By Shelia Watson
Contributing Writer

The Internet tax ban, set to expire Nov. 1, 2007, has won a reprieve, with the U.S. House Judiciary Committee voting unanimously to extend the moratorium on Internet taxes for four more years.

The vote to approve an amendment to the Internet Tax Freedom Act will extend the ban on Internet access taxes until Nov. 1, 2011. Congress passed the first Internet tax moratorium in 1998.

However, similar legislation in the Senate has stalled, even while several House members co-sponsored a bill to ban Internet taxes permanently.

Taxing the Internet has become a divisive issue, with some legislators arguing that a permanent ban is needed to preserve the growth of the Internet, while others insist the ban will restrict the ability of states and local governments to raise funds.

The issue has been a perennial introduction in congressional session. For instance, another bill introduced in Congress earlier this year was designed to control Internet sales and access taxes.

The Sales Tax Fairness and Simplification Act, introduced by Sen. Michael Enzi, R-Wyoming, would allow states to mandate the collection of tax from online and catalog merchants, whether or not they have a physical presence in the buyer’s state.

Under current law, online sellers are required to process sales tax only for buyers residing in states where the seller has a physical store.

A report by the Government Accountability Office noted that the bill is supported by large retailers who contend it makes the sales tax issue fair; yet it is criticized by many small retailers who say the tax collection process would be cumbersome considering there are more than 7,500 taxing districts across the country.

The bill would clarify the definition of “Internet access” to better protect essential goods and services provided by state and local governments. It also would ensure that a consumer’s connection to the Internet, including e-mail and instant messaging, would remain tax free.

Those who support the ban argue it will keep the country on the cutting edge of technology, encourage innovation and expand broadband networks into rural areas. Opponents say the ban prohibits states from a vital revenue source.

What the bill would not do is create a total tax-free zone. Goods that are taxable in a brick-and-mortar store would be taxable in an online transaction.

In addition, the tax ban would not apply to income taxes, corporate taxes, business licenses, franchise fees, property taxes or fees on the telephone bill.

So far, the proposed legislation has many supporters, including the National Governors Association, the National League of Cities, the U.S. Conference of Mayors and the National Association of Counties, according to the GAO.

The issue for local and state governments is how much revenue might be obtained, or lost, depending on whether the bills pass.

“Obviously we’re losing lots of money in tax revenue,” said Arnold Hite, a professor of economics at Charleston Southern University. “The size of the online economy is growing a lot faster than the traditional economy. A conservative estimate is twice as fast.”

Hite said in terms of the economy, there are several things to consider.

“First, is the tax fair? Economists usually agree that all commerce should be taxed at the same rate,” he said. “For instance, whether you buy a pair of shoes over the Internet or at the mall, it shouldn’t be that one gets taxed and one is not.

“There’s also the benefit principle of taxation, which means: Do the people paying the tax somehow receive the benefit, the governmental services, from the tax?”

In the example of the shoe purchase, Hite said, “If I buy shoes from California, that doesn’t yield government services to me. In that case, taxing would not make sense.”

The greatest difficulty in the tax structure, he said, is trying to minimize the cost of policing and administering the tax.

“For example, with a local store, the tax agent can go by and make sure they’re processing their taxes properly. But with Internet businesses, there’s no telling where they are. It might be impossible to track them down and enforce payment. Although as the Internet matures, they might come up with easier ways to do that.”

Overall, Hite said, the most important issue that Washington should consider is structuring the tax in such a way that there is minimal disturbance about what people buy.

“This is something that economists are always thinking about, although few other people do,” he said.

In terms of whether Internet sales could overtake brick-and-mortar, Hite has little concern.

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