The pressure to reclassify broadband Internet access as a Title II telecommunications service continues to ramp up. With industry comments due on July 15, thousands of consumers have already taken advantage of the FCC’s net neutrality inbox to implore the Commission to “save” the open Internet. Start up Internet Service Providers (ISPs) along with certain politicians have added to the pressure, explaining how the Commission’s proposal to allow commercially reasonable agreements would lead to a two-tiered Internet with those paying more receiving superior service. 

We disagree, and have previously stated here in our May 9, 2014 blog that even as a telecommunications service, broadband Internet service would still be permitted to be differentially priced as long as the Commission (or a court), found that the price differences were “reasonable.” Moreover, reclassification could significantly damage investment in the Internet and lead to years of litigation. We believe the Commission and the industry could make much better use of its time by working to develop meaningful factors for determining when a broadband agreement is not commercially reasonable rather than spending years litigating reclassification.

Unfortunately while the reclassification issue is undeniably important, it has obscured another important issue, the fact that the Internet Tax Moratorium is set to expire. Steve Pociask president of the American Consumer Institute for Citizen Research argues that the convergence of these two issues could lead to “devastating consequences that will inhibit Internet investment, significantly increase consumer broadband prices and decrease service subscribership.”         

The Internet Tax Nondiscrimination Act is a federal law that bans Internet taxes in the United States. Becoming law on December 3, 2004 it prohibited state and local Internet access taxes until November 2007. On November 1, 2007, President Bush signed the Internet Tax Freedom Act Amendment Act of 2007 into law. It extended the prohibitions against multiple and discriminatory taxes on electronic commerce until November 1, 2014. That law is set to expire in less than three months.

According to Pociask, there are two significant tax issues facing broadband Internet service. First, if it is reclassified as a telecommunications service, it would immediately lose its exemption from paying the existing state and local taxes that target regulated telecommunications services. The Heartland Institute estimates that telecommunications consumers are currently paying more than 17 percent of their overall bills in service taxes and fees. These existing taxes would immediately apply to broadband Internet service, and when passed through, would significantly raise the rates for broadband end user customers.

At the same time, if the Internet Tax Moratorium is permitted to expire, it would allow state and local governments to impose new and additional taxes on broadband Internet service. As Pociask states:

If the current state and local taxes imposed on wireless service consumers are any indication of what is to befall broadband consumers, state and local taxes will rise significantly and so will broadband costs. Today, wireless taxes already exceed taxes on other telecommunications services, with consumers living in six states paying more than 20% in taxes on their wireless bills or about three times the rate of sales taxes. The combination of FCC reclassification and the expiration of the Internet moratorium will mean the end of the growing Internet as we know it. It will be the perfect storm.

Unfortunately, as we noted, this Internet tax issue has received virtually no publicity. Perhaps, if it were more widely understood, it would help counterbalance some of the incredible pressure on FCC Chairman Tom Wheeler to seek reclassification. Wheeler, better than most, knows that reclassification will not “save” the open Internet. He knows that price discrimination can occur regardless of whether a service is classified as “information” or “telecommunications.” The key for the agency is to be able to efficiently and consistently recognize unreasonable discrimination and have the enforcement mechanisms to effectively deal with it.  It will be interesting to see how the Chairman goes from here.

Next time, we will summarize the key industry net neutrality comments that will be filed on July 15.

By Andrew Regitsky, President, Regitsky & Associates