Net Still a Tax-Free Zone

WASHINGTON, D.C. -- The ban on Internet taxes was officially reinstated Wednesday when President George W. Bush signed into law a bill from Congress proposing a two-year moratorium extension.

Originally passed in 1998 with an expiration date of October 21, 2001, the Internet Tax Moratorium Act served to prohibit states from taxing the fees that ISPs collect for providing Internet service and from collecting Internet-specific taxes on e-commerce transactions. A 1992 Supreme Court decision also forbids states from collecting taxes from Internet operations unless the company has a significant presence in that state.

That ban lapsed in October when Senator Byron Dorgan, a Democrat from North Dakota, failed to persuade the Senate to expand the Internet tax moratorium until June 30, 2002. His proposal included forcing state and local governments to revamp their tax structures--which vary by jurisdiction and can create tax collection nightmares for e-commerce companies that sell goods to consumers in many areas--to a simpler consumption tax on remote sales.

Temporary Stay

In October the House of Representatives passed a bill with a similar goal--to hold off on taxing Internet goods for a two-year period while states figured out a structure that treats sales made online fairly. Earlier this month the Senate approved a two-year extension to the ban without hashing through the thorny issues surrounding interstate tax rules.

President Bush said the bill, H.R. 1552, that he signed into law will help spur Internet growth.

"The Internet is an innovative force that enables such applications as distance learning and precision farming," the president said in a statement. "Government must do its part to make access to these services affordable. It should not raise costs through additional taxation."

Still Unresolved

The moratorium does not address the general issue of sales tax, however. States continue to eye growing Internet sales and commerce uneasily. For example, analysts at Forrester Research estimate e-commerce will total $74 billion in 2002. While government officials are eager to boost consumer spending and confidence in the economy, they also are reluctant to lose tax sales opportunities, in particular those that fund local services. Some are exploring ways to enforce existing laws that let them recoup sales tax revenue lost to out-of-state purchases.

Some critics charge that evidence does not show that Internet sales hurt local retailers. However, a report from the federal General Accounting Office estimates that by 2003 there will be between $2.5 billion and $20.4 billion in revenue lost from e-commerce transactions that are not taxed.