere.

He said services already not only allow use of personal computers as phones but may also include:

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