On The Horizon: Don't Stifle Internet Access With Taxes

States should quit whining about their inability to tax Internet sales and just stop spending so much, Bradford C. Brown says.
Art Buchwald once said, "Tax reform is taking taxes off things that have been taxed in the past and putting taxes on things that haven't been taxed before." As many states wrestle with budget deficits, taxation of the Internet has roared back as a tax option to generate state revenue.

Recently, the Senate avoided the taxation shell game and voted 93 to 3 to extend the ban on taxing access to the Internet. In addition, states that tax DSL now have two years to phase out their taxes at a cost of millions in state revenue.

Sens. George Allen, R-Va., and Ron Wyden, D-Ore., introduced the proposal known as S-150, The Internet Tax Non-Discrimination Act. It called for making permanent the moratorium on taxing access to the Internet and ensured that it applied to all 50 states. A number of members balked, though.

For example, Sen. Lamar Alexander, R-Tenn., wanted to make Internet taxation a states-rights issue. "What we're talking about is whether Tennessee and other states can collect a sales tax from an Internet service provider when it connects my computer to the Internet, just as it collects a sales tax from the telephone company when it connects my telephone..." As a result, he and Sen. Thomas Carper, D-Del., fought to weaken S-150.

The Alexander/Carper argument neglected to account for the fact that the network isn't just connecting Nashville with Dover, it's ubiquitous. This is a national issue about the future of the Internet, open access, global E-commerce, jobs, and growth, not a local issue about funding services.

Evidently, a compromise was reached, and the Senate agreed to extend the ban for four years instead of making it permanent. Internet telephony wasn't exempted from taxation because some senators, who saw telephony migrating to the Internet, had worried the proposal could have been interpreted to prevent voice over IP from also being taxed, costing states billions of dollars in revenue.

However, the fight isn't over. The House version of the bill, which also has passed, provides for a permanent ban on Internet-access taxes. It also exempts Internet telephony from taxes. That remains an issue because states like Florida already are moving to tax voice over IP. It's likely that many governors and mayors will continue lobbying to get the best deal that they can as the differences between the House and Senate are ironed out.

In the end, the message for federal and state legislators should be clear: Don't try to balance state budgets by creating an Internet-access tax; don't slow the growth of the Internet with short-sighted efforts to tax access to it because it's an easy way to raise revenue; don't deny universal broadband Internet access to all Americans by making the cost of access out of reach. In short, states already are receiving billions of dollars in tax revenue for communications services and Internet sales. A ban on access taxes won't stop that revenue flow.

The Internet can continue to be a pipeline for education, a channel for new economic growth, and a communications tool that transcends borders and politics, but only if access is unfettered.

Let's hope that legislators will embrace growth and the potential of the Internet and have the courage to balance state budgets by simply spending less.

Bradford C. Brown is chairman of the National Center for Technology and Law at the George Mason University School of Law. Reach him at [email protected]. (Any opinions expressed in this article are solely those of the author and do not necessarily represent those of the George Mason University School of Law.)

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