The Internet Taxman Cometh

[darrels joy]

The Internet Taxman Cometh
Christine Hall, CNSNews.com, and NewsMax Staff
Wednesday, October 29, 2003

Accessing the Internet may cost something extra after November 1, the date a federally imposed tax moratorium expires.
The five-year moratorium has prevented states and localities from levying taxes on Internet dial-up or broadband connections, but, as U.S. News reports, cash-hungry states are looking for revenue, and retailers have little reason to help consumers skirt taxation.

While the House in September passed a bill to continue the ban, if the Senate fails to act on a bill (S. 150) authored by Sen. George Allen (R-Va.), new Internet taxes could go into effect between the time Congress adjourns (likely in November) and returns in January.

Sen. Ron Wyde (D-Ore.), one of the principal proponents of the moratorium, has accused some state and local officials of trying to change the definition of "Internet access" in order to find new ways to tax.

"In doing so, what it would do is give States and localities explicit permission to tax what Internet users do once they get on line," Wyden said in an October 15 floor speech.

"That would mean you could have games, music, magazines, newspapers, information services, financial services, research services, or other products of services, in effect, facing a barrage of new taxes," Wyden argued.

"The phrase 'you've got mail' would be replaced with 'you owe taxes,'" Wyden quipped.

Sens. Lamar Alexander (R-Tenn.) and Maria [not Marie] Cantwell (D-Wash.), among others, have placed a procedural "hold" on the Senate bill amid concerns over state budget deficits.

Alexander on Friday called the no-tax plan sponsored by Democrat Ron Wyden (D-Ore.) and Republican George Allen (Va.) the "worst kind of unfunded mandate."

"If you limit Tennessee's ability to have a broad-based sales tax, then you are increasing the chances Tennessee has an income tax or a higher tax on medicine or food. Or higher college tuition for families to pay," Alexander explained.

Taxpayer groups like Americans for Tax Reform are fighting for the moratorium to be continued.

ATR President Grover Norquist said Internet taxes would hurt consumers. He contends that backers of the hold are "supporting taxes on Internet access and e-mail, as well as double-taxation of a product or service bought over the Internet."

Sen. George Voinovich (R-Ohio) is insisting on changes to the moratorium. The state of Ohio stands to lose a lot of existing tax revenue from phone taxes, Voinovich believes, unless the bill's language is clarified. The problem stems from an overly broad definition of telecommunications services that could encompass future Internet-based telephone services, Voinovich fears.

Ohio Republican Gov. Bob Taft wrote Voinovich a letter estimating that extending the moratorium would cost the state $350 million, but such cost estimates vary.

Nationwide, the Congressional Budget Office has estimated that extending and expanding the moratorium will deprive states of $80 to $120 million in taxes annually. But the Multistate Tax Commission has said states are likely to forego between $4 billion and $9 billion in 2006 alone.

John Berthoud of the National Taxpayers Union (NTU) says it's just politicians looking to tax their way out of a problem. "The bottom line is that these guys just want more money".

"Internet use is already taxed through the burdens that states and localities impose on phone and cable bills," added the NTU's Paul Gessing. Congress shouldn't allow new Internet access taxes or multiple-state taxation of a single item purchased online, Gessing believes, because "it amounts to double jeopardy."

Another obstacle to be overcome is the differences in state and local taxation - there are almost 8,000 different tax-collecting jurisdictions.

As U.S. News reports: "Cough drops, for example, are taxable in Massachusetts but not in Maryland, while in Ohio a gift basket of fruit is not taxed though a crystal dish filled with candy is. Cloth diapers in Wisconsin? Tax exempt. Disposable ones? Taxable." Not to mention the city taxes on top of state taxes ...

How will all of this be overcome? States are promising more uniformity of product definitions and taxable vs. non-taxable items, and, special software will instantly calculate taxes based on the zip code of the buyer.

The bottom line? Patti Freeman Evans of Jupiter Research said, "Consumers are used to paying tax." Albeit not on the Internet - it seems all good things indeed must end.