Milton, Vermont

Jesse and his nearby neighbors on the west side of Milton are frustrated.  They live just 20 minutes away from Burlington, the largest city in the state of Vermont.  Despite the proximity to a city with nearly 40,000 residents, there is no cell phone coverage in western Milton, no cable television service, and no DSL service from FairPoint Communications.  For this part of Milton, it’s living living in 1990, where dial-up service was one’s gateway to the Internet.

Jesse and his immediate neighbors haven’t given up searching for broadband service options, but they face a united front of intransigent operators who refuse to make the investment to extend service down his well-populated street.

“After many calls to Comcast, they eventually sent us an estimate for over $17,000 to bring service to us, despite being less than a mile from their nearest station,” Jesse tells Vermont Public Radio.  “They also made it very clear that there was no plan at any point in the future, 2010 or beyond, to come here unless we paid them the money.”

Jesse and his neighbors want to give Comcast money, but not $17,000.

For at least 15 percent of Vermonters, Jesse’s story is their story.  Broadband simply remains elusive and out of reach.

Three years ago, Vermont’s Republican governor Jim Douglas announced the state would achieve 100 percent broadband coverage by 2010, making Vermont the nation’s first “e-State.”

Vermont Public Radio reviewed the progress Vermont is making towards becoming America’s first e-State. (January 20, 2010) (30 minutes)
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Gov. Douglas

In June 2007 the state passed Act 79, legislation that established the Vermont Telecommunications Authority to facilitate the establishment and delivery of mobile phone and Internet access infrastructure and services for residents and businesses throughout Vermont.

The VTA, under the early leadership of Bill Shuttleworth, a former Verizon Communications senior manager, launched a modest broadband grant program to incrementally expand broadband access, often through existing service providers who agreed to use the money to extend service to unserved neighborhoods.

The Authority also acts as a clearinghouse for coordinating information about broadband projects across the state, although it doesn’t have any authority over those projects.  Lately, the VTA has been backing Google’s “Think Big With a Gig” Initiative, except it promotes the state as a great choice for fiber, not just one or two communities within Vermont.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/Google Fiber Vermont 3-22-10.mp4[/flv]

Vermont used this video to promote their bid to become a Google Fiber state.  (2 minutes)

Some of the most dramatic expansion plans come from the East Central Vermont Community Fiber Network.  ECFiber, a group of 22 local municipalities, in partnership with ValleyNet, a Vermont non-profit organization, is planning to implement a high-capacity fiber-optic network capable of serving 100% of homes and businesses in participating towns with Internet, telephone and cable television service.  In 2008, the group coalesced around a proposal to construct a major fiber-to-the-home project to extend broadband across areas that often don’t even have slower speed DSL.

The ECFiber project brought communities together to provide the kind of broadband service private companies refused to provide. Vermont Public Radio explores the project and the enthusiasm of residents hopeful they will finally be able to get broadband service. (March 8, 2008) (24 minutes)
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ECFiber's Partner Communities

The Vermont towns, which together number roughly 55,000 residents, decided to build their own network after FairPoint Communications and local cable companies refused to extend the reach of their services.  Providers claim expanding service is not financially viable.  For residents like sheep farmer Marian White, interviewed by The Wall Street Journal, that means another year of paying $60 a month for satellite fraudband, the speed and consumption-limited satellite Internet service.

White calls the satellite service unreliable, especially in winter when snow accumulates on the dish.  Unlike many broadband users who vegetate for hours browsing the web, White actually gets an exercise routine while trying to get her satellite service to work.

“I open a window and I take a pan of water and, a cup at a time, I launch warm water at the satellite dish until I have melted all the snow off the dish,” Ms. White says. “It works.”

Other residents treat accessing the Internet the same way rural Americans plan a trip into town to buy supplies.

Kathi Terami from Tunbridge makes a list of things to do online and then, once a week, travels into town to visit the local public library which has a high speed connection.  Terami downloads Sesame Street podcasts for her children, watches YouTube links sent by her sister, and tries to download whatever she thinks she might want to see or use over the coming week.

A fiber to the home network like ECFiber would change everything for small town Vermonters.  The implications are enormous according to project manager Tim Nulty.

“People are truly afraid their communities are going to die if they aren’t on the communications medium that drives the country culturally and economically,” he says. “It’s one of the most intensely felt political issues in Vermont after health care.”

Despite the plan’s good intentions, one obstacle after another has prevented ECFiber from making much headway:

• The VTA rejected the proposal in 2008, calling it unfeasible;
• Plans over the summer and fall of 2008 to approach big national investment banks ran head-on into the sub-prime mortgage collapse, which caused banks to stop lending;
• An alternative plan to build the network with public debt financing, using smaller investors, collapsed along with Lehman Brothers on September 14, 2008;
• An attempt by Senator Pat Leahy (D-Vermont) to insert federal loan guarantees into the stimulus bill in February 2009 was thwarted by partisan wrangling;
• Attempts to secure federal broadband grant stimulus funding has been rejected by the Commerce Department;
• Opposition to the plan and objections over its funding come from incumbent providers like FairPoint, who claim the project is unnecessary because they will provide service in those areas… eventually.

For the indefinite future, it appears Ms. White will continue to throw warm cups of water out the window on cold winter mornings.

Vermont Edition takes a comprehensive look at where the state stands in broadband and wireless deployment. (April 8, 2009) (46 minutes)
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For every Tunbridge resident with a story about life without broadband, there are many more across Vermont living with hit or miss Internet access.

Take Marie from Middlesex.

Most residents in more rural areas of Vermont get service where they can from FairPoint Communications

“I am in Middlesex, about a half-mile off Route 2, and five minutes from the Capitol Building. Yet up until just recently, we had no sign of high-speed Internet. I understand that my neighbors just received DSL a few weeks ago, but when I call FairPoint, they tell me it’s still not available at my house, which is a few hundred yards up the hill. Hopefully, they’re wrong and I’ll see DSL soon,” she says.

Marie is pining for yesterday’s broadband technology — FairPoint’s 1.5Mbps basic DSL service, now considered below the proposed minimum speeds to qualify for “broadband” in the National Broadband Plan.  For Marie, it’s better than nothing.

Geryll in Goshen also lacks DSL and probably wouldn’t want it from FairPoint anyway.

“We have barely reliable landline service. A tech is at my house at least three times per year. I was told the lines are so old they are decaying. Using dial-up is impossible. I use satellite which is very expensive and is in my opinion only one step up from dial-up. I am limited to downloads and penalized if I reach my daily limit,” he says.

Many Vermonters acknowledge Douglas’ planned 100-percent-broadband-coverage-by-2010 won’t come close to achievement and many are highly skeptical they will ever see the day where every resident who wants broadband service can get it.

Chip in Cabot is among them, jaded after six years of arguments with FairPoint Communications and its predecessor Verizon about obtaining access to DSL.  It took a cooperative FairPoint engineer outside of the business office to finally get Chip service.  His neighbors were not so lucky, most emphatically rejected for DSL service from an intransigent FairPoint:

“I laughed when Governor Douglas announced his e-State goal “by 2010” three years ago. Now I’m thinking I should have made some bets on this claim. It took years of legal battles and a zoning variance to obtain partial cell coverage here in Cabot. Large parts of the town still do not have any cell coverage. Governor Douglas can perhaps be forgiven – he has no technical knowledge, and as a politician would be expected to be wildly optimistic about such “e-State” claims. The Vermont Telecommunications Authority and the Department of Public Service should know better however. We’re talking about rural areas where there is no financial incentive to provide either DSL or cell service. It will take a huge amount of money to provide service to those remaining parts of the state. I’m not optimistic.”

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/Wall Street Journal Vermont Broadband Problems 03-02-09.flv[/flv]

The Wall Street Journal chronicled the challenges Vermonters face when broadband is unavailable to them.  ECFiber may solve these problems.  Some of the stories in our article are reflected in this well-done video.  (3/2/2009 — 4 Minutes)

Time Warner Cable may be robocalling you any day now with news that your set top box is getting what the cable company is calling an upgrade.

Time Warner Cable is making this robocall to customers with set top boxes announcing an upcoming upgrade. (1 minute)
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Calls are being made to customers with set top boxes in Buffalo and Rochester notifying them an upgrade to the new Mystro platform begins as early as April 13th, depending on the box being used.  Syracuse and southern tier residents can expect their upgrade to commence in May.  The company maintains a website that will let you find the exact schedule for the Mystro upgrade in your area.

Time Warner Cable’s Navigator software displays the electronic program guide, helps you program and control your DVR, and also includes the setup menu for the box.

The upgrade will result in a dramatic change in the look and feel of the box’s on-screen graphics, change how you navigate through the program guide, and provide more options for hooking up today’s HDTV sets. If you have a DVR box from Time Warner Cable, the upgrade sets the stage for an upcoming feature that will let you remotely program your DVR while away from home.

Not everyone is thrilled with the upgrade, however.  In fact, a Google search for “Time Warner Navigator upgrade” reveals a large selection of websites and forums filled with complaints.  Regularly reported problems include:

• Sluggish performance, especially on older set top boxes;
• Poor responsiveness on fast forward/rewind functions for DVRs, making it difficult to land precisely where you want to be;
• The loss of “virtual HD” channels which some boxes passed through to even standard analog-only TV’s (albeit not in HD of course);
• DVR bugs that made recording reliability inconsistent;
• A DVR menu that makes it difficult to record only new episodes of series that repeat regularly on the channel lineup;
• Box crashes, lost program guide data, and issues with the box retaining settings, especially for more complex HDTV setups;

Time Warner Cable began testing Mystro at least two years ago in selected markets, and the company believes it has worked out a number of the bugs noted above along the way. Time Warner plans to systematically upgrade their customers to the new platform nationwide now that testing has been completed.

This customer was so bemused with the Time Warner Navigator upgrade, he made a video illustrating the absurd journey he took to find a science-fiction movie to watch.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/Navigator Demo.flv[/flv]

Time Warner Cable’s own promotional videos show off the new Time Warner Cable Navigator system in a better light. (5 minutes)

DC Circuit Court

The U.S. Court of Appeals for the District of Columbia has ruled the Federal Communications Commission has no authority to tell the nation’s largest cable operator to stop throttling broadband traffic crossing its network.  In a widely anticipated 36-page unanimous decision, the Court found the Commission exceeded its authority when it censured Comcast in 2008 for interfering with BitTorrent traffic.

The implications of the ruling could derail Commission plans to enforce Net Neutrality and implement the wide-ranging National Broadband Plan announced in March.

Judge David Tatel, writing for the court, found the Commission erred when it relied on policy statements issued by Congress as the basis for its authority to regulate broadband service:

The teaching of Southwestern Cable, Midwest Video I, Midwest Video II, and NARUC II—that policy statements alone cannot provide the basis for the Commission’s exercise of ancillary authority—derives from the “axiomatic” principle that “administrative agencies may [act] only pursuant to authority delegated to them by Congress.” Policy statements are just that—statements of policy. They are not delegations of regulatory authority.

Tatel

The seed for today’s authority-stripping ruling was first planted by the Bush Administration, which favored telecommunications deregulation.  When the FCC was tasked with finding a way to regulate fast-growing broadband, the Republican majority on the Commission was receptive to industry arguments that over-specific broadband regulation could hamper broadband development and have unintended consequences on private investment.  Urged instead to develop a general policy towards broadband, then FCC Chairman Michael Powell presided over the development of an “Internet Policy Statement” containing four informal principles the agency would rely on when assessing broadband:

1. Consumers are entitled to access the lawful Internet content of their choice.
2. Consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement.
3. Consumers are entitled to connect their choice of legal devices that do not harm the network.
4. Consumers are entitled to competition among network providers, application and service providers, and content providers.

The Commission’s often vague Internet Policy Statement was fatally flawed from day one, according to some legal experts.  First, the Statement was never codified by the Commission’s own rulemaking procedure.  Second, the Commission framed the broadband policy as a set of “guidelines,” a term considered legally vague.  Third, the FCC relied on the concept of “ancillary” authority — borrowing regulatory authority from so-called “policy statements” coming from Congress, to claim jurisdiction.

Even though some in the industry favored total deregulation of broadband, most providers agreed to adhere to the Four Principles, until Comcast decided it had the right to throttle down the speed of customers using file swapping software.  That violated Principle #2, and the Commission censured Comcast for purposely interfering with network traffic.

Comcast sued, claiming the Commission lacked the authority to regulate its network management policies.  Comcast first denied it was throttling broadband traffic, but later admitted the company was purposely governing the speed available to such software applications to protect their other customers.  Comcast argued that certain file swapping software does in fact harm its network (Principle #3) because the software utilizes as much broadband capacity it can find to move files back and forth.  Since Comcast customers in a neighborhood share a limited amount of bandwidth, a small number of customers ‘maxing out their connections’ running such software could potentially slow down everyone  else in the neighborhood.

Ultimately, today’s court decision agreed with Comcast — the Federal Communications Commission lacks authority over broadband.

It also did the industry one better by warning any regulatory authority the Commission believes it has over broadband better be backed up with specific authority granted by Congress, or the court may find those policies vulnerable as well.

In short, the court just fired a warning shot suggesting the FCC has no authority to enact Net Neutrality protections or the National Broadband Plan, at least not under Kevin Martin’s flawed approach.

The ruling comes as no surprise.  The attorney for the FCC found a hostile reception from the court during oral arguments back in January.  Where was the specific authority, granted by Congress, to oversee broadband policy they asked?  Why is the Commission relying on general principles to govern broadband?  By the end of the session, the FCC’s lead attorney was foreshadowing the imminent loss of his case by asking the court to make the decision against the FCC a teachable moment — giving advice in the ruling as to how to write policies that -will- survive a court test.  The court wasted no time telling the attorney that wasn’t their job.

Public interest groups and others advocating Net Neutrality and the National Broadband Plan issued statements warning about the implications of an industry freed from regulatory oversight.

S. Derek Turner, research director for Free Press:

“The decision has forced the FCC into an existential crisis, leaving the agency unable to protect consumers in the broadband marketplace, and unable to implement the National Broadband Plan. As a result of this decision, the FCC has virtually no power to stop Comcast from blocking Web sites. The FCC has virtually no power to make policies to bring broadband to rural America, to promote competition, to protect consumer privacy or truth in billing. This cannot be an acceptable outcome for the American public and requires immediate FCC action to re-establish legal authority.

“This crisis is not a result of a weak congressional law, but a direct consequence of the previous two Commissions’ misguided and overzealous attempts to completely deregulate America’s communications networks. Past FCC actions created a huge loophole in the law that leaves the agency unable to protect consumer privacy or promote universal broadband access.

“The FCC must have the authority to carry out its consumer protection and public interest mission in the 21st-century broadband marketplace. The current Commission did not create this existential crisis, but it now has no choice but to face these tough jurisdictional questions head on, and do what is necessary to protect consumers and promote competition.”

Ryan Singel – Wired Magazine:

A broadband company could, for instance, ink a deal with Microsoft to transfer all attempts to reach Google.com to Bing.com. The only recourse a user would have, under the ruling, would be to switch to a different provider — assuming, of course, they had an alternative to switch to.

Companies can also now prohibit you from using a wireless router you bought at the store, forcing you to use one they rent out — just as they do with cable boxes. They could also decide to charge you a fee every time you upgrade your computer, or even block you from using certain models, just as the nation’s mobile phone carriers do today.

While this might seem like a win for the nation’s broadband and wireless companies, the ruling could be so strong that it boomerangs on them. For instance, if the FCC is left without the power to implement key portions of the National Broadband Plan — a so-far popular idea — then Congress or the FCC may have to find a way to restore power to the commission. That could leave the FCC stronger than it was before the ruling.

Gigi Sohn, Public Knowledge:

“Today’s Appeals Court decision means there are no protections in the law for consumers’ broadband services. Companies selling Internet access are free to play favorites with content on their networks, to throttle certain applications or simply to block others. In addition, as of now, the Federal Communications Commission’s (FCC) ambitious National Broadband Plan to help boost the economy is in legal limbo. The ability of the FCC to support broadband through universal service is in jeopardy, as is the agency’s ability to protect consumer privacy, ensure access to broadband-based emergency communications or promote access to broadband for the disabled. In our view, the FCC needs to move quickly and decisively to make sure that consumers are not left at the mercy of telephone and cable companies.

“If it chooses, the Commission can continue to roll the dice and let the courts decide each time it wants to try to put some consumer protections on a broadband service. The court decision left open that option.

“We have a different idea. The FCC should immediately start a proceeding bringing Internet access service back under some common carrier regulation similar to that used for decades. Some parts of the Communications Act, which prohibit unjust and unreasonable discrimination, could be applied here. The Commission would not have to impose a heavy regulatory burden on the telephone and cable companies, yet consumers could once again have the benefit of legal protections and the Broadband Plan could go forward. The American public deserves no less.

“We need to emphasize that no one is talking about regulating ‘the Internet.’ No one is talking about regulating search engines or Web sites. We are talking about re-applying policies to a telecommunications service that the FCC incorrectly abandoned. That is the most simple solution and it’s the correct one.”

The FCC, despite the decisive loss in court, claims it will carry on.

“Today’s decision invalidated the prior commission’s approach, but in no way disagreed with the importance of preserving a free and open Internet,” FCC spokeswoman Jen Howard said in a statement.

Nick Summers, writing for Newsweek’s ‘Techtonic Shifts’ blog, believes FCC Chairman Julius Genachowski is likely to aggressively respond to today’s court decision by employing the “nuclear option,” reclassifying broadband Internet as a communication service just like the nation’s phone system, bringing it fully under FCC regulation.

Would Genachowski go that far, undoing virtually all of the Bush-era FCC’s policies? Yes. In September, he gave a major address about net neutrality without ever actually uttering the phrase. But he concluded with these strong words:

“We are here because 40 years ago, a bunch of researchers in a lab changed the way computers interact and, as a result, changed the world. We are here because those Internet pioneers had unique insights about the power of open networks to transform lives for the better, and they did something about it. Our work now is to preserve the brilliance of what they contributed to our country and the world. It’s to make sure that, in the 21st century, the garage, the basement, and the dorm room remain places where innovators can not only dream but bring their dreams to life. And no one should be neutral about that.”

The importance that Genachowski et al. place on net neutrality has never remotely been in doubt. In February 2009, months before he was confirmed as FCC chairman, at a private dinner in Manhattan, Genachowski spoke about the Internet’s role in the election of President Obama and in America’s future. He was circumspect about details, but Genachowski spoke unreservedly about the need for certain core protections if the country was to remain at the fore of the Internet revolution. It’s just that important.

[flv]http://www.phillipdampier.com/video/CNBC FCC Loses Comcast Case 4-6-10.flv[/flv]

CNBC reports the FCC’s loss in court could open the door to metered broadband service in the United States.  (2 minutes)

[Article Correction 4/15/2010: The original piece laid blame for the classification of broadband as an “information service” on former FCC Chairman Kevin Martin.  In fact, the classification was made by former FCC Chairman Michael Powell, who served during the first term of the Bush Administration.  We regret the error.]

Ontario County, New York

Senator Charles Schumer (D-New York) visited Canandaigua Monday to promote Ontario County’s fiber optic broadband project, in hopes of securing federal funding to expand the fiber project into adjacent counties in the Rochester-Finger Lakes region.

Schumer likened fiber optic broadband development to other revolutionary transportation projects in New York’s past which transformed local economies, created jobs, and brought prestige to the region.

“One fact has proven true since the days of the Erie Canal: if you don’t have good infrastructure, you’re not gonna bring jobs, but when you do have good infrastructure, you are gonna bring jobs. And the fiber optic ring that we are talking about here in Ontario County is the Erie Canal of the 21st century. It’s that simple,” Schumer told an audience at the Center for Infotonics.

Ontario County began constructing a fiber ring more than a decade ago to improve connectivity across the often-rural county.  Bookmarked between high growth areas around Victor and Canandaigua to the east and Geneva to the west, large expanses of Ontario County are rural. Being a part of central New York’s Finger Lakes Region means the often hilly terrain and winding roads can make wiring expensive and difficult in certain areas.  But the prospect for 21st century connectivity has helped fuel growth — and jobs — into the region.

Sen. Schumer

Schumer wants FCC officials to visit Ontario County to explore the project as a potential blueprint for wiring other counties.

“We will not only put this region at the cutting edge of attracting new businesses that need high speed fiber optics, but we’ll do a service to the rest of the country by showing them how it can work,” said Schumer.

New York’s senior senator said he will aggressively pursue millions in federal funding to expand the project outside of Ontario County, and help complete the fiber optic network.

The senator may find some opposition to federal funding initiatives from incumbent providers Frontier Communications and Time Warner Cable, particularly if funds originate from broadband stimulus programs.  Both companies would likely object to federal spending on a fiber network that crosses areas both companies already serve.

Frontier Communications offers DSL service in many parts of Ontario County, and Time Warner Cable has wired most of the significant-sized towns and cities in the county.

The Ontario County project has been built without any federal stimulus money.

[flv]http://www.phillipdampier.com/video/Ontario County Fiber Schumer Visit 4-5-10.flv[/flv]

Sen. Schumer’s visit to Canandaigua, New York to promote Ontario County’s fiber project was covered in these three reports from YNN, WROC-TV, and WHAM-TV — all in Rochester, New York.  (6 minutes)

America's most creative taxing authority, charged with collecting the innovative taxes the state government dreams up

No state can be more innovative in finding new ways to tax, fee, and surcharge residents than New York.  Once it becomes taxable in the Empire State, it’s only a matter of time before it becomes taxable in other states as well.  Now consumers face the prospect of paying new sales taxes on broadband and other services they purchase online, even in cases where federal laws would seem to exclude such possibilities.

New York residents have endured the so-called “Amazon tax” since June 1, 2008 when the state government demanded large, out of state Internet retailers collect and remit sales taxes for online purchases should they result from online advertising.  Although largely ignored by smaller online retailers, large high profile Internet retailers with so-called “affiliate programs” that pay independent websites for referring potential customers faced the choice of cutting ties with their “affiliates” in New York or imposing sales tax on New York customers.

Websites ranging from Overstock.com, Buy.com, Amazon.com, Newegg, and others were all targeted by the New York State Department of Taxation and Finance.  Overstock and Newegg eventually threw their New York affiliates under the bus to preserve an “unofficial” tax-free shopping experience for New Yorkers.  Buy.com and Amazon both complied with the state, although the latter filed suit challenging the constitutionality of out-of-state sales tax collection.

What made the New York sales tax law different from all the rest is that it delivered an end run around settled federal interstate commerce law.  A Supreme Court decision found it legal for states to demand sales tax payments from businesses that operate within their state, but no such provision was made for businesses who don’t locate an office or store in a particular state.  Buying a new hard drive from an online retailer inside your state?  You’ll be charged sales tax.  Order it from outside of the state, and the company typically won’t try to collect sales tax.

New York wants online businesses to get a new attitude.  It wants sales tax money for orders placed by New Yorkers no matter where your business is located.

As the Great Recession wreaks havoc on state budgets, state lawmakers who don’t want to cut popular spending programs are instead sniffing for new ways to raise revenues.  Some are declaring ‘I Love New York’ for blazing the trail to fatter sales tax coffers.

Colorado's legislature ignited a firestorm of controversy after passing an online sales tax bill into law

One recent example is Colorado, where state lawmakers borrowed liberally from New York’s tax law and passed their own — requiring large online retailers to start collecting sales taxes or provide a summary of residents’ web purchases in the state (so the Colorado taxing authority can pressure residents to declare those purchases and pay sales tax themselves.)  The penalty for not doing so is a fine of several dollars per non-compliant transaction.  Amazon.com, among others, yanked their affiliate program in the state, and some online retailers have declared they won’t comply.  A few proclaimed they would throw away any fine notifications, suggesting the state has no authority to impose such fines for interstate commerce, which is regulated on the federal level.

Rhode Island passed its own sales tax law, and collected almost nothing from it, in part because online retailers outside of Rhode Island almost universally ignored it.  Now the law faces repeal.

Other states like North Carolina and California have endured their own controversies over such legislation.  In North Carolina, Amazon.com threw their affiliates under the bus.  California Gov. Arnold Schwarzenegger vetoed a sales tax proposal last year.  There are bills to impose sales taxes on all online purchases in Iowa, New Mexico, Vermont and Virginia.

Meanwhile, New York’s taxing authority has some new ideas on how to expand the scope of sales taxation to include a whole new range of online activities.

The E-Commerce Times reports the New York State Department of Taxation and Finance has declared doing practically anything online that involves the transfer of money in return for a service could be subject to New York sales tax:

This new position results in the imposition of sales tax on purchases of services provided over the Internet that would not be subject to sales tax if provided in person by a human being. For example, the purchase of an educational course is not taxable if provided by a live speaker, but the same course may now be considered taxable by the Department if the course is given online.

The Department has painted with a broad brush to conclude in a number of advisory opinions that, among other things, the following services or forms of entertainment are really sales of software when provided over the Internet:

1. e-learning courses;
2. information technology courses;
3. mail-tracking services performed for airlines;
4. loan origination and processing services;
5. automobile insurance policy services;
6. payroll processing services; and
7. video games played on computers located at a business’ facility.

Rhode Island's efforts to collect sales tax on out of state purchases was a flop

The logic used to justify taxation of online services illustrates the time and talent state workers are willing to extend to help fill New York’s dire budget pothole:

The Department is asserting that a purchaser of an online service is controlling the software on the provider’s server by clicking various icons on his or her own computer screen, and thus the purchaser has control over the software; hence the software has effectively been “transferred” to the purchaser. Accordingly, the Department is taking the position that the purchase of an online service is really the purchase of a license to use software, even though the software is being used by the service provider on its own server.

Critics of the taxing authority accuse it of exceeding its legislative mandate.  In fact, the New York State legislature previously considered — and rejected — legislation that would have imposed sales tax on digital downloads like music and movies.  The legislature has been resistant to taxing online activities in hopes of retaining high tech businesses in the state, who might consider locating out of state if it meant avoiding imposing sales tax on consumers.

Of course, online buyers are technically subject to paying sales taxes for every taxable purchase, made in or out of state.  But since most states ask taxpayers to voluntarily report such purchases, the compliance rate is notoriously low.

In New York, the taxing authority has a reputation best summed up as “we don’t play — padlock and seize first, ask questions later.”  Aggressive enforcement against non-compliant retailers is likely, and E-Commerce Times suggests online retailers need to pay attention:

The sales tax is a transfer tax, and sellers collect the tax from purchasers and remit the tax to the Department. However, when a seller fails to collect and remit any tax due, the seller itself becomes liable for the tax, interest and possibly penalties. The Department has not been content simply to apply its new position going forward, but rather has been seeking to apply its position retroactively on audit as well.

There have been instances of the Department auditing online service providers and assessing sales tax as far back as 2005, even though the Department’s first clear administrative guidance with respect to its new position dates from November 2008 (and even though the Department issued administrative guidance in February 2006, that seems to conflict with its present position).

The Times predicts this will all come to a head when the taxing authority sues an online retailer or state resident for non-payment of taxes.  Then it’s up to the courts to decide… when they get around to it.  Remember the lawsuit Amazon.com filed against New York in 2008?  The New York Supreme Court threw out the suit in January 2009, but an appeal was filed with the next court up the chain — the appellate court — July 13th.  It’s still pending.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Online Sales Taxes 4-5-10.flv[/flv]

Here are three reports about the ongoing online sales tax controversy underway in three states (9 minutes):

1. KMGH-TV in Denver reports on a local family running a campaign to repeal the so-called “Amazon tax” in Colorado which resulted in the end of the company’s affiliate program for Colorado residents.
2. WCAX-TV in Burlington, Vermont discusses a proposed Vermont law that would extend sales tax to online purchases.  Local merchants support the proposed law as a way to restore pricing fairness between online and brick and mortar retailers.
3. WTVR-TV in Richmond, Virginia covers that state’s proposed online sales tax bill.  George Peyton from the Retail Merchant’s Association reminds viewers whether or not an online retailer charges them sales tax, they still owe the state the tax — declared on your income tax return.