Unable to do anything important before its election season recess, Congress is about to knock down a favorite digital straw man—It will extend for a few months the about-to-expire federal ban on state taxation of Internet access.
The federal moratorium, called the Internet Tax Freedom Act, is scheduled to expire on November 1. The House has passed a permanent freeze but, because they Senate won’t go along, a temporary curb is in the works.
To listen to backers of the moratorium, you’d think that come 12:01 AM on November 1, every state in the union is ready to impose confiscatory taxes on Web access, forcing us to communicate with quill pens and carrier pigeons. This argument is ridiculous.
Before I explain why, you should know two bits of background. First, the moratorium, which Congress first enacted in 1998, has nothing at all to do with the argument over whether states can require online retailers to collect sales tax on goods and services sold over the Web. While some lawmakers have tried to merge the two bills for political reasons, we are talking about very different laws. In one case, the debate is over taxing stuff purchased over the Web. In the other, the argument is over whether to tax access to the Internet, such as the fees charged by Internet service providers like AT&T, Verizon, and Comcast .
Second, you should know that seven states taxed Internet access before 1998 and their levies are grandfathered under ITFA. The digital world has not collapsed in any of those states. If the federal moratorium expires, the rest could—in theory—tax Internet access as well.
But only in theory. So far, only one state, Washington, has indicated that its existing sales tax could apply to access services.
You wouldn’t know it from the anti-tax hysteria. A Sept. 11 Wall Street Journal column (behind a paywall) began: “Get ready for new taxes on your monthly Internet access bill.” Then there was this, from an online publication called The Monitor: “Nov. 1 could be the last day that Internet use remains tax-free.”
Take a deep breath. To start, state legislatures have all completed their budgets for this year and only a handful are even in session so none would be in a position to adopt a new tax on access for months. While state tax authorities could interpret existing laws as permitting access taxes and begin imposing such levies administratively, that seems unlikely. I have to wonder whether even Washington State would actually take this step, even if it has the legal authority.
And then there is the nature of the Internet itself. When Congress first passed the moratorium, backers argued that the Web was a freshly budding flower that would be torn from its stem by excessive taxation. Does anybody really think the Web is still a budding flower? These days, it seems more like kudzu.
The ubiquity of the Web matters in two ways. First, it is hard to imagine very many people being forced off-line if their monthly access bill is increased by, say 5 percent. If we were so price sensitive, providers such as Verizon and Comcast probably wouldn’t be raising their own fees so often.
More fundamentally, there is no good argument for favoring the Internet over other services that compete in the same space. Why, for instance, should Skype be tax free when landline and wireless phone calls are heavily taxed.
The power of these firms also matters when it comes to state politics. Internet providers are enormously influential in state capitols and are unlikely to meekly sit back and watch as their services are subjected to a new tax, either legislatively or administratively.
And that brings us to one more issue: Usually anti-tax conservatives strongly oppose federal preemption of state laws. I’m not sure why taxing Internet access is different. After all, if a state wants to tax access, why should the feds stop it? Let the voters of that jurisdiction punish lawmakers for such a policy, if they object.
When it comes to the Web, there is plenty Congress could be doing. For instance, it could settle the ongoing, nasty battle of “Net neutrality” where the very same Internet providers are trying to impose what is effectively their own tax on third-party content firms and, ultimately, consumers. Or it could address the broader sales tax issues. But these days Congress would rather spend its time jousting with a convenient digital straw man.
