Click and Tax- New Taxes to the Internet

October 3, 2007

WASHINGTON — Congress faces a looming deadline of Nov. 1: The day the Internet tax moratorium expires.

If it doesn't extend or make permanent this moratorium, state and local governments will be free to impose taxes on Internet access, products or services purchased online and discriminatory fees that treat those purchases differently from other types of sales.

State and local government officials have been eyeing such tax possibilities for years. There's an endless list of ways officials can tax the Internet including the taxing of email, downloads and a whole host of other transactions, services and emerging tools yet to come.

“New taxes on Internet access amounts to turning the information superhighway into a high-priced toll road,” said Monica McGuire of the National Association of Manufacturers regarding the potential new costs to manufacturers, their suppliers and consumers.

The original Internet Tax Freedom Act of 1998 created the tax-free moratorium, which Congress extended two times. Legislation introduced in both Houses this year — S. 156 and H.R. 743 – by Sen. Ron Wyden, D-Ore., and Rep. Anna Eshoo, D-Calif., respectively, would make the ban permanent.

What’s the hold up?

Well, state and local governments and their allies are putting pressure on Congress to let the moratorium expire, while other special interests are utilizing the legislation as a vehicle for their own pet causes.

Regarding state and local governments, they argue that the moratorium and possible permanent ban on Internet taxes robs them of revenue sources to fund their programs. Such a permanent extension would “make it difficult for states and localities to continue to secure revenues needed to fund health care, education, public safety and other critical services,” according to the Center on Budget and Policy Priorities.

Critics of this argument respond that state and localities are hardly hurting for money.

In recent analysis, Small Business & Entrepreneurship Council Chief Economist Raymond Keating finds that there has been no revenue shortage flowing to state and local governments as Internet usage has been rapidly expanding.

He cites U.S. Census Bureau data showing that state and local government revenues increased from $1.4 trillion in 1995 to $2.5 trillion in 2005 – a 78 percent increase, compared to inflation registering 22 percent over the same period.

The Information Technology and Innovation Foundation argues that the Internet tax status should be resolved at the federal level in that “the cost, speed, and availability of Internet access should be a national priority.” The foundation also says the tax is a “key enabler of commerce, education, government services and civic participation” with high speed Internet access being “a fundamental building block for increasing productivity and growth in the national digital economy.” The group comes down on the side of making the current moratorium permanent.

In passing the first and subsequent Internet tax moratoriums, the overwhelming consensus in Congress was that investment in, and access to the Internet remained a critical national priority given its relative infancy, and its potential for enabling innovation and business, as well as empowering individuals.

So, has the Internet matured? Now that it’s a staple in homes and businesses nationwide, is it time to tax it just like everything else?

Hardly, say supporters of making the moratorium a permanent ban.

"Consider what an Internet tax is actually taxing," writes Walter McCormick, president and CEO of United States Telecom Association, in a recent piece for The Hill, a daily Congressional newspaper. It is taxing “access to information, to knowledge, to a voice in the democratic process, and to economic opportunity.”

Indeed, as small business owners and entrepreneurs well know the Internet has been an extraordinary tool that has allowed them to innovate, expand into new markets, increase productivity and integrate greater efficiencies into all aspects of business operations.

In fact, broadband deployment is hardly complete and experts say we have only hit the tip of the iceberg in terms of innovative Internet services. According to tax ban supporters, maintaining the current regulatory framework – that is, making permanent the Internet tax moratorium, would keep costs low for providing Internet access, foster investment in broadband infrastructure and continue to encourage innovation in Internet-based products and services.

"The moratorium has served us well and the Internet is now an integral part of everyday life. Americans across the country utilize the Internet for communication, commerce, business, education and research,” said Rep. Eshoo in May 2007 testimony before the Senate Committee on Commerce, Science and Transportation.

"Now is not the time to reverse course and kill GoldenGoose.com. It's more critical now than at any time since the moratorium was established to protect the Internet from new taxes and fees,” she added.

The permanent Internet tax ban that Eshoo supports looks less likely by every legislative hour, yet another extension appears to be in the cards. The bill would also clarify the intent of Congress regarding the definition of “Internet access” (for example, some states are taxing DSL services) and grandfather back in those states who taxed access prior to the 1998 legislation. These nine or so states continue to fight the grandfather clause tooth and nail, and up to this point have won their battles.

You can join the fight to help defend the Internet from duplicative, discriminatory and duplicative taxes. Click here to take action with the Don’t Tax Our Web coalition, or you can do nothing and get taxed when you click after November 1, 2007.

This article first appeared in The Beltway Small Business Report for Fox News.