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November 22, 1998

Internet access is tax free in R.I. -- except with Cox

By Timothy C. Barmann

If you are one of the thousands in Rhode Island who subscribe to Cox Communications's high-speed Internet service, you are paying state sales tax on that service.

But most of your neighbors who are connect to the Internet through other services are not paying any tax at all.

The Cox service, called Cox@Home, costs $29.95 a month for cable television subscribers, and $39.95 a month for all others. It provides customers with a high-speed Internet connection over the Cox cable network, and it's available in 14 communities in Rhode Island.

The @Home sales tax amounts to $2.10 a month for cable TV subscribers, and $2.80 a month for others.

Unlike Cox, most other Internet service providers in the state do not charge state sales tax.

"I just went through a state sales tax audit in Rhode Island, and I was told explicitly by the Rhode Island sales tax people that Internet services are not taxable," said John Sulima, who heads RIconneCT, a Westerly based Internet access provider.

Likewise, John V. Gibbons III, a certified public accountant, and president of INTAP, a Providence-based Internet services company, said his company doesn't charge sales tax on access either.

An informal survey I did showed that several companies, including America Online, Bell Atlantic, Big Dog Online, Brainiac Services, eFortress and InteleCom Data Systems, have the same no-tax policy.

There's good reason for that. Gary Clark, the state's tax administrator confirmed that the state does not require Internet-access providers to collect sales tax.

"Just a plain Internet service, through an Internet provider, we do not put a sales tax through on that," he said.

(One Rhode Island-based Internet-access provider does charge tax -- bbsnet Worldwide, based in Portsmouth. The president, John O'Donnell, said he began charging sales tax when the state couldn't provide guarantees that he would not be liable for back taxes should it decide to impose an Internet-access tax later.)

Even if the state wanted to tax Internet access now, it can't for the next three years. Last month, President Clinton signed into law the Internet Tax Freedom Act of 1998. Among other things, the new law puts a three-year moratorium on new taxes for Internet access.

SO WHY DOES Cox charge sales tax for its @Home service?

Cox said the reason has to do with the medium by which its Internet service is delivered. While other Internet service providers are telephone-based, Cox provides its service over its cable network.

"Cable modem service is a cable product," said John Wolfe, vice president of government and public affairs for Cox. "In Rhode Island, we pay a sales tax on the modem and service."

"Our position as a company has been because it is a cable product, we have the same tax obligations," Wolfe said.

There is a debate going on about whether cable-delivered Internet access is an information service or a cable service, he said. "We've taken the position that it is a cable service since it's delivered over the cable network, the cable plant."

But David P. McClure doesn't see it that way. He is executive director of the Association of Online Professionals, an Alexandria, Va.-based organization whose membership includes Internet-access providers across the country, as well as some high-profile Web site companies.

McClure said the Internet Tax Freedom Act, which his group helped to draft, is clear about state sales tax.

"Internet access of any form should not be taxed by state and local authorities," McClure said. "It doesn't matter if it's from a telephone line or a cable TV line."

Here's what a key part of the law says:

"No State or political subdivision thereof shall impose any of the following taxes during the period beginning on October 1, 1998, and ending 3 years after the date of the enactment of this Act... taxes on Internet access, unless such tax was generally imposed and actually enforced prior to October 1, 1998...."

The law doesn't say which method of Internet delivery it applies to.

Before the law was passed, some states already charged sales tax on Internet service, including Connecticut. Because those taxes were in place before the Tax Freedom Act became law, they can remain in place, though states cannot impose new taxes on access.

But in Rhode Island, the state has not told Cox that it needs to collect the sales tax, and Cox hasn't asked the state whether it should. Patricia Sylvia, a spokeswoman for Cox, said she doesn't believe there has been a dialogue between the Department of Taxation and the company to determine whether the @Home service is taxable. Cox made the determination on its own that its service falls under the same guidelines as those for its television service, she said.

Wolfe said Cox wouldn't charge sales tax if it didn't have to. But McClure counters that there may be a reason for the cable companies' position. He said cable companies believe that by charging sales tax, it will keep them from being regulated as telecommunications company rather than as cable companies.

"I think it's a very bad strategy on their part," he said. "Taking the square peg of Internet access and trying to force it into the round hole of cable television is not going to give them the results that they want.

"I would definitely urge Internet subscribers in the state to take that up with legislators." McClure said his organization would even help draft legislation.

Clark, the Rhode Island tax administrator, said he is not sure whether Cox is required to collect sales tax on its Internet access service.

"I'm really not aware of whether that is proper or not," he said.

It is clear, he said, that cable television service, and the equipment that customers rent are subject to sales tax.

But this is a new issue to him.

"I was not aware of this," he said. "For all I know, [Cox] may be doing exactly the right thing."

"We'll have to ask our excise tax people to take a look at that."

Timothy C. Barmann is a Journal-Bulletin staff writer. His column runs every other Sunday on the Computers and Technology page. Send him comments via e-mail at tim@cybertalk.com or U.S. mail, c/o the Journal-Bulletin, 75 Fountain St., Providence, R.I. 02902.