Should the Internet be taxed? That's the wrong question. The building blocks of the Internet--phone lines, cable, all telecommunications--are already one of the most heavily taxed parts of the American economy. The first excise tax on telecommunications was levied in 1898 to fund the Spanish-American War. The war is over. The federal tax remains and is joined by state and local excise taxes that average 14.1 percent and get as high as 28.6 percent in Texas, 24.5 percent in Florida and 15.8 percent in Washington, D.C. AT&T reports that it files 50,000 tax forms to government at all levels.
Now some governors and big-city mayors want to add additional taxes on the Internet. They would overturn Supreme Court decisions that protect interstate commerce. Present law forbids Utah from forcing Amazon.com to collect Utah's sales tax when a citizen from Utah buys a book over the Internet.
Pro-tax-the-Internet Gov. Michael Leavitt (R) of Utah argues that the states need the extra taxes, that much tax revenue is being lost, and that these additional taxes can be imposed without hurting the Internet or the Constitution. He is wrong on all counts.
In 1998 the 50 states ended the year with $11 billion in surpluses. State and local government revenue has grown from 6.9 percent to 9 percent of GDP from 1968 to 1998, a period when federal revenues fell from 20.5 percent to 18.7 percent. Taxpayers looking for declining productivity in government and waste have been wrong to focus solely on Washington over the past three decades.
Second, a June 1999 study by Ernst & Young points out that because most e-commerce is business-to-business or the sale of intangible services or other exempt products not subject to sales taxes, the actual "loss" to state and local sales tax collection was $170 million in 1998, or one-tenth of 1 percent of sales taxes collected. Moreover, the definitive study on how taxing e-commerce would affect Internet sales was done by Prof. Austen Goolsbee of the University of Chicago Business School, who found that changing the Constitution to allow taxation of electronic commerce would reduce e-commerce by 24 percent or more. (That would do interesting things to the market cap of those companies presently driving up the Dow.)
The Constitution's commerce clause is not a loophole. It created a single American market and stopped states from attacking "foreign" (out-of-state) businesses. We do not want to create a situation in which Alabama politicians can levy taxes on New York businesses. We have already seen the damage Alabama juries do to "foreign" auto companies in Detroit through the abuse of tort law.
As for "fairness": Buy a book in your local bookstore in Washington and you pay a 5.75 percent percent sales tax. Buy a book over the net and you pay $12 in overnight shipping fees. You have to buy more than $200 worth of books at a time for the dot.com company to have any advantage.
One idea before the Electronic Commerce Commission is to urge states to lower or abolish sales taxes on big-ticket items, such as computers. This would eliminate any differential between electronic commerce and Main Street businesses without clogging up the Internet with tax collectors.
The battle lines are being drawn for the 2000 election. Gov. James Gilmore of Virginia, fresh off his victory over the auto excise tax, chairs the Commission on Electronic Commerce and has outlined a plan to ban taxes on electronic commerce, phase out the 3 percent federal excise tax on phone bills, ban taxes on Internet access, ban tariffs on international trade and reduce the "digital divide" by allowing states to spend surplus welfare funds to buy computers and Internet access for families making the transition from welfare to work. Sen. John McCain (R-Ariz.) and Rep. John Kasich (R-Ohio) have introduced federal legislation to make the ban on Internet taxes permanent and to ban all sales taxes on electronic commerce. Let the first Internet election begin.
The writer is president of Americans for Tax Reform and the consumer/taxpayer representative member of the Advisory Commission on Electronic Commerce.