Why an Internet Tax Moratorium?

Posted by: Stephen Wildstrom on October 16, 2007

With House passage today, it appears we are well on the way to enactment of a four year extension of a moratorium on state taxes on Internet service charges. Both anti-tax Republicans and Silicon Valley are disappointed that the moratorium wasn’t made permanent. The real question is why it should exist at all.

I was never convinced that the tax ban was needed even when Internet advocates were protesting that state taxes on access fees would nip the infant technology in the bud. But the baby has now grown into a very robust adult and doesn’t seem to require any special protection. Besides, wireless phone service, like other phone services, is taxed up the wazzoo, and the charges don’t seem to have slowed growth. And the argument that a tax moratorium is is needed to get broadband providers to expand their services would be laughable if it weren’t
so pathetic. they’ve done a dreadful job under the moratorium that has been in place and they’ll continue to drag their feet during the extension.

At least the anti-tax crowd is being consistent. For the tech industry, this is nothing more than an attempt to keep a place at the trough of federal largesse. The states are free to tax or not tax the sales of all other sorts of goods and services. What’s so special about Internet access?

While I’m on on the subject Congress should also finally act to resolve a 40-year-old dispute over whether state can tax mail-order sales, an argument that has long since spread to online commerce. Congress needs to set rules to prevent sales from being taxed in multiple jurisdictions, but I see no reason why online sales should be taxed differently from sales in brick and mortar stores. Justice Holmes famously said taxes are the price we pay for a civilized society, and somebody has to pay them.

Reader Comments

Nedim

October 17, 2007 4:56 AM

The government just wants to stick it's chubby, greedy little fingers into the untaped pool of money, but is the Internet tax really needed to have a "civilized society"? we already pay tax for everything, The government currently spends millions of dollars of our tax to pay contractors that never deliver, so am i supposed to give more free money to them? can the state guarantee that the tax will go to good purpose? i am already sick of the mismanagement of funds taken from our pockets, and i for one, will quit using internet access if this tax is imposed.

Daniel Castro

October 17, 2007 5:38 AM

The Information Technology & Innovation Foundation released a report this summer outlining the three main reasons we think Internet access should remain tax free.

1) As part of a national strategy to encourage broadband adoption.

2) Because this is a national issue. While states also benefit from higher levels of Internet adoption, there is an asymmetrical distribution between the costs and benefits of taxes on Internet access. When states tax Internet access, they receive all of the financial benefit of the tax, but the net social cost of lower rates of Internet access extends beyond the states’ borders to affect the entire nation. States that continue to tax Internet access under the grandfather clause are essentially free riders that happened to get “lucky” by imposing a tax on Internet access before 1998.

3. As Internet-enabled consumers conduct more business activity over the Internet, Internet access itself has become a key input to production, much like machinery. State tax policy should reflect the fact that Internet access is not merely a consumer good, but rather a tool used by producers to increase economic efficiency and lower the cost of production. Investment in machinery has also been strongly associated with economic growth and increased productivity. As a result, almost every state offers some form of a sales tax exemption on the purchase of new equipment.

The full report is available (along with a history of the moratorium and counterarguments) at:

http://www.itif.org/files/ITFA.pdf

JP

October 17, 2007 8:03 AM

To Government: stay out of my life.

john

October 17, 2007 8:27 AM

Sure! just tax everything!

Idiot.

ROGER M

October 17, 2007 8:28 AM

HMM, MUST BE A DEMOCRAT. FEWER TAXES ARE A GOOD THING. MAYBE IF THERE WERE A TAX ON INTERNET SERVICES FEWER PEOPLE WOULD READ STUPID BLOGS LIKE THIS ONE.

TJ

October 17, 2007 8:53 AM

Stop.. stop.. you are killing me with this. IF there is no difference between online sales and brick and mortar sales, then why is there such a fuss about media distribution rights online. All things are different in the digital world, or didn't you get that memo?

The truth is, there is no difference if online or not. Same for the taxes - If one state can tax a purchase from another state you have violated the states sovereignty, just as in the non-digital world.

Neither the states or feds need to tax everything, they should try to live within a budget just as the txpayers have to.

Steve Wildstrom

October 17, 2007 9:11 AM

In a reply to this post, Daniel Castro of the Information Technology & Internet Forum offers three arguments against state taxes on Internet access. Let's take a look at them:

1) I agree that we badly need a national strategy to increase wider adoption of better-quality broadband. But I believe that broadband service providers have dropped the ball under the existing moratorium and see no reason to believe that extending it will improve the situation.

2)We live in a federal system. The argument that taxing Internet access has national implications and therefore should be barred to the states could be used to prevent the states from taxing anything. As long as we expect the states to provide such vital services is education and law enforcement, we had better give them the means to pay for it.

3) To the extent that the "input to production" argument is valid, it would apply only to business use of the Internet. Besides, we have no problems taxing other inputs to production, most notably telephone service.

I'm not just trying to have the last word here. I welcome any responses and counterarguments.

Michael Mazerov

October 17, 2007 9:19 AM

The Center on Budget and Policy Priorities recently published a report supporting many of the arguments made in Mr. Wildstrom's column. It lays out why extending the Internet access tax moratorium will not make a significant contribution to spurring the deployment of broadband or closing the "digital divide" and could actually be counterproductive. Among other things, it notes that two studies have demonstrated that the rates of adoption and deployment of Internet access are no lower in the states that were grandfathered to tax Internet access than in states that don't tax the service. It also points out that all of the countries that are beating the U.S. in broadband adoption do tax Internet access under their national value-added or sales taxes -- further evidence that taxation is not the problem. See: "The Internet Tax Freedom Act and the 'Digital Divide'" http://www.cbpp.org/9-11-07sfp.pdf.

mark

October 17, 2007 11:42 AM

Beware of the use tax. You can still be liable for taxes on purchases over the internet, even if you didn't pay sales tax, see http://www.news.com/2100-1028_3-6060450.html

ROGER M

October 18, 2007 1:14 PM

I keep seeing these arguments in favor of a tax on internet services and my question is why? Regardless of whether it will slow broadband growth or not it's another tax that we don't need. The gov't already taxes my income, gas, utilities and in some states food. I pay tax now when I get my car washed for crying out loud. Enough is enough! I'm tired of paying taxes on everything I do!

James M. Jensen II

October 26, 2007 12:14 PM

I actually agree with this. Those in favor of the moratorium are basing their decision on whether or not they would agree with taxes on Internet service. The question is, should the federal government forbid state governments from imposing taxes? I think the answer is no. Whether states themselves should impose taxes is almost a completely different issue. The moral outrage against the moratorium is really over losing our privileged status.

fwatoo

January 26, 2009 3:21 PM

all yall r lame fussin about sum stuff like this

budwieser

January 26, 2009 3:25 PM

we should all pay taxes double wat were payin now on everything real americans will agree

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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