Sweet 16

by Bartlett D. Cleland, Grassroot Blog, February 15, 2014

Almost immediately after the World Wide Web made its debut some folks were hard at work figuring out a way to tax it. One idea was to tax Internet access, or to charge a higher tax on items bought via the Web than if that same item had been bought at a brick-and-mortar store. This Internet looting led to the passage of the Internet Tax Freedom Act (ITFA) in 1998, 16 years ago.

Originally intended to be permanent but negotiated down to merely temporary, and grandfathering in jurisdictions that were already taxing Internet access to give them time to adjust their tax codes and budgets, the law put in place a moratorium on “Internet taxes,” that is, taxes on Internet access and on multiple or discriminatory taxes on Internet commerce. Since then, ITFA has been extended three times, most recently in 2007 when the moratorium was extended for seven years, until November 1.

Legislation has been introduced in both the House and Senate to make permanent the current moratorium on Internet access tax, to permanently prevent multiple or discriminatory taxation of electronic commerce, and to end the grandfathering that provides seven states with various loopholes to continue discriminatorily taxing the Internet.

Several states have already passed legislation allowing for new taxes to take effect as soon as the moratorium ends. And those taxes that were grandfathered in have been accumulating, just as barnacles collect on a ship and cause damage.

With states now imposing an average sales tax rate of 7.5 percent, and an average 11.2 percent tax on telecommunications, the potential damage is considerable. Even worse, Internet service or sales could be taxed more than once. Multiple taxes were proposed when the original moratorium was passed, which is why multiple tax prohibition was included in the moratorium.

If the current moratorium expires, any national Internet policy will dissolve, as states, localities and even mosquito abatement districts enforce their own policies. This tax uncertainty and lack of restraint will result in market uncertainty because of the effect taxes have on expenses and on consumer uptake of broadband. The uncertainty in consumer uptake leads to less infrastructure build-out, but also, Internet use and application as a business input become muted rather than continuing to be an engine of innovation. Business innovation fails in an uncertain market when new ideas become too risky to try, so new businesses and new jobs fail to materialize.

In the end, those most hurt are those who can least afford to bear increased costs for access to broadband, new uses like education and health care opportunities, and those most vulnerable to the further loss of jobs. Small businesses that have been built on access to technology also suffer when the means to a global market is hindered.

If there is opposition to a continued moratorium and the elimination of discrimination against the Internet and related businesses, then let it be made publicly. Let the opposition explain how broadband adoption should not be a national priority, or that economic growth is not important.

The time is now for Congress to recognize that a permanent moratorium has come of age and mark the occasion by saying goodbye forever to discrimination. A permanent, uniform moratorium opposing discrimination against the Internet is the answer.

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Bartlett D. Cleland is Policy Counsel for the Institute for Policy Innovation. Read more at www.ipi.org.