In the fall of 1998, the Internet Tax Freedom Act put a moratorium on discriminatory and multiple Internet taxes on electronic commerce and access taxes at the federal, state, and local levels.  With large bipartisan support, the ban was extended in 2001 and 2004.  It expires on November 1, 2007.  Congress is considering a four-year extension.

As of June 2007, the Internet reached 1.2 billion users, almost one billion more users than when the Internet Tax Freedom Act was first enacted.  E-commerce accounts for $31.5 billion per quarter, or 3.2 percent of total sales, and is increasing at a rate of around 20 percent per quarter.

Even though the Internet tax moratorium has worked for consumers and taxpayers, states are becoming increasingly concerned about the lack of revenue as companies expand their Internet sales.  But that argument does not hold water.  Small Business and Entrepreneurship Council Chief Economist Raymond Keating found that revenue at both levels of government over a 10-year period has gone from $1.4 trillion in 1995 to $2.5 trillion in 2005, a 78 percent increase compared to an inflation level of 22 percent.

There is widespread speculation as to how taxes would be levied if the moratorium is not continued or made permanent.  While the obvious choice is the tax on Internet access allowed in nine “grandfathered” states, some have suggested that taxes could be applied to downloaded files, and even on emails.  However, this could be just the tip of the iceberg.  It is impossible to predict the extent to which politicians may attempt to fill government coffers.

As Congress faces the expiration of the moratorium, the ban should be made permanent.  If not, the extension of the moratorium should be for at least six years.  Internet business and commerce have become an important part of the economy, and the tax ban has been a contributing factor.  As the economy will undoubtedly become more digitally-focused, America has a lot to gain from keeping the Internet unshackled from the burdens that come from regulation and taxation.