Subj: Internet Taxes: Perspectives of IPI: Center for Technology Freedom From: Bartlett Cleland Institute for Policy Innovation To: Internet Caucus Advisory Committee As the sales tax example illustrates, there are a number of different dimensions involved in deciding whether, and if so how, to "tax the Internet." Therefore, before proceeding directly to a discussion of the pros and cons of "taxing the Internet," it is first useful to lay out a framework in which to consider these questions. The first step in defining what is meant by "taxing the Internet" is to categorize the different approaches to Internet taxation that have been suggested and then analyze how current law relates to the resulting categories. The first useful distinction to draw is between constitutional and unconstitutional methods of "taxing the Internet." The reason it is necessary to belabor the obvious is that some of the most prominent proposals to expand sales tax coverage to all Internet commerce seek to avoid existing constitutional restrictions (e.g., by novel definitions of "nexus") or they involve new approaches to taxing the Internet that are themselves constitutionally suspect (e.g., state laws and interstate agreements designed to collect sales taxes that may run afoul of the Commerce Clause or other constitutional provisions). It is also useful to sort Internet taxes by the tax base tapped. Some taxes under consideration treat the Internet per se as the tax base (e.g., byte taxes or web page excise taxes). Some taxes target activities unique to the Internet as the tax base (e.g., excise taxes on e-mail or Internet access fees). By far the largest category of Internet-related activities that government may seek to tax are activities that may be conducted on the Internet but are not necessarily unique to the Internet. Within this broad category, it is useful to combine income, payroll, real property and business activities into a single category and to treat sales and use taxes as a distinct category. The framework that results from this typology is shown in Table 1. ***· Unconstitutional Internet taxes (black); ***· Constitutional taxes already being used to raise revenue from an Internet- related tax base (white); ***· New, arguably constitutional taxes the federal government and states might choose to levy on the Internet and Internet-related activities. (gray). Table 1 provides a ready means to organize the Internet taxation debate as it stands today. Individual entries in the cells of the table consist of taxes that have been actively considered since the emergence of the Internet but one must assume that as this debate advances, advocates of taxing the Internet will devise additional ways to levy cyberspace charges. A category of new taxes that might be levied constitutionally on the Internet by the federal government and perhaps by the states is shaded yellow in Table 1. Gray shading is chosen to reflect the authors' opinion that these taxes, while probably constitutional in most cases, nevertheless should not be levied on prudential/economic grounds. The white bullet was selected for gray-shaded state taxes in the constitutional column to reflect the authors' opinion that some or all of these taxes may be constitutionally suspect. (See Section II below - constitutionality.) The gray-shaded area in Table 1 also maps out the categories of taxes currently prohibited by the Internet tax moratorium. The case against these taxes on economic and prudential grounds is straight forward: They are not needed to raise revenue, and they would impose an unacceptable economic burden on the Internet without a compelling non-revenue justification (e.g., tax neutrality) to recommend their adoption [Table 1--graphic--has been omitted - JN]