With the expiration of the ban on Internet taxation imminent, the Senate approved a further seven-year moratorium on October 26. The original moratorium, which was passed in 1998, was designed to prevent state and local governments from levying taxes on Internet services. The news was a relief for many small business owners who use the Internet to market their goods and services.

The issue had aroused interest from many areas in the private sector, and had been debated extensively on Capitol Hill. Affordable Internet access-- without the various taxes that appear on a typical phone bill-- is important to many sectors of the economy, but many small business owners regarded the prospect of new Internet access taxation as a serious threat to their bottom line. The 1998 bill – extended in 2001 and 2004 – does not prevent states and cities from imposing sales and user taxes, but it does ban access taxes, as well as multiple and discriminatory taxes, that would make on-line transactions more expensive that those conducted in bricks-and-mortar establishments. In testimony before the House Committee on Small Business, small business owners and Internet Service Providers aired their concerns that included estimates that new access taxes could raise Internet bills by 15 to 30 percent for small business enterprises. It is difficult to know exactly how many small businesses sell products over the Internet, but eBay estimates that some 720,000 small businesses use eBay to market and sell their goods.

The various opponents of further taxation (Internet Service Providers, retailers and trade associations as well as small businesses) had hoped that Congress would enact a permanent ban on Internet access taxes, but the fear that any further efforts to lobby for a permanent ban would extend the debate beyond the November 1 deadline made the compromise necessary.

As it is, the Senate’s bill - The Internet Tax Freedom Act Amendments Act of 2007 - with five days left before the deadline still needed to be reconciled with Congress’s version, which added only another four years to the life span of the tax ban. Noting this, the White House rebuked Congress for moving so slowly and urged Congress to keep the Internet tax-free.

Despite the hope that a conclusion to this issue is imminent, a congressional lawyer has warned that the more restrictive language of the House’s bill may create yet more problems. A legislative attorney from the Congressional Research Service (CRS) noted that the wording of the bill may leave the door open for possible e-mail taxes. This concern is a further illustration of the complexity of the whole Internet tax issue, and an indicator that the matter may yet require more legislative action. Stay tuned for more on this important issue, and contact your tax professional to discuss the implications of this and other tax matters that affect your bottom line.