Magazine article Information Today

Taxing the Internet

Magazine article Information Today

Taxing the Internet

Article excerpt

As the income-tax filing season was winding down in mid-April, the debate over the taxation of the Internet was just stepping up. Several actions in state legislatures as well as proposals in Congress are prompting a fresh look at options for Internet sales taxes and access taxes.

This is not a new debate. As the Internet became a commercial force in the mid-1990s, it was also seen as a potential source of tax revenue. Financially strapped states and cities explored the possibility of taxing Internet access, ISP franchises and users, bandwidth, and even email. Internet and ecommerce transactions also became a related target for sales and use taxes.

Internet Tax Freedom Act

While taxes have been a part of the telecommunications industry for years (just take a look at your phone or cable bill for a sample of the various taxes and fees for services), people expressed concern about how Internet taxation would stifle innovation and growth. In response to these concerns, Congress enacted the Internet Tax Freedom Act in 1998. This act banned most Internet-only taxes, surcharges, and fees, as well as sales and use taxes on Internet commerce. The act was renewed in 2004, but it is set to expire this November.

Earlier this year, bills were introduced in both the Senate and the House to make the act permanent. While the bills were introduced with bipartisan support, concern was raised that the opponents of the tax moratorium may rally greater sympathy from the new democratic Congress. Opponents of the moratorium include local and state governments, arguing that it deprives them of additional taxes to pay for needed services while subsidizing the telecommunications industries. Supporters of the moratorium include ISPs who argue that increased taxes would inhibit investment in the Internet infrastructure and new services and ecommerce businesses that fear reduced sales income.

In a recent speech, Sen. Ron Wyden, D-Ore., who authored the 1998 law and is a sponsor of the current bill, noted that several supporters of a permanent ban on Internet taxation are no longer in Congress. Some new members of Congress may also be less supportive of telecom and ecommerce companies and more supportive of the local businesses and municipalities, while also being more willing to consider new taxes.

Sales Tax on Ecommerce

The question of an Internet sales tax is also looming. While the Internet Tax Freedom Act banned the notion of imposing sales taxes on ecommerce transactions, the freedom from sales tax actually predates the Internet.

Technically, when a consumer purchases a product, the consumer pays the tax to the state. In practice, the merchant collects the tax from the consumer and then passes it to the state. A lesser-known companion to these sales taxes is "use taxes," which are charged for the "use" of property purchased outside of the state or through mail order. "Use" taxes are supposed to be paid directly by the consumer to the state, but on a practical level, they are rarely ever paid.

A Burden on Interstate Commerce

The catalog and mail-order industries asked an important question: Could a company doing business through the mail be required to collect and then transmit sales and use taxes to all the myriad state and local taxing authorities of its customers? The Supreme Court addressed this question twice--once in 1967 and again in 1992. …

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