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AuthorITies: Matter Of Fact


November 29, 1999

Internet, Death, and Taxes

By Rusty Weston

Groucho Marx, among others, joked that he would never join an organization that wanted him as a member. But I'll bet he never received a petition from the Internet Tax Fairness Coalition.

Internet taxes? Why, it's un-American! It must be, given the widespread opposition from so many Democrats, Republicans, Libertarians, and U.S. presidential candidates. It won't surprise you to learn that executives behind many of the best-known computer and Internet industry brands are strongly aligned against Internet taxes both for sales and use. The United Nations recently proposed a meager tax on E-mail and was promptly shot down by powers much greater than it could muster.

Given such opposition, you might think the very success of the Internet depends upon a tax ban. Sen. Conrad Burns (R-Mont.) sums up this popular belief quite well. The Internet "continues to grow because government hasn't figured out how to tax it or how to regulate it," he says.

In enacting a three-year moratorium against new Internet taxes last year, Congress also established an Advisory Committee on Electronic Commerce to issue a recommendation about how best to approach the issue in the future. The Committee members include everyday citizens such as executives from AT&T, Time Warner, UUnet Technologies, Charles Schwab & Co., Gateway Inc., and America Online. In other words, a blue-ribbon panel to produce a rubber-stamp conclusion.

The Net-tax moratorium was enacted despite objections from a handful of state and local officials worried about a possible erosion of their tax base due to E-commerce.

But their fear is moot. Or so says Ernst & Young, in a report endorsed by the Internet Tax Fairness Coalition, estimating that state and local governments lost out on "less than $170 million" in 1998 because of a lack of sales taxes on Internet commerce. E&Y also estimates that only 37% of total E-commerce sales to consumers are subject to state and local sales taxes. What's not taxable? Online brokerage transactions, electronic banking, ticket purchases, and grocery orders. What's taxable? Books, hardware purchases, videos, and CDs.

What's the basis of the argument that Net taxes would derail the growth of E-commerce or stop the flow of venture capital to dot-com startups? Consumer and business surveys I've seen consistently put pricing concerns way down on the list--below service and reliability. Does anyone seriously believe that Webvan or Peapod wouldn't be able to compete against brick-and-mortar grocers if they had to charge taxes? Consumers are seeking convenience, not sales-tax shelters.

While I can endorse a revolt against taxes on E-mail (truly a stupid idea), who is unwilling to pay their fair share of taxes on consumer or business purchases? What difference does it make whether the purchase is made over the Net or through a drive-up window?

Read My Lips
The current national debate about Internet taxes is entirely political, not economic. After disavowing his infamous "read my lips: no new taxes" remark then agreeing to new taxes in his first and only term as president, George Bush clearly had a problem--one that's been passed like a wet torch to his eldest son.

As a state official, Gov. George W. Bush reportedly would like to call for Internet taxes. With Dell Computer and Compaq Computer Corp. in his home state of Texas, there's a potential bonanza at stake. But presidential candidate Bush knows that Internet taxes are very unpopular. Will he give in to the greater ambition? Does a Longhorn have hooves? Bush's rival, Sen. John McCain (R-Az.) has introduced legislation to make permanent the three-year Internet tax moratorium.

There's a national consensus that the Internet economy needs freedom from taxation in order to grow and prosper. But this is not to be confused with a debate. Personally, I'm not excited about paying more taxes, but it's doubtful that purchasing products over the Net would lead to more taxes. And I'm not looking to the Net to shirk responsibility. How often have we seen those with the greatest means paying the least amount of taxes?

By the end of the three-year moratorium in 2001, it will become painfully obvious that the Internet economy is actually stronger than the brick-and-mortar world it may one day out-produce. The brick-and-mortar world is going to need the tax break.


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