Deceptive Deficit Tax
States use the Internet to clean up their spending messes.


Apparently, some states think they’re above the law. Recently, it was revealed that at least 18 states are collecting taxes on Internet-access charges even though the practice is banned under the national Internet-tax moratorium.

This is disturbing, especially when one considers that a coalition of state officials from across the country have been quietly advancing a plan that would create a de facto national Internet sales tax.

In a frenzy of activity aimed at closing huge budget deficits, many state officials, including a majority of governors with the National Governor’s Association, want to force online sellers to charge taxes that aren’t currently required.

Thirty-eight states want to force out-of-state businesses who sell to in-state customers to become their tax collectors. But since states don’t currently have the authority to do such a thing, they have embarked on a “tax reform” scheme in an effort to convince Congress to give it to them. This plan is called the Streamlined Sales Tax Project (SSTP).

By harmonizing their tax policies through the SSTP, the states are hoping to convince Congress, which has the authority to regulate interstate trade, to write a law that allows states to force businesses to collect sales tax even if they don’t have a physical presence in the state.

Such an action by Congress would allow state tax systems to apply nationwide, thereby creating de-facto a national sales tax on Internet transactions.

On its surface, the SSTP sounds like tax reform, but in reality it is a mechanism that would extract more money from American consumers at a time when they can least afford it. And supporters are selling the plan by relying on several important misperceptions.

For example, the pro-tax lobby is playing on the myth that the Internet isn’t already taxed, citing the Internet-tax moratorium as proof. In fact, the moratorium applies only to discriminatory taxes such as taxes on Internet-access charges, not sales taxes. Or, at least that’s what we all thought until this week.

States like Alabama, Florida, and Kentucky, however, have been skirting this restriction on their taxing power by arguing that DSL services fall into the category of “telecommunications,” not Internet access. Not only is this deceptive, but it’s disappointing, as access taxes only make it harder for low income people to afford the Internet.

But when it comes to Internet sales, tax is indeed collected. Businesses must collect taxes from consumers if the business has a physical presence in the state. If the business doesn’t have a physical presence in the state, however, it isn’t obligated to collect that state’s taxes. Rather, the consumer is supposed to remit a use tax, which, not surprisingly, rarely happens.

And therein lies the rub. Politicians don’t want to alienate the people who will be voting in the next election. Thus, we end up with the SSTP, which is being quietly pushed outside of the scrutiny of a political campaign.

Another misperception is the expectation that by collecting additional e-commerce sales taxes, states can erase the huge budget deficits that most of them face. But closer scrutiny reveals this simply is not the case.

In a recent study, the Direct Marketing Association points out that “in 2001, the states reported that approximately $13 billion went uncollected due to their inability to force out-of-state retailers to act as their unpaid tax collectors. In fact, the total amount potentially uncollected was about $1.9 billion.” That figure won’t come close to fixing state budget deficits around the country.

While budget deficits are real, the states’ fiscal predicaments are the result of overspending, not uncollected Internet sales taxes. In this economy, the last thing anyone needs is another tax, be it a sneakily implemented one or a new national Internet sales tax.

— Sonia Arrison is director of Technology Studies at the California-based Pacific Research Institute. William E. Simon Jr. is a former California Republican gubernatorial candidate.


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