Two threats from lawmakers in Washington could hamper the still ongoing development of the Internet and raise taxes on Americans already struggling under a hefty tax burden.
The first comes from proposed legislation to allow states to require out-of-state retailers to collect sales taxes on online purchases even if the retailer has no physical presence in the buyer’s home state. This often is referred to as an “Internet sales tax,” since the bulk of such sales are made online.
Currently, states can collect sales taxes only on purchases in which the seller has a physical presence in the state. A store, workforce, factory, storage facility, building or employees in a state usually establish a physical presence.
The standard has come under increasing pressure because state legislatures and state tax collectors want to be able to tax Internet sales, which they believe could grow their own coffers substantially.
In 2014, the Senate passed the Marketplace Fairness Act to address the issue. It would have allowed states to enforce their sales tax on out-of-state online retailers if those states had more than $1 million of sales. In early 2015, Rep. Bob Goodlatte, R-Va., chairman of the House Judiciary Committee, released a different plan known as “Home Rule and Revenue Return.”
Under this plan, retailers would collect sales tax on sales to out-of-state customers based on the sales tax law in the home state of the business if the state joins an inter-state agreement. Both plans raised serious concerns about federalism and the expansion of the federal government’s power to regulate the economy.
Both plans are top-down policies from Washington that would raises taxes on customers and burden retailers. They would curtail the Internet’s potential to serve as an engine of economic growth and set a dangerous precedent that expands the taxing power of states. Recent failures to adequately address the issue provide strong evidence the best approach to solving this perceived problem is to maintain the policy that has been in place for 23 years now—physical presence.
The second threat comes in the form of Congress allowing states to tax access to the Internet, which it put a moratorium on in 1998.
The moratorium on state and local governments taxing Internet access and other Internet services, such as emails, instant messages or data, has been in place for 17 years now but has been set to expire periodically. It was supposed to expire last December, but Congress extended it until the end of this year. This ever-present threat is disruptive to consumers and the economy. Congress should make the moratorium permanent.
If states were allowed to levy these taxes, they could greatly reduce access to Internet services by raising the price for consumers. Entrepreneurs and businesses that rely on the Internet also need the certainty that permanency would provide. The prospect of higher taxation makes businesses less willing to invest and entrepreneurs less willing to open new businesses.
There are concerns among some that a permanent ban on state taxes would violate the principle of federalism. But the Internet clearly is interstate commerce and therefore it is well within Congress’s power to ban taxing it.
Congress soon will have the opportunity to bar taxes on Internet access and activities permanently. It should do so.