Surprise? The Internet Taxman Cometh


What great timing during this first general election of the Internet era!

First, on the theoretical level, the United States Internet Council called for lawmakers at every level to create standing committees to address Internet-related legislation.

Then, on the more practical-and immediate-level, the California state Senate and Assembly adopted legislation that will force retailers to charge sales taxes on online purchases made by California residents. Gov. Gray Davis must sign or veto the bill by Sept. 30.

So much for that "hands-off-the- Internet" philosophy.

The Internet-including its nascent broadband component-is just too tasty and rich a treat for bureaucrats to ignore. The recent activities in Washington and California will accelerate the push for taxation and other intervention, even before the current, federally sanctioned Internet-tax moratorium expires next October.

Sen. Ron Wyden (D-Ore.) and Rep. Chris Cox (R-Calif.), who created the original congressional moratorium, are leading the effort to make the tax ban permanent.

To broadband providers-especially cable and telephone companies that regularly jump through hoops for state and local regulators-the looming specter of Internet taxes adds yet another burden. But they might as well get ready for it.

The National Governors'Association, among other public-officials groups, is salivating at the opportunity to find new tax sources from the booming Internet industry. The argument to keep hands off while this interactive baby blossoms is quickly losing validity, especially as Internet billionaires proliferate.

The USIC-a government and industry coalition that counts the National Cable Television Association, AT & T, computer associations and legislators among its members-points out reasons why government intervention is necessary.

"Not having grown up with the Internet, many legislators are simply unaware of the pace of technological innovation [and].the rapid proliferation of both technological problems and solutions," decrees the Council.

In other words: Use tax dollars to teach elected officials what their kids know intuitively!

The report, available at, does come up with several other significant points. In a distinct shift from its 1999 state-of-the-industry outlook, which predicted that copper wire would dominate Internet delivery through mid-decade, the 2000 Council stance shifts toward wireless Internet distribution.

It also calls for elimination of the local-access and transport-area boundaries set in 1984, at the time of the old Bell System breakup.

Those are the kinds of rearrangements that could affect broadband deployment, especially if those newly enlightened public officials start making public-policy decisions that extend into broadband services. Moreover, such shifts open the door to tax reviews at every level of the telecommunications process.

Of more immediate concern to Internet-tax foes is the California sales-tax legislation. It centers on the single most visible aspect of Internet taxation and regulation: "usage taxes" for e-commerce transactions. Gov. Davis'decision is likely to set a precedent for other states, including a definition of what it means to conduct business across state lines in the Internet age.

More than most of his gubernatorial peers, Davis has to weigh the tax's impact on a state where Internet workers and shoppers are a huge employment (and voting) bloc, versus the tens of millions of dollars in revenues that would pour in via Web-sales taxes.

By some measures, states lost more than $500 million in tax revenues last year through Internet commerce-and that's the smallest loss they'll ever see, given the expected growth of online commerce. Economists point out that the erosion of the sales-tax base is being masked by today's good economy. Those lost tax revenues pose too large a threat for the states to ignore.

To the nontech voter, the tax relief may seem like an extra bit of charity to the wealthy dot-com industry. Of course, it is the online buyer who actually foots the bill for the taxes. But the entire issue of "no tax on the Internet" sounds like a benefit to the wealthy companies that run systems and sell merchandise-not exactly a populist approach.

Even a few strong industry voices have proclaimed that the Internet-tax exemption is unrealistic. For example, early this summer, Intel chairman Andy Grove endorsed Internet sales taxes, contending at a Joint Economic Committee hearing that electronic commerce does not need "a federal or state subsidy in terms of tax-advantaged delivery."

But Grove acknowledged that there will be problems in developing a "fair and legally appropriate system" of taxing goods sold over the Internet. Most experts agree that the case will ultimately be decided in the courts, which is why the California legislation may ring the opening bell in that process.

Sales taxes are just the beginning. In an emerging world of t-commerce, where interactive transactions are conducted through broadband networks, the lure to tax these activities will be strong indeed. These transactions will be laden with extensive accounting and tracking procedures, making tax assessments feasible.

Could local distributors be required to tally and collect taxes for transactions conducted through their wired or wireless systems? And let's not forget about access taxes, which will also figure into the equation just as they do now on telephone and cable bills.

Appropriately for a topic so laden with political skirmishes, lobbyists are lining up for the next round of battles about Internet-tax policies.

Their sparring may remain in the background through this autumn's election campaigns. But the issue will certainly be ready to explode during the coming year. As we all know, there are only two sure things in life. And since no one expects the Internet to face death, it must certainly confront taxes.

I-Way Patrol columnist Gary Arlen is maxing out on extensions.