Don’t Tax My iPod!

Published June 1, 2005

April 15 is considered by many Americans to be “tax day.” But those who think this expensive event comes only once a year should examine their monthly phone bills … and beware of recent actions by greedy bureaucrats.

Anyone who has ever taken the time to inspect a landline or wireless phone bill will know that, on top of the price of service, the government heaps taxes: the telecom excise tax, universal service fee, and various others. The combined state and local tax rate for wireline telecom services averages 14 percent and can be as high as 30 percent, putting communications in the sin-tax bracket along with alcohol and cigarettes.

For a country that claims to value free speech, it’s ironic that the tax system is so regressive, favoring communication for the rich.

If you’ve switched phone service from wireline to voice over Internet protocol (VoIP), then the only tax you might pay is the federal excise tax. The U.S. Treasury Department has not issued an official opinion, but some VoIP firms are collecting the tax as a pre-emptive measure.

The 3 percent federal excise tax was established in 1898 to fund the Spanish-American War. It was supposed to be temporary, but that promise clearly wasn’t kept. Now, bureaucrats seeking to expand their budgets and power are proposing to extend the excise tax to Internet access, erecting yet another barrier to communication for the nation’s poor.

Fortunately, some legislators in Congress are paying attention and attempting to fight back. In April, Sen. George Allen (R-VA) announced plans to introduce legislation that would protect Internet access against this nasty tax scheme.

“When the temporary tax on telephones was passed in 1898, there were just 1,300 telephones–they really were a luxury item,” said Allen at a briefing hosted by the Computing Technology Industry Association (CompTIA). “We didn’t win the Spanish-American War to have our own government federales burdening Americans with taxes on innovation over 100 years later.”

Beware State Tax Efforts

He’s got a point … but it isn’t just the federal government Americans have to watch. Brewing in almost complete obscurity over the past couple of years is a scheme called the Streamlined Sales Tax Project (SSTP). The name alone should make Americans shudder as they realize the plan aims to make it easier for red-tape mandarins to drain more tax dollars out of an already-overtaxed population.

In 1992, the U.S. Supreme Court determined it was unconstitutional for a state to require out-of-state sellers, with no physical presence in the state, to collect sales tax from consumers in that state. Through the SSTP, state bureaucrats are now working hard to avoid abiding by that ruling.

By attempting to simplify tax systems, state officials are hoping to pull in more cash to fix budget shortfalls all across the nation. But budgets should be balanced by spending within a state’s means, not by reaching yet again for the taxpayer’s wallet–especially when that reach is aimed at digital goods, or as some call it, the “iPod tax.”

The move to tax digital goods should throw the tech community into a Boston Tea Party tizzy, especially when it’s revealed that California, home of Silicon Valley, is going along.

By backing the tongue-numbing concept of “destination-based sourcing of digital goods,” the California Board of Equalization supports forcing local digital goods vendors to collect and remit sales taxes for other jurisdictions. That means every distributor of iPod music downloads or other electronic products delivered over the Internet would be on-the-hook for collecting and accounting for sales taxes in every state where it has a customer.

Once that happens, of course, it’s easy to see how, under the guise of “tax fairness,” a Golden State iPod tax won’t be far behind. California legislators don’t seem to be following the issue at all, so California consumers have no one sticking up for them the way George Allen is sticking up for American consumers in Congress.

Taxation, which hounds consumers all year, has a negative impact on economic growth and innovation. Increasing the cost of communication and high-tech goods only reinforces out-of-control spending habits by government officials and should be stopped. It’s time to tell policymakers to keep their hands off the nation’s tech, especially when it comes to my iPod.

Sonia Arrison ([email protected]) is director of technology studies at the Pacific Research Institute. Reproduced with permission of TechNewsWorld and ECT News Network.