Most of us who have grown up with the Internet have watched it do amazing work. Companies that are idea-driven and whose sources of income come from “users” have even started going public with major IPOs. Whatever has been going on seems to be working. Freedom surges online; anyone can start a Facebook page, a Tumblr blog, a PayPal account, a Twitter, or a YouTube account and gain millions of followers with as little capital as a phone or a PC. Even the much ridiculed Justin Bieber was found by Usher on YouTube, where the young star is now worth $200 million—all in just seven short years.
For much of the time that this extreme growth occurred, the government was careful not to hamper innovation. The recent debate has been about the Internet Tax Freedom Act (ITFA) that is set to expire on November 1st. First created in 1998, it has been renewed three times, preventing state and local taxation of Internet access and electronic commerce. It also allows seven states who were taxing Internet access prior to the law to be grandfathered in so they can continue unabridged.
It seems at first glance that the federal government should not be telling states and municipalities what they can and can’t tax, but undue taxes naturally hinder the flow of the marketplace to begin with. Looking at current cell phone taxes provide some insight as to how Internet access taxes could look if the law expires. The national average on cell phone taxes is over 16.3%! My $80/month “unlimited everything” plan from Sprint sounds good in a Spotify ad or on a billboard, but it’s deceiving. It’s actually closer to $100 with all the extra taxes. A similar phenomenon could happen and put accessing the Internet out of reach for people who can barely afford it now.
A bipartisan group in the Senate has been working on a proposal called the Marketplace and Internet Tax Fairness Act, which would ban Internet access taxes for another 10 years, but allow states to collect sales taxes from out-of-state companies, and still allow grandfathered states to charge Internet access taxes. It is unclear whether or not sales taxes from Internet purchases would also be up for expiration after 10 years like the Internet access tax ban would be, but it seems unlikely.
Since the Internet itself has no one “location,” it would be difficult to create a simple set of tax rules for items bought and sold. Rather than make it complex and add to the mix of confusing tax policies that already dominate American life, we should continue to shop and sell unabridged from government interference. Because the Internet can facilitate private marketplace transactions easily and efficiently, profits can be spent on investments that can lead humanity further into the future. Imagine if the government taxed the Internet. They could tax individual apps, how much data you use, the words you type in an email or a blog… Considering there are state taxes that apply to altered bagels in New York, toilet-flushing in Maryland, or holiday decorations in Texas, it isn’t far-fetched that certain states would come up with odd ways to suck out as much money as they could from the Internet…and for counties and cities that have home rule, and thus, their own taxes, multiple taxes by multiple bodies of government could begin appearing.
This proposal is ludicrous, especially since we still operate under federalism. If the Internet is inherently borderless and knows no location, then it should not have any state or local tax applied to its use. Imagine the arguments between states on who should be able to tax what. Should the states that house the servers for the seller’s website get any of the revenue? How about the state where the seller lives? What about the state that the seller’s items get shipped out of? These, along with many other variables, seem not to be an option when it comes to Internet sales taxes.
When taxes are first explained to us—probably when most of us were young—they made it sound all well and good. “Taxes are used for roads and schools and to defend our country!” We repeatedly hear these statements throughout our lives. However, as we grow up, we realize how wasteful governments of all sizes are. The surplus of social security income is not kept in a nice “pot” for us to all go back and draw from (plus, it’s a forced retirement plan), and tolls we pay in most states (with exorbitant fines if you don’t pay, often marked up 1000% or more than the original price)—contrary to popular belief—do not all go to repairing and building new highways. The documented waste, tax increases, new tax proposals all keep growing and growing while the good service we’re promised for our schools and our roads and our defense continually seems neglected. Do not add Internet taxes of any kind—sales or access—to this list that will only fuel the government fire of irresponsibility and waste for decades to come.