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A tangled tax web

As Congress moves toward a permanent ban on Internet taxes, the debate itself has become infused by libertarian strains and a frontier mentality that bear little resemblance to modern tax policy. While there is a compelling argument against taxing a technological connection that is becoming a basic utility of life, no one is proposing that Congress similarly prevent states from taxing telephones or electricity.

So what is the point here?

The Senate is scheduled to take up its version of the tax ban on Thursday, which would make permanent a temporary moratorium, first adopted in 1998 and then extended in 2001, that expired Saturday.

When the ban was first adopted, only one in four households enjoyed Internet access, and the "Don't tax the Net" cry was delivered as though it were a plea for freedom. Now, nearly three in four households are connected, and the reality is that they are paying for a consumer service. The Internet is an extraordinary technological advance that links people across states and nations, but, as a matter of tax policy, it is a commodity virtually indistinguishable from cable TV. Yet Congress bans taxes on one and not the other.

Though state and local governments rely entirely too much on regressive and hidden forms of taxation, of which Internet services would surely be one, this Republican-led Congress has also expressed devotion to the principle of states' rights. That the Internet implicates interstate commerce is a debate of a different kind, related to the consumer transactions that are made across state lines and not to the provision of a basic Internet connection.

To his credit, Sen. George Allen, R-Va., one of the bill's sponsors, has insisted the language be narrowly tailored so the ban cannot be construed to apply to services unrelated to the Internet connection. But what about voice technology that could replace phone services? What about the next invention no one knows about yet? As David Quam of the National Governors Association told the Washington Post, "I don't know how you write a permanent bill for an industry that is changing so fast, without shoveling a lot of unintended consequences on state and local governments."

The Senate and House also have separated the Internet tax ban from the more nettlesome issue of Internet commerce. That may be wise politics, but it does little to help states resolve the costly questions of tax equity that began with mail-order houses and have exploded with Internet trading.

When a consumer buys a book online, as opposed to the bookstore down the street, why shouldn't he or she pay a sales tax? How fair is it to tax the bookstore and not the online company? These are questions of fair play that are punctuated with increasingly larger dollar signs. In the second quarter this year, according to the U.S. Department of Commerce, Internet retail sales totaled $12.5-billion _ a 27.8 percent hike from just last year. Much of it, maybe most of it, went untaxed.

Congress' Internet tax strategy has been to deny and postpone. The original moratorium was adopted in part to allow time for a careful analysis of the interstate issues, but the last Internet task force splintered and ended up calling for yet more delay. So the bill on which the Senate will vote says simply not to worry. Make the ban permanent, play to the "Free the Net" crowd, and maybe sort out the real issues another day. So much for fairness.