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April 1, 2013

Taxman Eyeing Cable Services

Proposed Levy on 'Digital Goods' Would Touch Video, VoIP
  Multichannel News

By Gary Arlen

Nearly a half-dozen tax proposals affecting Internet operations are expected to appear on the congressional agenda, with many of them affecting broadband and cable services.

Tops among the expected legislation is an update of the "Digital Goods and Services Tax Fairness Act," which could tax digital video sales and rentals, including pay-per-view, video-on-demand and video downloads.

Revenue-hungry legislators will also have to review the fundamental "Internet Tax Freedom Act," which expires in November of 2014. That law prohibits taxes on Internet access, thus exempting Internet-service providers - including cable operators - from such taxes as discriminatory levies on online transactions.

Steve DelBianco, executive director of NetChoice ( - an advocacy group whose members include News Corp., Yahoo!, Facebook, AOL and Barry Diller's IAC - said he expects the Digital Goods and Services proposal will be introduced in coming months, though there is currently "no timetable." He expects this year's version to resemble the 2011 bills, adding that it may again be sponsored by Sens. Ron Wyden (D-Ore.) and John Thune (R-S.D.) and Reps. Lamar Smith (R-Texas) and Steve Cohen (D- Tenn.).


"The rental and purchase of digital video are becoming popular targets for new taxes," DelBianco said. "NetChoice supports this legislation, since it says which state gets the right to impose a tax, requires that legislators make the tax decision, and prevents discriminatory taxes."

In addition to movies and TV episodes, "digital goods and services" may include interactive "apps," music, ebooks and video games.

Cable-industry executives, speaking on background, said they want to make sure that pay-per-view and video-on-demand products are treated in the same way as over-the-top video, despite some architectural differences. For example, OTT providers - especially ones that operate in "the cloud" - generally do not have a nexus (point of presence) in every state, unlike cable operators, which do have such presence and might therefore face diverse state taxes.

DelBianco's group is "working to address technical concerns of state and local tax administrators, including the issue of whether tax legislation must be validated by the courts," he said. Even if such legislation is adopted, "state and local governments are still going to seek new taxes on the ways we enjoy digital media," he added.

Legislative considerations will have to include a "critical" evaluation of content that is downloaded versus streamed, according to DelBianco.

Cable lobbyists are watching the congressional approach to taxes on digital services, sales-and-usage taxes and the expected "Wireless Tax Fairness Act," which may affect cable's growing Wi-Fi services. The bill - which CTIA-The Wireless Association expects to be introduced by next month - could include a 17% levy on voice-over-Internet protocol, an important component of cable's so-called triple play.

Invoking familiar language, cable-industry lobbyists said that the industry simply seeks "a level playing field" as video program delivery expands into broadband on-demand and over-the-top services.

The fundamental "no tax on the Internet" legislation is the "Internet Tax Freedom Act" (H.R. 434), introduced by Rep. Steve Chabot (R-Ohio) and referred to the House Judiciary Committee; submitted by New Hampshire GOP Sen. Kelly Ayotte (S. 31) and sent to the Senate Finance Committee. Both bills were submitted in late January and seek to extend or make permanent the ban on taxing Internet access.

No action is expected until closer to November of 2014, when the current moratorium expires. Cable-industry groups support the measure.

Congress will consider nearly a half-dozen tax proposals with fallout for cable operators and other Internet providers.

"The bill assures that the tax moratorium remains in place to assure access to all and [ensure] the growth of the Internet," Capitol Tax Partners partner Annabelle Canning said at a recent Capitol Hill seminar on Internet taxation. That briefing for congressional staffers, policymakers, cable and telco representatives and the media, assembled by the Information Technology and Innovation Foundation and the Institute for Policy Innovation, spelled out Congress' expected taxation agenda affecting communications, e-commerce and information technology providers. It took place just days before the Senate's March 22 approval of an amendment authorizing taxes on interstate online purchases.


The online sales tax was tacked onto the Congressional budget resolution and is seen as a harbinger to approval of the more sweeping and divisive "Marketplace Fairness Act of 2013" (S. 336), introduced in February with 26 Senate co-sponsors.

The National Cable & Telecommunications Association and other cable groups have supported the sales-tax moratorium and are expected to push to make it permanent when it comes for reconsideration. Many in the industry say the bill simplifies taxation for states and consumers.

Since a core feature of this proposal is the elimination of discriminatory taxes, the bill could also set a precedent to prohibit local jurisdictions from placing e-commerce sales taxes on top of state taxes.

ITIF president Robert Atkinson, a moderator of the congressional briefing session, enunciated principles that he believes should define congressional consideration of Internet taxation.

In particular, he called for safeguards that taxes "should reflect what is being sold, not how it's being sold."


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