The Internet Tax Freedom Act of 1998 (ITFA)
established an Advisory Commission on Electronic Commerce to study
the feasibility of taxing electronic transactions done via the
Internet. The Commission's recommendations on the critical issues
of electronic commerce and tax policy are to be submitted to
Congress no later than April 2000. Although a formal plan has not
yet been adopted by the Commission, early proposals by some of its
19 congressionally appointed members support a pro-tax system for
Internet and electronic transactions.
These proposals are raising concerns in
the Internet-based business community and on Capitol Hill that the
Advisory Commission is moving to adopt a burdensome new regime for
taxing electronic commerce without considering the repercussions
that the new taxes would have. Moreover, some Members of Congress
are suggesting that the Advisory Commission has incorrectly
interpreted its charter under the ITFA. A September 14 letter from
House Majority Leader Richard Armey (R-TX) and 35 Republican
cosigners to the Advisory Commission expressed their concern "that
most of the news reports from the first Commission meeting seemed
to focus on how to tax the Internet, rather than whether to
tax the Internet."
the Senate, similar concerns have led to the introduction of two
bills that would make permanent the current three-year moratorium
on Internet taxes the ITFA put in place. These actions, coupled
with the House letter, send a clear message: There is no
congressional mandate to tax the Internet. Congress should
ensure that this important new medium is not subjected to
discriminatory and potentially unconstitutional state and local
The "Lost Revenue" Myth.
During recent Advisory Commission meetings, many of the
Commission's members showed their pro-tax bent. Some appear to be
working under the assumption that the need to tax the Internet is a
forgone conclusion; all that remains is to develop the proper
mechanism to do so. Fear of lost state and local sales-tax revenue
appears to drive the pro-tax agenda within the Commission, whose
members include governors and mayors. They fear the impending
demise of their budgets and state and local tax bases if electronic
commerce is not taxed, or taxed later rather than sooner.
However, even without Internet taxes,
state and local governments are collecting record tax revenues.
According to a recent Investor's Business Daily editorial,
state revenues grew 227 percent and local revenues grew 193 percent
between 1980 and 1995. In fact, state tax revenues grew at almost
twice the rate of inflation between 1992 and 1998, according to
fiscal policy analysts Dean Stansel and Stephen Moore of the Cato
Institute in Washington, D.C. In their recent study, "The State
Spending Spree of the 1990s," they concluded that, "Today, almost
without exception, state governments are awash in tax revenues."
And Michael Flynn of the American Legislative Exchange Council
agrees. In a new study on "Surplus Revenue in the States," he notes
that states are "in their best financial health in over a decade"
with $74 billion in windfall surplus tax revenues over the past
rise of untaxed electronic commerce helped to generate much of the
additional tax revenue for every level of government because the
Internet has helped create new business, new industry sectors, and
new high-paying jobs in the states. The Advisory Commission could
slay the "goose with the golden egg" through a confusing and
overlapping array of state and local Internet taxes. Far from
promoting economic growth and expanding state and local tax bases,
taxing the Internet would reduce and weaken these efforts.
Since Congress established the Advisory
Commission, it should monitor its work and ensure that it carries
out its ITFA mandate to examine "the effects of taxation,
including the absence of taxation, on all interstate sales
transactions, including transactions using the Internet, on retail
businesses and on State and local governments..." (emphasis added).
The purpose of the Commission is to advise Congress, so Members of
Congress should have no qualms about reminding the Commission that
it must not treat lightly or overlook any of the possible
legislation options, including preserving the current non-tax
status afforded Internet commerce.
Restraining a Pro-Tax Commission.
Regardless of the Commission's final recommendations, Congress
ultimately determines tax policy. So, it will determine future tax
policy regarding Internet and electronic transactions. As Majority
Leader Dick Armey and the 35 cosigners in the House stated in their
letter, "The Commission should remember that only Congress can
authorize one state to compel sellers in another state to collect
Internet taxes. This idea is not a popular one in Congress or among
the American people. You should know that there are many Members
that will oppose any new taxes on the Internet."
options would preserve the non-tax status of Internet transactions.
The first would keep the Internet free of discriminatory taxes by
making permanent the ITFA's three-year moratorium on Internet
taxation. Senator John McCain (R-AZ) recently introduced
legislation to this end. Senator Bob Smith (I-NH) introduced a
similar measure (S. 328) earlier this year.
second option would be for Congress to codify existing Supreme
Court decisions that set the precedents in this area. In
National Bellas Hess v. Illinois (1967), Complete
Auto Transit, Inc. v. Brady (1977), and Quill v.
North Dakota (1992), the Supreme Court essentially forbade
states from attempting to tax out-of-state commerce, which the
Court deemed unconstitutional.
the meantime, Congress should remind the Advisory Commission that
it is obligated to consider all its members' initiatives, including
anti-tax proposals. For example, Commission member Dean Andal, vice
chairman of the California State Board of Equalization, has
introduced a detailed plan that seeks to clarify existing federal
tax policy and limit state tax authority to cases in which a
business has a "substantial physical presence" in a state. The
Andal proposal also defines when that test would be satisfied.
Considering such constructive proposals
would help put the Advisory Commission back on track to recommend
how best to preserve existing state and local taxing authority
while discouraging burdensome and unconstitutional new taxes on
Adam D. Thierer
is a former Alex C. Walker Fellow in Economic Policy at
The Heritage Foundation.