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The Taxman Cometh?

Just as the flower of e-commerce shows signs of blossoming into a retailing colossus,

Or so say those opposed to taxing the Internet. Last November, before the U.S. Senate could vote on a House-approved measure to extend the country’s five-year ban on taxing Internet access, the bill died in a bipartisan crossfire of complaints.

Enacted as The Internet Tax Freedom Act of 1998, the ban—now lifted—was aimed at blowing life into the fledging Internet marketplace. The law barred states from slapping taxes on Internet service providers, who would be obliged to pass those taxes on to their customers.

As long as the moratorium remains lifted, states and municipalities will have a legal shot at taxing almost all phases of e-commerce, advocates of the ban say. This scenario opens the door to multi-state taxes on Internet sales, higher tax rates for online sales than traditional retail sales, new taxes on Internet service and on Internet access itself. As time ran out amid rancorous senatorial squabbling Nov. 25, Sen. George Allen, R-Va., the extension bill’s chief sponsor, vowed to bring the measure back for a vote as early as possible this year.

Allen, who favors a permanent ban on Internet taxation, had argued that lifting the tax moratorium now would be a blow to the high-tech industry in general and could cripple online businesses just as they’re beginning to turn a profit. Predictably, tech-sector lobbyists vehemently agreed.

“The last thing we need is for the cost to individual consumers and businesses to go up,” said Mark Bohannon, a senior vice president of the Software and Information Industry Association. “That would be a direct deterrent to using the Internet.” Proponents for lifting the ban argue that e-commerce is now a mature, stable industry that should no longer be given any special tax breaks. They argue that states are missing out on billions in tax revenues each year as consumers increasingly turn to the Internet for their news, entertainment and shopping. —F.S.