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Costly Internet Tax Could Be On The Horizon

Web users will face billions of dollars in new taxes if Congress allows a ban on Internet taxes to expire in December.

The Internet Tax Freedom Act prevents state and local governments from taxing Internet use, and has been reauthorized every three years since 1998. If it is not reauthorized in December, consumers and businesses could face $14.7 billion in new taxes, according to a new American Action Forum report.

Extension of the ban has wide support in Congress, but this time it could be linked to a much more controversial bill, the Marketplace Fairness Act, that would allow states to collect a sales tax on Internet goods sold in the state by companies located online or outside of the state.

The tax would be a welcome source of revenue for cash-strapped governors, and supporters say it would take away the unfair advantage online companies currently hold over companies with physical locations. Senate Majority Leader Harry Reid told The Hill he’ll do “whatever it takes” to pass the Marketplace Fairness Act this year.

But members of his own party, including Senate Finance Committee Chairman Ron Wyden, and leading Republicans, including Speaker of the House John Boehner, and many conservative groups oppose the bill — setting up a potential lame-duck fight that could jeopardize extension of the Internet Tax Freedom Act.

“I hope that the proponents of the Marketplace Fairness Act will face the facts and admit that they can’t achieve their goal by holding the Internet economy hostage,” Sen. Wyden said in a statement following the ban’s temporary extension in September.

“Anyone who votes for passing MFA alongside ITFA is voting to repeal the Internet Tax Freedom Act,” he added.

If the ban is allowed to expire, a new Republican-controlled Congress could reauthorize it next year. But some states might automatically begin collecting taxes in December, according to a House Judiciary Committee report. Montana already has a law mandating a 3.75 percent Internet access tax if the ban expires.

Many states already levy taxes upwards of 10 percent on wireless access — some as high as 15 percent. Assuming Internet access would be taxed at the same rate as wireless, the American Forum Action report found consumers would pay $10 billion in new taxes and businesses $4.7 billion should the ban expire.

“With the FCC already considering burdening large swaths of the Internet with new regulations, the brunt of the high taxes could add yet another drag onto the most dynamic part of the economy,” the report reads.

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