James Gilmore knows Internet regulation. As governor of Virginia and chairman of the Advisory Commission on Electronic Commerce, it's his job to take a big-picture view. "It is very possible to over-regulate, overburden, overtax and to stifle the growth of this medium," he said, "and then we won't be a world leader anymore." The commission -- created by the Internet Tax Freedom Act's passage last year to examine taxation and tariffs on the Internet -- includes representatives from state, local and federal governments as well as IT industry leaders.

On a microlevel, however, while many state and local governments have an eye on global competition, their focus is much more on the realities of Main Street -- where government officials believe tax revenues such as those that could be generated from online sales are critical to balancing their budgets.

In addition to creating revenue, taxation is often used to encourage or discourage certain behavior. Taxpayers get breaks for donating to charities, and "sin taxes" are levied on alcohol, cigarettes and legalized gambling. Municipalities also regulate through outright bans, zoning laws and ordinances. But what happens when the gambling occurs in the nongeographic arena of cyberspace? What happens when the pornography isn't being sold at the store on the corner, but on a server in the Bahamas? Gilmore is quick to point out that pornography is not protected speech

John Marcotte  |  Contributing Writer