No Internet Tax: Why Internet Sales Taxes Aren’t Necessary

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Ten years ago, discount retailers like Wal-Mart were redefining the face of the American retail industry. Today, online retailers like are again redefining not only ways that businesses interact with their customers, but also how they interact with each other. Two years ago, Congress passed a three-year moratorium on new Internet taxes to help the fledgling market grow. In the interim, the battle to create an Internet tax plan has begun.

The rapid growth of the Internet and E-commerce has eclipsed that of any previous human invention. Estimates that were once seen as naively optimistic are now often considered too conservative. A recent Forrester Research report estimates that online advertising will reach $33 billion worldwide by 2004, more than double their previous estimate of $15 billion for 2003. In 1998, the same firm also estimated that online business will be worth $1.3 trillion by 2003, representing over 9 percent of U.S. business sales. It is now likely that this figure is too low as well. These phenomenal growth projections have changed the focus of the Internet taxation debate. The discussion has moved from the access fees that collect taxes at the on-ramp to information super-highway to sales and use taxes as tax hungry politicians team up with corporate interests to fill already over-flowing tax coffers and forestall competition to existing retail outlets.

Although the debate has shifted from access fees and other barriers to the information super-highway and many states have been protected from Internet access taxes by the Internet tax Freedom Act, the problem of punitive taxation has not gone away for many Internet users. Because the access fee in Texas was exempted from the congressional action, Texans must still pay taxes just to get on-line if the Internet service they use costs more than $25 a month. Combine this with the fact that Texans pay some of the highest telephone taxes in the country and Web surfers in Texas find it is impossible to connect to the Internet without paying a tax rate that exceeds the rates placed on cigarettes and alcohol.

Still, politicians like Dallas Mayor Ron Kirk argue that the problem is not that taxes are too high, but that there aren’t enough of them. Mayor Kirk and others would have us believe that unless they are allowed to impose new tax regimes on the Internet and specific Internet sales taxes the state’s schools will not be able to educate our children, it’s fire departments will not have enough firemen to put out fires, and the police departments will not have enough policemen to keep our streets safe. All this presents a pretty bleak picture and is enough to make even the most ardent anti-tax advocate reconsider his position, but in reality these are nothing more than scare tactics and propaganda.

Nationwide lost tax revenue will only be about $170 million – not quite one-tenth of 1 percent of state and local government sales and use tax collections. Today, most every state in the nation has a surplus and does not need an extra cent of revenue. In fact, most states are looking for ways to get rid of the sales tax revenues they’ve already collected. According to a recent report by the National Conference of State Legislatures (NCSL), states had a $5.5 billion surplus for 1999, and “this is the third straight year that most states have faced decisions on how to allocate these excess revenues.” In fact, 21 states have chosen to cut taxes and lower their existing sales tax collections by a total of $1.6 billion. This decision represents a $1.6 billion net loss in sales tax revenues, roughly 1000 percent more than the E-commerce losses the NCPA projected.

The debate should be focused on cutting tax rates for consumers and small businesses, not raising taxes on the Internet at a time when many states have a budget surplus. Many of the politicians pushing hardest for a tax on Internet sales suggest that while they may not need the money just yet, they might need it sometime down the road. If politicians are really concerned about a source of revenue for the future, it makes more sense to give E-commerce the opportunity to grow, rather than drowning it in a sea of regulation and taxation.

State and local politicians have teamed up with large developers and powerful retail giants to raise taxes on American consumers and force small businesses off the Internet. They are using scare tactics and half-truths to promote an agenda that will lead to higher taxes and bigger government.

Those policymakers who would tax our nation’s leading engine of economic growth are shortsighted. The Internet economy accounts for nearly one-third of our nation’s economic growth. It is estimated that if taxes were applied to on-line sales, growth in the technology sector would be slowed by twenty-four percent. The government must be stopped from taxing to death the goose that laid the golden egg.

Policymakers should support a permanent moratorium on discriminatory Internet taxes. That is, they should oppose taxes or tax rates that would apply exclusively to the Internet and not also to bricks and mortar or catalogue sales. Policymakers should also take quick action to repeal Internet access fees and lower existing telephone taxes. Both of these steps will help speed millions more individuals on to the Internet and, in doing so, provide Americans with better educational and job opportunities and a better standard of living.

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