Tech Fact #4 – Taxing the Internet, Let Me Count the Ways …

Federal legislation imposed a temporary moratorium on new Internet taxes, but that has not stopped enterprising politicians from proposing numerous ways to tax electronic commerce:

State governments want new powers to tax sales on the Internet, which they claim will deprive them of $20 billion in revenues by the year 2002. Researchers at the University of Chicago and Harvard University estimate that a more accurate figure is much smaller – $3.5 billion.

At its July convention, the National Association of Counties unanimously endorsed a national tax on online retail sales.

Senator Ernest Hollings (D-S.C.) has introduced legislation to establish a five percent federal sales tax on Internet transactions.

The Internet Corporation for Assigned Names and Numbers (ICANN), a nonprofit agency set up to register Internet domain names, recently proposed an annual tax of $1 on every Internet domain name. ICANN has since backed down, but has not ruled out this tax for the future.

Even the United Nations sees the Internet as a cash cow, proposing an e-mail tax to take more than $70 billion from Internet users.

In an era of budget surpluses, what would governments do with all this new cash? Senator Hollings wants to funnel his sales tax revenues back to states to increase teacher salaries. The U.N. wants to redistribute wealth, using its e-mail tax to fund Internet development in poor countries. State and local governments just want the money, period.

The tax debate putters along in blissful ignorance of the fact that many Internet users pay high taxes already. Anyone who uses phone lines to access the Internet pays state and local telephone taxes that add as much as 30 percent to the bottom line, a universal service charge that will soon raise $2.6 billion annually for federal coffers, and a 3 percent federal excise tax that piggybacks on top of all the other taxes. Given this reality, it is not clear whether new Internet taxes would make the tax system more neutral or merely exacerbate an already disproportionate tax burden on communications. The Internet is still in its infancy, its future unknown. Applying industrial age taxes to the digital age at this point is unwise and may have unseen repercussions.