The Inevitability of Net Taxes

By eweek  |  Posted 2001-11-26 Print this article Print

Even though the U.S. Senate 10 days ago voted to extend the Internet tax moratorium for two years, its time will run out eventually.

Even though the U.S. Senate 10 days ago voted to extend the Internet tax moratorium for two years, its time will run out eventually.

Shrinking state coffers—Massachusetts, my home state, is facing a $1.35 billion budget shortfall—will see to that. A headline in a Gartner online newsletter says it all: "Internet Taxes: Delayed, but Still Inevitable."

If youre an opponent of Internet taxation, be forewarned. Bureaucrats are cooking up a number of schemes to get around the difficult issue of collecting taxes across state borders.

The National Governors Association is seeking uniform sales tax rules across the states to get at Internet commerce. Some proponents have also pushed a "bit tax" that would tax services at something like 1 cent a megabit.

Some states want to treat ISPs like a regulated utility or telephone company, which would automatically impose certain types of taxation.

Somehow, the Senate managed to extend the tax moratorium, first enacted in 1998. Thats as potential online taxation sources get bigger and bigger. One study estimates that not taxing across state borders results in $13.3 billion in lost revenue. Add in downloads, MP3 files, e-mail, e-commerce and access of all types, and you immediately see whats at stake.

Why bother with an economic stimulation package if were going to eventually tax all this? The best way to get people off the Internet is to apply a bit tax. Such a deception should never be implemented.

But taxing online product sales is a more difficult problem. With declining tax receipts from personal income and corporate profits, how do governments pay for health care, schools, low-income housing or even homeland security? Is it fair that dot-coms dont collect sales taxes when retailers have to?

Timing is everything. Putting shaky Internet businesses at more of a disadvantage would just about kill them. You can count the number of successful Internet retailers on one hand. Internet businesses making money almost without exception are supplemented by stores or a catalog business.

No, its not time to tax Internet products and services. Lets see where we are Nov. 1, 2003, when its time to renew the moratorium or punt.

But dont have any illusions that the tax moratorium is somehow permanent. The states will sooner rather than later figure out how to get their piece of this very big action.

Its free for two more years, but what about after that? Write to me at


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