There’s good and bad news on the Internet tax front. The good news is that H.R. 49, the Internet Tax Non-Discrimination Act, is moving through Congress. It is the successor to the 1998 Internet Tax Freedom Act, which banned taxes on Internet services until it expires Oct. 31.
H.R. 49 passed the House on Sept. 17 and now is awaiting action on the Senate floor. It would place a permanent ban on such taxes, freeing Americans to continue enjoying unfettered access to the Internet. Federal, state or local governments could not tax Internet services, such as dial-up or DSL, through placing a levy on “bits” used or on hours of usage.
The bill’s author is Rep. Chris Cox, R-Newport Beach, Calif. “Today, Republicans and Democrats have come together to say that no matter how we might choose to fund government services, we all agree that it would be counterproductive to create new taxes that target the Internet, which are harmful to consumers, destructive to technological innovation, and bad for our economy,” he said Sept. 17.
The bad news is that on Thursday a supposedly conservative Republican, Rep. Ernest Istook of Oklahoma, introduced H.R. 3184, which would allow sales taxes on the Internet. Sales taxes are not covered by the other bill, H.R. 49. But until now, court rulings covering both catalog sales and Internet sales have prohibited sales taxes on out-of-state sales unless a company has a physical “nexus” in the state of the buyer, such as a bricks-and-mortar store.
“I cannot overemphasize how important this is to each state,” Rep. Istook announced. “They are struggling” with state budgets. But as we know so well, that’s not because the state governments are unable to add yet another tax to the many already in place but because they are spending too much.
The stakes are high. According to a study by the University of Tennessee, if Internet sales taxes had been allowed, in 2001 the states with sales taxes would have garnered $13.3 billion in additional sales tax revenue, including $1.75 billion for California. The amount would be even higher in 2003 because Internet sales grew 26 percent in 2002.
Rep. Cox said the Istook bill is supposed to advance toward a “unified” sales tax regime nationwide, but it actually would allow “two tax rates, food and non-food, per jurisdiction, which isn’t defined.” He said with about 7,500 jurisdictions in the country, businesses could end up trying to figure out 15,000 tax rates.
What a nightmare, especially for small businesses. That also would be a new tax jolt to a growing segment of the economy that would send shudders through the entire U.S. economy at a time when it is struggling in the aftermath of recession.
Let’s leave this new medium free to grow and prosper.