• United States

Is it tea time again?

Feb 24, 20033 mins
Enterprise Applications

Like the title thing in the 1958 Steve McQueen science fiction film “The Blob,” Internet taxes are on the move again.

In the U.S., we generally have been free of taxation for Internet services and for goods and services purchased over the ‘Net. But this might be coming to an end.

Our freedom from these taxes is not based on any lack of attempts by tax authorities. They have tried quite hard but have been blocked by two things.

First, a 1992 U.S. Supreme Court decision that said states could not force retailers with no significant presence in the state (in those days it was mail order houses) to collect taxes on goods and services sold to people living in the state. This came about because the complexity of having to deal with 7,500 or so separate tax jurisdictions was too much to impose on the sellers.

Second, a series of federal laws prohibited anyone from adding new taxes for Internet services.

The current iteration of the federal law will expire this November unless it gets extended again, but it does not block taxes on goods and services purchased over the Internet. Those taxes still are blocked by the Supreme Court’s ruling, which could be dealt with by the passage of a new federal law that say it is OK to tax in spite of the complexity or by simplifying the tax chaos. Many states are busily doing the latter.

A group of 31 states have been participating in the Streamlined Sales Tax Project, which recently adopted model tax rules that, if adopted by enough state legislatures, could pass the Supreme Court’s simplification threshold. The adoption of these simplified rules are far from a done deal because they override some county, city or local taxes, and these folk likely will object. And things might not stay “simple” for all that long because the model rules let states add new taxes later, something I seriously doubt they will refrain from doing.

I would expect that any taxes on Internet services quickly would become the general revenue-gathering device that taxes on telephone services have become. I also expect that those imposing such taxes would try to distinguish between different Internet services such as voice over IP, and in some cases be urged by incumbent telephone companies to kill competing technology (ostensibly for the sake of fairness).

As you might expect, the prospect of taxes on the Internet has brought out quite a range of opinions, from brick-and-mortar stores that see a need to even the playing field, to the folks who think all taxes are unconstitutional (one of whom wrote late last year that taxing out-of-state companies would be taxation without representation). I seem to recall that phrase from somewhere in Boston’s past.

It will be interesting to see what this tax-cutting administration will do if a bunch of states go through the simplification process and then demand to be able to collect some of the $1.5 billion to $50 billion (depending on who you ask) of “lost” taxes next year.

Disclaimer: I expect the Harvard Business and Government schools have different opinions on taxes of all kinds but I did not ask them – the above musing is mine.