Government tends to tax any new thing under the sun. We’re lucky, then, that it hasn’t gotten its hands on the Internet yet — a fact of vital importance to growth and innovation in the online industry. Thanks goes to a temporary moratorium on Internet taxes that was last renewed by Congress in 2004. It’s up for renewal again, and state and local governments — eager to generate revenue by slapping taxes on every imaginable online service — are fighting to make sure it doesn’t become permanent. But their self-interest should not an entire industry stifle. Internet taxes should be banned, for good.
State and local governments look upon the Internet with publican mouthwatering because Internet taxes would be hidden in such places as phone bills. Wherof taxpayers take no notice, thereof they do not complain. Hikes in property and income taxes, by contrast, are hard to conceal, and tend to spark political opposition.
Understandably, state and local governments are less than forthcoming about their real motives for wanting to see Internet taxes allowed. Instead they make two specious arguments against the moratorium.
The first is that Internet-service providers could conceivably evade taxes on their non-Internet services — such as telephone and cable — by providing them in concert with Internet coverage. The logic here is that the moratorium’s prohibition on taxing the Internet would apply to other services “bundled” with it. But Congress addressed this concern when it renewed the moratorium in 2004. That bill made Internet service subject to taxation if it is bundled with other telecommunications services. It also clarified that the Internet-tax ban does not apply to telephone service over the Internet.
The second argument against the moratorium concerns its prohibition of “multiple or discriminatory” collection of sales taxes on e-commerce. In practice, that means online sales from vendors like Amazon cannot be taxed in more than one state. This supposedly makes it easier for unscrupulous vendors to avoid charging sales taxes altogether. An e-store in California could sell to a man in New York, charge him no tax, and tell the New York government that the man paid tax in California.
But this only shows the need for states to coordinate with one another on tax collection in such cases. The moratorium requires nothing more than that e-commerce be taxed in one jurisdiction only, and this is as it should be. We would argue that the simplest way for the states to achieve this is by taxing online commerce at its point of origin, thereby avoiding the need to determine a buyer’s location.
The House Judiciary Committee passed a bill Wednesday that would extend the moratorium to 2011. But an amendment offered by Virginia Republican Bob Goodlatte to make the ban permanent was defeated, primarily because of Democratic opposition. After the vote, House Republican whip Roy Blunt asked, “If Democrats think that extending the Internet-tax moratorium for an additional four years is a good thing, then why not go the extra mile and make it permanent?”
Democrats won’t go that extra mile because they know there will come a time when taxing the Internet doesn’t seem as vampiric as it does today. Which is precisely why now is the time to make the moratorium permanent.