TCS Daily


By Sonia Arrison - April 14, 2003 12:00 AM

April 15 is almost here and taxes are on everyone's mind. It's a tough time of year for those who get unexpected or hefty tax bills, and the situation could get worse if state legislators around the country win the ability to further tax Internet transactions.

The Internet tax debate is slippery, filled with misperceptions, heated rhetoric, and even a bit of old-fashioned betrayal. Perhaps the greatest misperception of the entire debate is the belief by some that the Internet isn't taxed at all.

It's easy to see how some people could get confused about whether the Net is actually taxed, given that folks in Congress keep talking about renewing the "Internet tax moratorium." But the moratorium, now dubbed the Internet Tax Nondiscrimination Act, isn't a ban on sales taxes on the Internet; it's a ban on discriminatory taxes, such as Internet access taxes - the kind of taxes that erect barriers to low-income people getting online.

In recent testimony to a House committee, Harris Miller of the Information Technology Association of America made this point. "The Internet does not deserve carve outs or special treatment," he said, "Neither does it deserve to become the tax piƱata of 2003, hit by every revenue starved taxing jurisdiction in the country. The Internet tax moratorium should be made permanent because it promotes across-the-board fairness, not special advantages for one group over another."

You'd think that once the purpose of the Internet tax moratorium was clear - protection against discriminatory taxes - that lawmakers might all agree they shouldn't treat the online economy like a never-ending virtual candy bowl to raid at will.

Alas, the battle rages on as state governments and some bricks-and-mortar businesses (who, in an effort to squash competitors and avoid paying back-taxes agree with them), are attempting to pressure Congress to force online sellers to charge taxes that aren't currently required. In other words, there's a big push for a new Internet tax.

In a frenzy of rhetoric, some politicians are arguing that "fairness" dictates that Congress should act to virtually overturn a 1992 Supreme Court ruling called Quill that said a business doesn't have to collect the sales tax if it doesn't have a physical presence in the state. But it's hard to see how the Court's decision wasn't fair.

Since when has it been fair for a government to tax a business outside its borders? That sounds more like taxation without representation to most, and is a principle that Americans soundly rejected a long time ago at a big tea party in Boston.

The other argument often heard these days is that if governments, who are desperate for money, could only tax e-commerce, the money would go a long way toward fixing budget problems. Here too, one finds problems with the premise.

For instance, numbers such as "$45 billion" in revenue by 2006 cited by the National Governor's Association were based on data from the heady days of the Internet boom, far overstating estimates of potential revenue gains. But a recent study conducted by the Direct Marketing Association shows a different story.

According to that report, "potential uncollected revenue to the states is about 85 percent less than compared to prior studies." So, even if the states managed to win new taxing authority, the budget crisis wouldn't disappear. But to some, like California's Controller Steve Westly, every bit counts - apparently even if it means harming the very business that helped him get rich.

Westly, who struck it rich at Internet auction site eBay, said in a recent statement that the amount of uncollected revenue for California "will become more significant as the Internet industry grows." But it is unclear how the Internet industry is supposed to grow in this economic climate under threat of new taxes.

Executives at eBay won't comment on the perception by some in Silicon Valley that one of their own has betrayed the technology community, but they will say that if states get new Internet taxation powers, many jobs and economic activity could be lost. For instance, eBay Associate General Counsel Tod Cohen argues that new taxation schemes, even if they are less complex, would hurt many eBay customers because the "small sellers are so small."

While income taxes are due next week, it will be months until the drama of the Net tax debate runs its course. Given the way the economy is struggling, Congress should ignore state campaigns for more taxes and maintain the balance set by the Supreme Court.

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