November 7, 2003 | WebMemo on Internet And Technology
State politicians are in an uproar over a U.S. Senate bill,S. 150, that would prevent state governments from imposing taxes on Internet services. The state legislators are saying they need the money to balance their budgets.
Their efforts are misguided, and would stifle innovation.
Congress should make permanent the moratorium on Internet taxes -- first passed in 1998, and renewed in 2001 -- with two significant changes:
Stark Choice About Innovation
An email circulating for several years now warns of a bill in Congress -- 602P -- which would place a tax on each email sent. The email is a hoax. But sometimes life imitates fiction, and Web surfers are rightfully suspicious that many politicians would like to tax their Internet usage. And even small taxes tend to become big taxes.
Yet, the debate transcends who will get a pot of money. It starkly illustrates a choice policymakers will make about innovation in America:
History of Net Taxes
This Internet tax issue goes back to 1998, when Congress first passed a three-year moratorium on new taxes on the Internet. Barred were:
In short, states and localities were barred from imposing taxes that were specifically targeted to the Internet, or were higher for the Internet. The moratorium was renewed in 2001 for another two years, expiring last Sunday.
Importantly, this moratorium did not specifically address the related issue of whether sales taxes can be imposed on Internet purchases. Such taxes were already limited by a 1992 U.S. Supreme Court decision limiting states' taxation to sellers with a sufficient "nexus" to their state. Recently, a number of states have agreed to an interstate agreement, which would allow such taxation. This agreement must be approved by Congress to become effective.
Permanent Tax-Free Surfing
The legislation now pending in Congress would make permanent the existing moratorium, with two significant changes:
Critics say this still leaves a long-term worry for the states: What happens if the bulk of telephone service starts to travel over the Internet? For instance, they point out that "voice over Internet protocol," or VOIP technologies are predicted to take off in the next few years. Yet, these concerns are misplaced, for three reasons:
Good for Consumers, Not State Coffers
Over the past few weeks, legislators in Washington have been bombarded with facts, figures and arguments about this issue, one of the most hotly debated in years for technology policy. In the end, however, legislators have to make a choice: what kind of bird will the Internet be? One camp sees it as a fat Thanksgiving turkey, ready to be plucked and served, or a golden goose that can provide immense benefits, if left to do what it does best.
Making the ban on taxation of the Internet would be a good step forward for U.S. consumers and the economy. The Internet, and related digital technologies - have changed daily life for Americans, and its continued success may be critical toward reviving the U.S. economy. It cannot be seen as just another source of revenue for the taxman.