Subj: Internet Taxes: Perspectives of IPI: Center for Technology Freedom From: Robb Watters , Jefferson Government Relations To: Internet Caucus Advisory Committee We are at a historic juncture where Congress must decide how to ensure that the Internet and electronic commerce continue to grow. If states and local governments are allowed to set up a tax system targeting remote vendors, the end result will be to hinder one of the most rapidly growing sectors of the economy. Many are opposed to any such tax system that is discriminatory or burdensome on interstate commerce. When the Internet Tax Freedom Act (sponsored by Sen. Ron Wyden of Oregon and Rep. Chris Cox of California) was passed in 1998 it created: a moratorium on new Federal Internet or Internet-access taxes; a declaration that the Internet should be free of international tariffs and other trade barriers; a three year prohibition through October 21, 2001 on new taxes imposed on Internet access and on multiple or discriminatory taxes on electronic commerce; and established the Advisory Commission on Electronic Commerce (ACEC) to study international, federal, state and local tax issues related to the Internet. This legislation created a moratorium on the application of all taxes that were not already being imposed or enforced prior to October 1998. Because this tax moratorium expires after three years, Congress has only a limited window of opportunity to head off state and local taxes that will interfere with the growth of electronic commerce. The on- line world is not seeking to escape taxation all together. In fact, on-line businesses pay all the taxes that traditional businesses pay. There are presently taxes imposed on telecommunications channels; e-commerce companies pay income and other direct taxes; sales taxes are collected on in-state purchases; and state income taxes capture a generous share of the personal wealth generated by electronic commerce. For these reasons, it seems that states are merely trying to expand their authority over out of state businesses by seeking to impose sales taxes on Internet transactions. The effect of state-imposed taxes on Internet transactions is potentially devastating. A recent Bizrate.com public opinion poll revealed that nearly 60 percent of on-line buyers would make fewer purchases if they had to pay a sales tax on all transactions. In addition to public opinion, eminent scholars have also concluded that taxing the Internet would have a disastrous effect on on-line buying. For example, University of Chicago economist Austan Goolsbee has shown that applying existing sales taxes to the Internet would reduce the number of on-line transactions by almost 25% and reduce on-line Internet spending by as much as 30%. In addition to the direct costs of Internet taxes, there are the huge compliance costs associated with multiple taxes from a seemingly endless number of state and local municipalities. Ernst and Young tax economists Robert Cline and Thomas Neubig noted that: " high compliance costs result directly from complexities built into each component of the tax system: definitions of what is taxable, multiplicity of tax rates, numerous exemptions for specific buyers or uses, overlapping jurisdictions, filing requirements and audit procedures." The effect of such taxation would not only devastate the Internet but also harm the economy as a whole. A survey of about 1,500 traditional "brick and mortar" businesses showed that 74 percent of these establishments have gone on-line. In addition, 20 to 40 percent of these businesses' sales are a direct result of the Internet. Traditional brick and mortar businesses are becoming "click and mortar" businesses. This shift in the business paradigm will result in more income for these "click and mortar" businesses and an increased tax base for the states and local municipalities where they are located. Thus, taxing the Internet would not just damage e-commerce but harm everyone, including those who would collect such new taxes. The ACEC report being submitted to Congress this April must allow the Internet to continue to grow and thrive. It must not impose burdensome new taxes that inhibit the entrepreneurship and record levels of economic growth coming from this sector. The imposition of the current system of state and local taxes would create a significant compliance burden on multi-state sellers. The present tax system is unwieldy and out of step with the demands of e-commerce. By reining in the tax reach of states and local municipalities, Congress has the opportunity to uphold the principles of interstate competition, due process, and fairness, while allowing e-commerce to be free to serve as the growth engine of tomorrow's economy. Washington’s goal should be to protect the Internet from unfair restrictions. Commerce on the Internet has transformed the traditional standard of business -- especially business-to-business interaction, entrepreneurship, and consumer service. Only in the absence of unnecessary government regulation can the Internet continue to mature and prosper. If Congress acts, it should be to block the extraterritorial taxation of electronic commerce in both tangible and intangible products. That would ensure that states and municipalities tax only those firms with a physical presence in their jurisdiction. Congress should firmly refuse to give in to demands for new taxing authority. The tax treatment of sales over the Internet is an extremely complicated issue and one that has many factions fighting to ensure that the outcome produces a fair and equitable system. While we await Congress's action, some steps should be taken to protect consumers in the meantime. We should all support the latest effort by Rep. Cox and Sen. Wyden (the Internet Non-Discrimination Act --INDA), a bill to make permanent the temporary moratorium on new, special and discriminatory Internet taxes originally imposed under Cox-Wyden II in 1998. It is also advisable also that for the Internet to reach it fullest potential, the moratorium needs to be expanded to include an outright ban on sales and use taxes, as well as eliminating "grand fathered in" Internet access taxes and the 3 percent telephone excise tax. (The 3 percent telephone excise tax was enacted to fund the Spanish American War over 100 years ago as a temporary luxury tax on the telephone.) The Internet's potential is not limited to our domestic economy. Thus, the recently passed Global Internet Tax Freedom Act (Cox-Wyden III) urged the United States to seek a global consensus supporting a moratorium on tariffs and special, multiple, and discriminatory taxation of electronic commerce. The United States should play a leading role in ensuring the future of the Internet is global. The Internet is the ultimate global marketplace and how we act at home could set the standard for those around the world.