Internet Taxation: The Arguments

By October 16, 2007Innovation, Taxation

Attempting to influence today’s House vote, The Washington Post’s editorial page endorsed a four-year extension of the federal moratorium on taxing Internet access. “The Web Grows Up — Internet services shouldn’t be a tax-free zone” is the title of the column, which is a fair-enough argument about the merits of a temporary versus permanent ban on Internet taxes. (To be specific, what’s being debated is halting state and local taxes on accessing the Internet, not the taxation of services provided via the Internet.) Except the Post’s view of issue is awfully limited, and in a familiar way, underestimating the appetites of those who tax.

A four-year extension is a more than fair deal for an industry whose claim to special tax treatment is tenuous at best. The Internet is not in danger of being stifled by a few extra dollars tacked on to subscribers’ monthly bills. The latest justifications for treating Internet services differently from clothing, food or numerous other goods and services that states and localities choose to tax is to spur the build-out of broadband access and reduce the “digital divide,” the gap between the rich and poor when it comes to Internet access.

But that’s a bogus argument, the Post contends, since states that had taxation grandfathered in are not suffering comparatively in broadband penetration compared to non-tax states.

The Post’s analysis of the economic impacts is too narrow, though, based on an assumption that only Internet companies need worry about a modest tax. But the NAM goes at the issue not (only) from the perspective of a trade association with many members who provide Internet access or manufacture Internet-related products. Internet access affects probably 99-plus percent of U.S. manufacturers in one form or another, and we’re not talking about a “few extra dollars” hitting only home customers. Many corporations monitor worldwide inventories, for example, via the Internet; CAD schematics might be discussed in five engineering shops simultaneously; and we all know about virtual meetings.

One can be sure that tax writers would see lucrative new sources of revenue and a “few extra dollars” would soon becomes thousands, tens of thousands, millions of dollars — multiplied many times across the entire economy.

You know what just crystallized our thinking on this issue? Examining our monthly phone bill, that page with the category, “Tax, Surcharges and Other Fees.”

DC Universal Service Trust Fund — $0.31
DC Public Rights-of-Way Use Fee — $1.91
DC Gross Receips Tax Surcharge — $0.73
DC E911/311 Fee — $0.76
DC Federal Universal Service Fund Surcharge — $0.45

We just bet that jurisdictions would find a way to turn a simple Internet access tax into a wondrous range of surtaxes, premiums and user fees.

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