August 31, 2001

August 31, 2001 | Commentary on Taxes

The Internet: A Taxing Problem

I've studied government policy for more than 30 years, and if I know one thing, it's this: Lawmakers will tax just about anything.

From pets to pornography, examples run the gamut. The federal government taxes unemployment benefits. The burial fees in many local jurisdictions include a "cadaver fee." In Los Angeles County, politicians want a local electronics company to pay a property tax on the satellites they've launched-ones now floating some 22,000 miles above the Earth.

So I'm not surprised to learn that 40 of the nation's governors are urging Congress to allow them to tax Internet purchases. With the federal moratorium on Internet taxes slated to end Oct. 21, states facing tighter budgets are looking at Internet taxes the way a fat man on a diet looks at an ice-cream sundae.

And if they can pull it off, the states could net an extra $30 billion by 2003, Gov. Jim Geringer, R-Wyo., recently told the National Governors Association.

Of course, they're all eyeing the same sundae-and they all want it made differently. There are about 30,000 tax jurisdictions in the United States, and 7,500 of them levy sales taxes. Few, if any, impose those taxes the same way on the same things.

Washington, D.C. once had a popcorn tax that applied to popped popcorn but not to unpopped kernels. Florida taxes charcoal if it's used for cookouts, but not if it's used for gardening. You can imagine how the hair-splitting nuances of tax policy could create a mess for Internet businesses, which offer everything from pants to peacocks to Porsches.

Another problem with an Internet tax is the question of who can be taxed in the first place. Both the Supreme Court and the Constitution say that states can impose sales taxes on companies and people in their borders. But with the Internet, it's possible to buy something from a business in Hawaii without leaving your home in Maine. So who pays the sales tax? The company in Hawaii? The buyer in Maine? Neither?            

Unfortunately, many governors think the answer should be "both." They've already proposed something called the Streamlined Sales Tax Project, which they say would "simplify" state and local tax definitions, exemptions and rates. But it's really a step toward a national sales tax, which is hardly something Americans need, considering the number of taxes they already pay, from sales taxes, income taxes and property taxes to death taxes, payroll taxes and so-called "sin" taxes.

If states must impose Internet sales tax, they should follow the examples of catalog companies, which tax only people who live in the same state as the businesses they're buying from. After all, the Internet is essentially a catalog that moves at the speed of a mouse click.            

But the best solution would be to make the moratorium permanent. E-taxes would spoil perhaps the greatest business development since the creation of money. Thanks to the Internet, you can buy anything, anytime, anywhere in a marketplace bigger than anything even the great economist Adam Smith could have dreamed of.

Now 40 governors want to spoil this great multibillion-dollar economic marketplace. They may call it a matter of fairness, but it sounds more like an old-fashioned money grab.

Edwin Feulner is president of The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

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