Internet Tax Neither Fair Nor Lucrative

Published November 1, 2003

The Internet tax debate is filled with misperceptions, rhetoric, and even a bit of old-fashioned betrayal. Perhaps the greatest misperception is that the Internet isn’t taxed at all.

It’s easy to see how folks could get confused, given that Congress keeps talking about renewing the “Internet tax moratorium.” But the moratorium isn’t a ban on sales taxes on the Internet. It’s a ban on discriminatory taxes, such as Internet access taxes, which erect barriers to low-income people getting online.

In testimony to a House committee, Harris Miller of the Information Technology Association of America explained, “The Internet does not deserve carve-outs or special treatment. Neither does it deserve to become the tax piƱata of 2003, hit by every revenue-starved taxing jurisdiction in the country.”

Alas, the battle rages on as state governments and some bricks-and-mortar businesses are pressuring Congress to force online sellers to charge taxes not currently required.

Some politicians say “fairness” dictates that Congress should act to virtually overturn the Supreme Court’s 1992 ruling in Quill, which determined a business doesn’t have to collect a state’s sales tax if it doesn’t have a physical presence in the state. Since when has it been “fair” for a government to tax a business outside its borders? That sounds more like taxation without representation–a scheme Americans rejected a long time ago.

Internet taxers also argue that if state governments could only tax e-commerce, state budget woes would go away. The National Governors’ Association projected such a tax could raise “$45 billion” by 2006. Such projections are based on data from the Internet boom. A more recent study, by the Direct Marketing Association, concludes “potential uncollected revenue to the states is about 85 percent less than prior studies.”

Given the way the economy is struggling, Congress should ignore state campaigns for more taxes and maintain the balance set by the Supreme Court.

Sonia Arrison is director of technology studies at the California-based Pacific Research Institute.