Should We Tax the Internet?
by Merrill Matthews, Jr. on 03/20/2000
23 Pages
The Internet has quickly become the defining element of the last decade of the 20th Century. Whether the Internet continues to be the driving force behind the economy, education and even culture in the next century depends to a large extent on what policies, regulations and taxes —if any —Congress and the states impose on the new medium.
While deciding not to tax the Internet raises several problems, so does imposing a tax. How will businesses ensure the privacy of purchasers? Would government keep a record of those purchases? Would an Internet sales tax slow the growth in e-commerce, and would e-tailers flee U.S. shores in order to avoid the tax?
Federal, state and local governments have the constitutional or statutory authority to collect taxes —such as sales and use taxes and taxes on business income —when people and businesses fall within the governmental body’s jurisdiction. But while states have the right to collect taxes, that authority stops at their borders.
However, the states are currently doing their best to change that fact. Internet tax proponents have suggested a number of ways to raise tax money from the Internet, including a proposal sponsored by the National Governors’ Association.
There are two primary arguments used to support new or expanded Internet taxation: fairness and lost state revenue. For example, Joseph Brooks, a councilman for the city of Richmond, Virginia, has said: “We believe the lost revenue from tax-free online shopping will be significant —between $9 and $11 billion by 2004.”
The fairness argument may be even more compelling. Requiring brick-and-mortar businesses to collect a sales tax that online retailers don’t have to collect could be considered discriminatory. But is it possible to create a fair Internet tax?
It is theoretically possible to create a level tax playing field that does not discriminate against certain types of vendors, products, services or the way in which a vendor markets his product (i.e., in retail stores, on the street, through catalogues, etc.) However, in reality, there are no fair taxes. Special interests are constantly trying to find ways to protect their own interests and maximize profits by seeking a special deal. As a result, the goal of a fair tax is probably unachievable.
While a consistent view of federalism and state sovereignty would acknowledge that states have the right —albeit limited by the Constitution and the courts —to tax Internet access, sales and perhaps other elements, that doesn’t mean they should. According to the National Conference of State Legislatures, based on responses provided by 44 states:
- 24 states have cut personal income taxes recently,
- 14 states have cut corporate and business taxes, and
- 21 states have reduced sales and use taxes.
Does it make sense to create a new tax at a time when state coffers are full?
And what would be the impact of an Internet sales tax? According to Austan Goolsbee of the University of Chicago’s Graduate School of Business, based on the projection that business-to-consumer sales, left unhindered, are predicted to reach about $108 billion by 2003, taxing Internet sales could mean a reduction of $27 billion in the economy.
So the states don’t need the additional revenue, there is no way legislatures would pass a fair tax and if they did pass a tax, it would harm the economy. That being the case, there seems to be little justification for taxing Internet access or sales.
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