Coveted Internet Cash Cow?

Published in the Washington Times <?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

January 30, 1998

Excerpted in Forbes Magazine

December 27, 1999

The National Governors Association brags in a just-released survey that states will enter 1998 with $24 billion in budget surpluses. But such windfalls are not enough to safisfy these tax-hungry politicians. How else to explain the NGA's fierce opposition to the Internet Tax Freedom Act now before Congress?

The bill, which would impose a moratorium on Internet-specific state and local taxation, would rein in the more than 30,000 local taxing jurisdictions which are likely to view electronic commerce as merely another cash cow. The tax-anything-that-moves brigade is waking up to the idea of assessing fees on any and all Internet transactions. Whether you buy a book on, download a photo from someone's website, or merely log on to Prodigy, there are tax collectors the country over who can think of creative reasons you should have to grease their palms.

Tacoma, Wash., recently instituted a 6 percent tax on Internet access providers. Public outcry over double taxation–these companies were already paying a special “Information Service Providers” tax on the phone lines used to provide access to the Net – forced the city council to repeal the levy.

Tacoma made the mistake of taxing its own citizens. Other localities aren't so foolish. To politicians and tax bureaucrats, the beauty of the Internet lies in the newfound ability to tax people other than the voters to whom they answer. The state of Texas, for instance, brazenly claims to have tax jurisdiction over any Internet transaction which gets routed through a server in the Lone Star State.

“When someone in Washington State uses America Online in Virginia to buy a gift basket from Harry and David's in Southern Oregon that's shipped to someone in Ohio, and pays for the transaction using a bank account in San Francisco, how many states can tax the sale?” asks Sen. Ron Wyden, Oregon Democrat. The answer: All of them.

To prevent such tax chaos, Mr. Wyden and Rep. Christopher Cox, California Republican, introduced the Internet Tax Freedom Act. Without its protections, a new era of commerce may be strangled in its crib, at a time when it should be starting to take real steps. This would represent modern-day confirmation of John Marshall's dictum about the power to tax being the power to destroy. Transactions totaling $200 million took place on the Net last year. By 2002, only five years from now, sales are estimated at $1.5 trillion.

The Internet promises to usher in a new era in commerce by directly linking up buyers with sellers. It will enhance efficiency, increase productivity, and open access to foreign markets by helping eradicate the traditional barriers of distance and time. But only if allowed to.

The National Governors Association, along with such other groups opposing the bill as the National Conference of State Legislators, the National League of Cities, and the U.S. Conference of Mayors, argues that Congress is trampling on their rights. Govs. Michael Leavitt of Utah and Roy Romer of Colorado wrote recently that the bill “pre-empts state or local government's authority to collect appropriate taxes.” Ohio Gov. George Voinovich, chairman of the NGA, complained the bill “would establish a protected class of taxpayers at the expense of Main Street businesses and other taxpayers.”

Is this battle really over states' rights, or even class warfare? Or is it about the proper activity of the federal government? In their wildest dreams the Founding Fathers could not have imagined personal computers or the Internet. But in their wisdom they defined the regulation of interstate commerce as one of the few clearly marked responsibilities of federal authority.

Some of the NGA's most prominent members have broken with the organization in voicing strong support for the measure. New York's George Pataki, California's Pete Wilson, and Massachusetts's Paul Celluci and his predecessor William Weld have been vocal in support of federal action ensuring that prohibitive local taxation doesn't hold the Internet hostage.

Perhaps the most telling sign the bill doesn't trample on states' rights comes from California. A majority of the State Assembly signed a letter supporting the Internet Tax Freedom Act. The state's tax board unanimously adopted a resolution expressing support for the bill.

Despite the complaints of Govs. Leavitt and Romer, the bill would have surprisingly little effect on the rights of state and local governments, other than preventing double and predatory taxation. For the purposes of assessing taxes, they would be free to treat electronic commerce exactly as they do telephone, mail order, and direct mail transactions.

President Clinton has indicated he will sign the measure if passed. Ironically, the bill's biggest booster in the administration is Mr. Clinton's Internet policy czar Ira Magaziner, who drew up the blueprints to socialize American medicine in 1993. Reports from Capitol Hill indicate that Mr. Magaziner possesses the zeal of a convert.

A strong statement from Congress protecting the integrity of the Net from meddlesome state and local intrusion would arm Mr. Clinton with an important and effective tool in international negotiations. It would send the right signal to other nations of the United States' seriousness regarding free trade, both inside and outside our borders.

This bill is unusual, and has been a long time coming from Washington. It isn't directed against ordinary citizens, like most laws, telling them how or how not to live their lives. Instead, it is aimed at government, restricting its ability to interfere in people's everyday business. Were that more laws from Washington drafted in this spirit of the Bill of Rights.

Max Schulz is an adjunct scholar of Frontiers of Freedom.


Copyright 1998 © News World Communications, Inc.