Tech, Telecom and the Internet
The contentious ongoing battle over Internet taxation promises to be the hottest high-tech fight in Congress and State capitals across America during the next few years. At the heart of this debate lies the question of whether state and local sales and use taxes should be imposed on goods and services purchased via the Internet. Moreover, the debate has raised important questions about the taxation of the telecommunications industry in general. Specifically, should the telecom industry be singled out for unique tax burdens and levies that other industries do not face?
Regrettably, the debate over Net taxation is largely an effort to simply roll the out-dated state and local sales tax structure of the Industrial Age onto the fast-paced Information Age economy. While some state and local representative groups profess to believe they can create a "simplified" system of sales tax administration that will could be applied to Internet, such claims seem dubious.
But even if this claim is taken at face value, it is important to understand that the simplification process which these groups advocate is, in reality, an attempt to create a collusive multi-state tax cartel. Such a result would betray the Founding Fathers' intended model of competitive federalism and would greatly discourage tax competition between the states. In that sense, such "simplification" proposals can be seen as little more than an attempt to create an Articles of Confederation-style tax system for e-commerce.
While Congress is busy fighting over an extension of the Internet Tax Freedom Act's existing moratorium on access taxes, lawmakers should instead be taking a harder look at the anti-competitive tax systems state and local officials are proposing. A better approach work as follows:
a. Congress should make permanent the current moratorium on Internet access taxes.
b. Congress should clarify and codify existing Supreme Court nexus jurisprudence to ensure there is no taxation without representation.
c. State and local governments should explore pro-competitive tax reform alternatives such as an origin-based methodology for sales tax collection or a movement away from product-based sales taxation altogether.
d. State and local governments should also take steps to reform other telecom industry taxes and levies.
e. Congress and the Administration should continue to pursue a international agreements that will guarantee a "global free trade zone" for electronic commerce.
Finally, the ongoing debate over Internet and telecommunications tax policy should be guided by five principles:
1. No multiple or discriminatory taxation: The Internet should not be subjected to unique or overlapping taxes.
2. No taxation without representation: Companies should only be required to pay taxes in those jurisdictions where they have a substantial physical presence or "taxable nexus."
3. Tax competition, not tax collusion: State and local governments should not be allowed to establish collusive tax regimes which discourage vigorous interstate tax competition.
4. Protect consumer privacy: Intrusive regulations and tax collection systems should not be created in an attempt to trace and tax electronic transactions.
5. Reform or abolish "taxes on talking": Existing industry-specific telecommunications taxes should be radically reformed or abolished to equalize tax treatment with other industries.
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Adam Thierer is Director of Telecommunications Studies, Cato Institute.
