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
Their efforts are
misguided, and would stifle innovation.
make permanent the moratorium on Internet taxes -- first passed in
1998, and renewed in 2001 -- with two significant changes:
- Ten states would
have to end their existing taxes on Internet services that were in
place before the first moratorium, and
- The moratorium
would be explicitly applied to telecommunications services used for
Stark Choice About
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
- Are new
technologies a Thanksgiving turkey to be tapped for government
- Or, will
policymakers leave their hands off, enabling consumers to reap the
full benefits of this golden goose?
History of Net
This Internet tax
issue goes back to 1998, when Congress first passed a three-year
moratorium on new taxes on the Internet. Barred were:
- New taxes on
Internet access, and
- "Multiple or
discriminatory taxes on electronic commerce."
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.
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.
now pending in Congress would make permanent the existing
moratorium, with two significant changes:
- Ten "grand
fathered" states would have to end existing taxes on Internet
services. Under the legislation the House passed last month, this
would be immediate, while the Senate version allows for a
three-year phase-out. This is sensible, as it makes no sense for
these 10 states to be treated differently simply because they
imposed taxes early.
- Secondly, the
moratorium would be explicitly applied to telecommunications
services, used for Internet access. This has been a particular
point of contention, as states are concerned that they would lose
the revenue they receive from telephone taxation. The tax ban,
however, would only apply to services used only for
telecommunications services - such as high-speed DSL lines.
Taxation of traditional, analog, voice telephone service would not
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:
- It will be years
before VOIP is used comprehensively - allowing plenty of time for
states or intern Congress to adjust.
- Adoption of such
new technology would provide huge benefits for the economy,
possibly leading to economic growth (and tax revenues) far
- Perhaps most
importantly, the states "worst case" scenario - a reduction in
telephone taxes - may not be such a bad thing. Telephone service is
one of the most heavily taxed in America - with consumers typically
facing a half-dozen or so taxes and fees, averaging 25 percent of
their bill. This system needs re-examination, not protection.
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