NCPA - National Center for Policy Analysis

Taxing the Internet

October 21, 2003

Just as Congress is poised to make the temporary ban on taxing Internet access permanent, some politicians are using the occasion to stage a revenue gold rush by pushing for an Internet sales tax. This would handicap a developing technology, says the Wall Street Journal.

States are quick to cite budget deficits as a reason to let them tax online sales. According to the Journal:

  • Americans sent a record $872 billion to state and local governments in 2002, according to the Commerce Department.
  • In real terms, that's 10 percent more than was sent five years ago and a 27 percent increase in state and local revenue over the past decade.
  • Before a Congress under GOP control extends any more taxing authority to the states, it might consider that the underlying problem is overspending, not lack of revenue.
  • Stores like Wal-Mart and Target have retail outlets in most states and hence enjoy certain benefits -- police and fire protection, garbage collection, road construction -- from the sales taxes they collect and remit to local authorities.
  • Online vendors like Dell, which has no retail outlets, do not enjoy those benefits.
  • Forcing Dell to pay the same taxes in jurisdictions where it has no nexus does not "level the playing field."

Tax simplification would certainly be welcome, but granting local officials open-ended tax authority over interstate commerce looks like the first step toward a national sales tax. Indeed, states won't solve their fiscal problems by taxing the Internet, but they could do a lot of harm to this new medium while trying, says the Journal.

Source: Editorial, "The Internet Tax Grab," Wall Street Journal, October 21, 2003.

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