Internet too young for taxes

In addition to humanitarian considerations, there are pragmatic reasons we don’t put children to work. The modern education of a child has much more value to the child and society than does early entry into the workforce. The development of certain skills would be sacrificed if a child was forced to work rather than develop unabated.

This same economic reasoning is behind the need to keep the Internet tax-free. And this issue has silently vaulted to the top of policy agenda because the Internet Tax Freedom act, which forbids states from taxing e-commerce, expired Monday. The two bills intended to amend the Act are hung up on Capital Hill – one in the House and the other in the Senate – and they have created dissent between state- and federal-level politicians. The states want to tax e-commerce, while the federal government wants e-commerce to continue growing unimpeded by taxes.

The Internet and e-commerce were just fledglings when the Internet Tax Freedom Act was written. Yet even at this early stage, it was clear that there was great potential. It was also clear that subjecting this industry to taxation would severely hinder its development.

The underlying problem is the decentralization of commerce – the lack of so called brick-and-mortar location. A product purchased on the Internet could be coming from any of the 50 states. And within the states, there are 7,000 tax rates, 38,000 tax rate areas and what is and is not taxed throughout the states is not standardized. So, if an Internet company was subjected to state taxes it would have to know and file in accordance with all these laws. This would take too much time and require an unreasonable knowledge of tax laws, creating a significant deterrent to e-commerce. In fact, it would be such a significant deterrent that it is unconstitutional.

Still, state politicians have good reason to find a way to tax e-commerce. The federal government estimates that states are missing out on collecting between $1 to $12 billion per year that could supplement increasingly tight budgets. Governor Ventura stressed the need for simplification and is involved with 32 other states in the Streamlined Sales Tax System project.

Yet, even if they developed a practical way to collect interstate tax, which is unlikely, taxation would still stunt the Internet’s growth. Right now, the lack of tax on e-commerce is an incentive for consumers to use this technology. This incentive plays an instrumental part in the Internet’s propagation. And although it is no longer the fledgling it was a few years ago, it is in an adolescent stage, suffering the changes of puberty, and must be further helped through its maturation process – not strapped to the plow as tax-hungry states would like.