Stop Giving the Internet Special Treatment

BOSTON (06/05/2000) - Tax the Internet. Or more appropriately, stop treating the Internet as though it was some special class of citizen deserving the tax-exempt treatment usually reserved for churches, universities and charities.

I say this as a staunch libertarian with a profound distaste for big government and a belief that we could run our public affairs with far fewer taxes than we now collect. But in exempting Internet commerce from additional taxation, as Congress has overwhelmingly done (and is considering extending through 2006), we single out the Internet as something other than what it is, namely, a commercial venue, just like a brick-and-mortar mall.

Further, we place a clearly unfair burden on those least likely to trade on the Web - lower-income groups - while easing the tax burden on those who do trade on the Web, generally middle- and upper-income groups.

But putting aside egalitarianism for a moment, let's look at the politics behind the current moratorium on additional federal, state or local taxes on Internet access or e-commerce.

Two years ago, Congress authorized an Advisory Commission on Electronic Commerce to recommend some direction regarding Internet taxation. Comprising various state government officials as well as executives from America Online Inc., AT&T Corp., Gateway 2000 Inc. and others, the committee immediately split into protax and no-tax camps. In March, the committee announced it lacked the two-thirds majority needed to make a formal recommendation to Congress.

The stated reason for the Internet's status is that Congress wants to protect e-commerce from being strangled in its infancy by taxes, primarily state sales taxes. Most states with sales taxes have legitimate concerns about potentially heavy revenue losses, particularly when e-commerce revenues are predicted to top $1 trillion by 2003.

Predictions such as those from venerable sources like International Data Corp. and Forrester Research Inc. don't have disclaimers like "provided e-commerce isn't taxed." The unbridled growth of e-commerce is a slam-dunk. Just ask any IT manager whose life has been unbraided by executive mandates to "move the business to the Internet." There's no proof that reasonable sales taxes will stunt that growth in any way.

Meanwhile, the feds say it's perfectly OK to continue taxing goods sold by brick-and-mortar establishments. Utah's governor, Michael Levitt, a member of the advisory committee, argued unsuccessfully to Congress that traditional companies are being put in an untenable position when their online competitors can sell tax-free and they cannot.

Ask yourself this: Where are the low-income, the elderly and poor likely to shop today - at Wal-Mart or Walmart.com? And Congress wants which type of purchases to be tax-free for buyers?

I don't blame the big IT companies that are lobbying for a tax-free Internet.

But what about Congress' motives?

I believe its members are driven by three things. First, they've always liked cozying up to campaign contributors with very deep pockets, and certainly, the computer world is filled with them.

Second, Congress likes to set industrial policy rather than let free markets do so. Motivated more by political expedience, this has yielded protectionist policies that favored big steel in the 1950s and '60s, and light-truck makers even today. Now Congress wants to "protect" the Internet, as though it needs it.

Third, is it possible Congress wants to reserve any future taxation for itself rather than the states, believing Washington is better at allocating public funds? The Constitution allows Congress to overrule the states in certain matters of taxation, not unlike an Internet or e-commerce tax. In preventing states from recouping the increased tax revenue generated by the growth of e-commerce, Congress forces the states to either defer to other taxes (like income taxes), do without the additional revenue (a good lesson for Congress) or come groveling to Washington for more money.

Yes, tax the Internet, just like we would any other commerce medium. Failing to do so is elitist, destructive of other non-Internet businesses and just plain unfair.

Bill Laberis is a consultant in Holliston, Massachusetts, and former editor in chief of Computerworld. Contact him at bill@laberis.com.

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