FCC panel wants to tax Internet-using businesses and give the money to ISPs

By Jon Brodkin

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A Federal Communications Commission advisory committee has proposed a new tax on Netflix, Google, Facebook, and many other businesses that require Internet access to operate.

If adopted by states, the recommended tax would apply to subscription-based retail services that require Internet access, such as Netflix, and to advertising-supported services that use the Internet, such as Google and Facebook. The tax would also apply to any small- or medium-sized business that charges subscription fees for online services or uses online advertising. The tax would also apply to any provider of broadband access, such as cable or wireless operators.

The collected money would go into state rural broadband deployment funds that would help bring faster Internet access to sparsely populated areas. Similar universal service fees are already assessed on landline phone service and mobile phone service nationwide. Those phone fees contribute to federal programs such as the FCC's Connect America Fund, which pays AT&T and other carriers to deploy broadband in rural areas.

The state tax proposal comes from the FCC's Broadband Deployment Advisory Committee (BDAC), a group criticized by San Jose Mayor Sam Liccardo—who quit the committee—"for advancing the interests of the telecommunications industry over those of the public." BDAC members include AT&T, Comcast, Google Fiber, Sprint, other ISPs and industry representatives, researchers, advocates, and local government officials.

Model code for states

The BDAC tax proposal is part of a "State Model Code for Accelerating Broadband Infrastructure Deployment and Investment." Once finalized by the BDAC, each state would have the option of adopting the code.

An AT&T executive who is on the FCC advisory committee argued that the recommended tax should apply even more broadly, to any business that benefits financially from broadband access in any way. The committee ultimately adopted a slightly more narrow recommendation that would apply the tax to subscription services and advertising-supported services only.

AT&T stands to be one of the biggest beneficiaries if states assess the new taxes. AT&T already receives nearly $428 million per year from the FCC's Connect America Fund in exchange for providing 10Mbps Internet service in rural areas.

The proposed tax doesn't seem likely to get support from FCC Chairman Ajit Pai. "Chairman Pai has been clear that he opposes taxes on the Internet," a spokesperson for Pai told Ars when asked if Pai supports the BDAC proposal.

The BDAC model code doesn't require approval from Pai or other FCC commissioners, however. "The FCC does not have to act on this at all—it is adopted by the BDAC as a model code for the states to use, at their discretion," Pai's spokesperson told Ars.

The Internet Association, a lobby group for websites including Netflix, Google, and Amazon, opposes the proposal. "A new tax on Internet services is likely to make them more expensive, which in turn makes it harder for Americans—especially low-income individuals—to use the Internet," the Internet Association said in a statement to Ars.

It's not clear how big the proposed taxes would be. The model code says that states "shall determine the appropriate State Universal Service assessment methodology and rate consistent with federal law and FCC policy."

Definition of “broadband-dependent”

Article 11 of the BDAC's model state code would create a Rural Broadband Deployment Assistance Fund, paid for by contributions from broadband providers and "Broadband Dependent Services."

The definition of "Broadband Dependent Services" is where things get interesting. An earlier version of that definition—available in this document—reads as follows:

"Broadband Dependent Service" means a subscription-based retail service for which consumers pay a one time or recurring fee which requires the capabilities of the Broadband Service which the consumer has purchased and shall also include entities that financially benefit from access to a broadband system located in the state, including advertising providers.

The BDAC met on December 7 and pared that definition back a bit to exclude "entities that financially benefit from access to a broadband system." Video is available here; the discussion on the definition starts around 2:04:45.

BDAC Chair Elizabeth Bowles, who also runs an Arkansas-based wireless Internet service provider called Aristotle, expressed concern that the original version of the definition "was including every small business in America," potentially forcing them all to pay the new tax.

Google Fiber objects

Google Fiber policy chief John Burchett said the more expansive version of the proposal would tax "basically everyone who has an Internet connection" and shift large amounts of sales tax revenue from state general funds to broadband funds. (In cases where broadband-dependent services are already subject to state sales taxes, the model code provides the option of depositing those taxes into the Rural Broadband Deployment Assistance Fund.)

"We want to give the government the ability to tax everyone for anything they ever do with any kind of Internet connection?" Burchett asked. Burchett said the BDAC's definition of broadband-dependent services was so broad that it makes the proposal "absurd."

AT&T executive Chris Nurse, the telecom's assistant VP for state legislative and regulatory affairs, said the definition is "not broad enough."

"It basically is everybody [that should be taxed] because this is a societal objective," Nurse said during the BDAC meeting. "Universal service is a societal objective. We want to spread that $20 or $30 billion burden more broadly so the tax is low on everybody."

"Who are we cutting out and who are we leaving in?" Nurse also asked. "Today it's basically the telephone companies [who pay] and not Google and not Amazon and not Facebook, right? And they're gigantic beneficiaries from the broadband ecosystem. Should they contribute or not? Someone has to pay."

Nurse proposed adding subscription-based wholesale services to the definition so that Amazon Web Services and other cloud infrastructure providers would be taxed as well. That proposal was rejected, and the BDAC voted to revise the definition to read as follows:

"Broadband Dependent Service" means a subscription-based retail service for which consumers pay a one time or recurring fee, and shall also include advertising-supported services which requires the capabilities of the Broadband Service which the consumer has purchased.

Nurse voted in favor of the new definition in the near-unanimous committee vote, despite previously saying it should be broadened.

The newly revised definition isn't quite grammatically correct and seems to apply to any subscription-based retail service, even those that don't use the Internet. But it was clear from the meeting that the committee intended to apply the tax only to subscription-based businesses that require Internet connections and to advertising-supported services that use the Internet. The BDAC hasn't finalized the model code yet, so it could edit it further to make its intentions clearer. Bowles told Ars that the definition "will be corrected for grammar and to match the intent of the BDAC before the final version of the Model State Code is posted to the website."

The BDAC also hasn't yet changed another model code section with language almost identical to what was removed from the definition. The other section says, "Entities that financially benefit from access to a broadband system located in the state, including advertising providers, shall contribute to the Broadband Deployment Fund." Bowles told Ars that this section will be changed to match the new definition of broadband-dependent services.

"The intent of the provision is to reach bandwidth-intensive streaming services that require broadband to function," Bowles told Ars. "It is these services that drive the need for higher speeds and, in order to ensure everyone who wants broadband can receive it, all players in the ecosystem need to contribute into the fund."

"It is not the intent of the language to reach every business that uses the Internet to conduct commerce," Bowles also said. "In fact, the edit was specifically made to avoid that result, as the prior version would have included small businesses that have an online presence."