Internet taxes
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From the inception of the Internet until the late 1990s, the Internet was free of regulation by government at all levels, and also free of any specially targeted tax levies, duties, imposts, or license fees. By 1996, however, that began to change, as several U.S. states and municipalities sought to re-interpret laws that had been on the books since long before the creation of the Internet in order to apply them to this new form of communications.
Before these efforts could gain much headway, however, the Congress preempted virtually all conceivable forms of Internet taxation. The purpose of the 1998 Internet Tax Freedom Act was to nip in the bud these incipient taxation efforts. In the United States alone, some 30,000 taxing jurisdictions could otherwise have laid claim to taxes on a piece of the Internet.
The enactment of this legislation has coincided with the spectacular growth of the Internet since then. Arguably, the benefits of knowledge, trade, and communications that the Internet is bringing to more people in more ways than ever before are worth the tax revenue losses, if any; indeed, supporters of the law argue that the economic and productivity growth attributable to the Internet may well have contributed more revenues to various governments than would otherwise have been received. Opponents, on the other hand, have argued that the Internet would continue to prosper even if taxed, and the current federal ban on Internet-specific levies denies government at all levels a much-needed source of revenue. But such arguments are difficult to judge. What is clear is that the currently untaxed Internet is bringing medical information — even for locating organs for transplant — to the sick; education to people wherever they may be, even if no school is near; and help to those searching for a rare book, planning a trip, seeking the news, viewing and purchasing esoteric goods, or wondering whether to prepare for rain. For these reasons, much is at stake in the determination of Internet tax policy.
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[edit] Forms of Internet taxation
[edit] Internet access tax
This normally takes the form of taxation on Internet service provider (ISP) access charges. ISPs levy these charges on users. Currently, states are the main arena in which these fees are imposed. There is no national tax on ISP user charges. No uniform within the category of sales tax in some states, telecommunications tax in others, or are considered service charges, which are usually exempt from taxation, in still other states. Nine states (which were grandfathered under the Internet Tax Freedom Act as part of a political compromise) currently provide for some manner of taxation on ISP charges. Texas recently ended its taxation.
[edit] Telecommunications tax
Some states treat Internet access charges as telecommunications services, thus subjecting them to often high telecommunications taxes. Tennessee and Wisconsin are examples. Because these taxes tend to be higher than other potentially applicable levies, they have a more significant potential to inhibit growth in online activity, including both Internet usage and the development of new networks. A further complication in the application of telecommunications taxes to the Internet is the disparate treatment that results from the current lack of uniformity in the application of such taxes to different forms of Internet access. Because of this, the method of accessing the Internet (regular phone, ISDN, DSL, cable, wireless, satellite) can dictate the level of taxation for what is essentially the same Internet service. This, in turn, could create unfair advantages or disadvantages for various market participants, as well as users. The often complex mix of local and state telecommunications taxes presents yet another layer of complexity.
[edit] Franchise tax
Both states and localities have traditionally levied franchise taxes on utilities and cable television operators. Prior to the Internet Tax Freedom Act, many municipalities were studying the possibility of extending their franchise taxes to either ISPs, their customers, or both. The greatest problem associated with franchise taxes is the multiplicity of potential levies on a single retail customer; the ban on multiple taxation in the Internet Tax Freedom Act is a response, in part, to this issue. A correlative issue is the compliance burden on ISPs who must deal with competing franchise taxes in thousands of local jurisdictions, although the likelihood is such a burden would be passed on to customers.
[edit] Bit tax
Several countries have proposed taxing Internet usage by volume. The bit tax would not discriminate between telephony, data, voice, images, or other content; it would apply based on the volume of data transferred. Because this is an Internet-specific tax that has no analog in the offline world, it is specifically banned by the Internet Tax Freedom Act.
[edit] Bandwidth tax
The concept behind the bandwidth tax is progressivity; it would apply on a graduated scale according to the speed of one's Internet connection. It is also clearly banned by the Internet Tax Freedom Act.
[edit] E-mail tax
The United Nations has in the past considered proposing an e-mail tax, in an effort to raise funds to boost Internet technology access to poor countries. Citing a "knowledge gap" between the United States and underdeveloped countries, proponents of e-mail taxes believe that its potential redistributive effects make it an ideal tax for implementation on a global scale. According to a report by the United Nations Development Program entitled "Globalization With a Human Face", Internet users are largely comprised of males located in the United States, a situation UN researchers suggest puts the world's undeveloped countries at risk of being left behind in a race for knowledge. "The literally well connected have an overpowering advantage over the unconnected poor, whose voices and concerns are being left out of the global conversation," the UNDP said in a 1999 press release. To "rectify the imbalance" between Internet users and non-users, the report's authors proposed a "tax of one US cent on every 100 lengthy e-mails" which they believed would generate $70 billion a year. Imposition of E-mail taxes by the U.S. government or any of its political subdivisions are banned by the Internet Tax Freedom Act.
[edit] Conceptual issues of Internet taxation
There are many conceptual issues involved in the determination of which of several jurisdictions have the authority to tax the Internet, or transactions on it, in some way. Because Internet taxation has essentially been banned in the United States since 1998, the U.S. experience is limited to those jurisdictions that were grandfathered under existing federal law. Most of that experience involves Internet access taxes, franchise taxes, and telecommunications taxes, although a smattering of other forms of taxation currently exists.
- The concept of Internet taxes is separate from the issue of local jurisdictions taxing goods and services purchased by their residents, using the Internet or otherwise. See tax-free shopping.
[edit] Location
The issue of location—of the Internet user, the user's counterparties in a commercial transaction, the headquarters facilities of any involved commercial entities, and even the servers and switches—is important for tax purposes. For example, of the nine states that currently tax access in some manner, four make reference to location. In each case, both the provision of service and the billing must take place within the state. Connecticut places the burden of determining whether this is so upon the Internet service provider. But in general, there is no simple way to determine location, owing largely to the Internet's lack of boundaries. Users can and routinely do access their accounts from remote locations; providers are almost always located in multiple taxing jurisdictions; and the data traffic itself, via the Internet's packet-switched architecture, is routed through myriad locations. Such issues are important not only for practical reasons of determining the incidence of the tax and its enforcement, but also because the U.S. Constitution requires that a state or taxing sub-jurisdiction have "nexus" with the transaction in order to exert its taxing power, and that determination rests precisely upon such considerations. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
[edit] Setup v. monthly fee
In the United States, some states and taxing authorities distinguish between the initial setup fee for Internet access and the monthly, hourly, or per-minute billing fee for actual access. Nebraska taxes the initial setup, but only if software is provided. It does not tax subsequent monthly billing. Tennessee, on the other hand, taxes both.
[edit] Good vs. service
A basic issue in determining whether Internet access and Internet usage of various kinds is subject to sales tax, use tax, telecommunications tax, a combination of these taxes, or no taxes at all, is whether Internet access and usage is determined to be a "good" or a "service." If access to the Internet or usage is deemed a service, in general no sales or use taxation applies, while the rates and variants of telecommunications taxes that apply can be different. However, if access requires downloading of user software, some states may deem that a "taxable sale" of goods (e.g., Massachusetts) for their residents.
[edit] Collection
Collection of Internet taxes presents a complex array of issues. These include whether states themselves should collect the tax; whether the burden instead should be placed on the Internet service provider; the extent to which retailers or value-added intermediaries can be required to perform collection duties; and in all cases, the ways in which this collection can be accurately and meaningfully enforced by the taxing jurisdiction.
[edit] Current law and future prospects
The 1998 Internet Tax Freedom Act was authored by Representative Chris Cox, R-CA and Senator Ron Wyden, D-OR and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial potential of the Internet. This law bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and e-mail taxes. The law also bars multiple taxes on electronic commerce.
It has been twice extended by Congress since its original enactment, and is currently scheduled to expire in November 2007 unless further action is taken to maintain it in force. The most recent extension, co-authored by Rep. Cox, Senator George Allen, R-VA, and Sen. Wyden, was titled the Internet Tax Nondiscrimination Act.
