STATEMENT
Of the Honorable Nydia M. Velazquez, Chairwoman
United States House of Representatives, Committee on Small Business
Full Committee Hearing: “The Internet Tax Moratorium”
Wednesday, October 3, 2007, 10 a.m.

With the advent of the Internet, electronic commerce has been a driving force for economic growth in our country.  Small businesses in particular have played a vital role in the digital economy. For many entrepreneurs, an Internet connection can serve as an avenue to start a new business or grow an existing one. 

Today’s hearing will focus on the Internet Tax Moratorium and its pending expiration.  Since 1998, federal law has prohibited taxes on Internet access and has ensured parity between online and offline sales.  

As we have witnessed over the past 15 years, the Internet has proven to be the great leveling field in American business today, permitting small firms with fewer resources to compete.  In a recent survey of small business owners, 83% reported that the Internet had improved communications about their company.  Additionally, over sixty percent stated that the Internet has opened up new markets for their businesses.

The current moratorium has played an important role in encouraging Internet sales for small businesses.  However, with many states and local governments under pressure to find additional sources of revenue – some have advocated against the extension. 

Today’s discussion will examine the impact the expiration would have on small businesses competing in a technology driven economy.  It is fairly clear that the moratorium has been a catalyst for the growth in e-commerce among smaller enterprises.   The current non-discriminatory tax treatment has allowed many small businesses to use the Internet as another medium to expand.   

While the overall degree of impact may be argued, the growth by small businesses in Internet commerce cannot.  E-bay reports that as many as 250,000 sellers make their full-time living as home- based businesses.

Layering unpredictable taxes, many of which would be regressive in nature, could place small businesses at a disadvantage. Studies have shown that a hike in these taxes could hit the smallest e-retailers the hardest.  It could also add significant paperwork burdens for small businesses that simply don’t have the resources to meet new requirements.

While some may discount the impact of higher access fees, it is important to consider the overall price sensitivity of the market.  Assuming that Internet access is taxed similarly to wireless communications, small businesses could see an upwards of a 15-30% increase in their Internet bill.  For some, that could make the difference in the decision whether to market products and services online. 

The moratorium was created as an economic policy to allow small businesses to compete.  The prohibition has made the Internet a gateway for entrepreneurship regardless of race, income, or neighborhood.  Many of the most commonly known Internet companies in the world, including E-bay, Amazon, and Google, started as very small Internet companies. We should be careful to make sure we are not preventing the next Google. 

At a time when small businesses face many obstacles, we should be advancing policies that help small firms compete in our new digital economy.  With the moratorium set to expire in a little less than a month, it is important for the Committee to fully understand the implications if Congress fails to act.