Policy Paper 103 |
November 21, 2000 |
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The Race to Cyberspace: Internet Taxation and State Tax Competition By Paul J. Gessing The coming Thanksgiving holiday marks not only the start of the Christmas shopping season, but also a turning point in the history of Internet Commerce. While the ongoing collapse of many dot-coms makes this season essential to their bottom lines, the upcoming debate in Congress over a five-year extension of the Internet Tax Moratorium may be of greater importance to e-commerce’s long-term viability. Legislation extending the Internet Tax Moratorium will be among the first items considered by the 107th Congress. Debate over this proposal will be a good indicator of how the newly convened Congress may be inclined to deal with Internet-related issues. The main purpose of the Internet Tax Moratorium is to prohibit state and local governments from taxing monthly fees paid by Internet subscribers. The moratorium and any extension thereof have no impact on states’ ability to charge sales taxes on products bought over the Internet. Yet, the issue is important because failure to extend the moratorium, or even a particularly acrimonious battle over its extension, could be a troubling sign that pro-taxation forces have gained the upper hand in Congress. As the pro-tax Center on Budget and Policy Priorities explains, "If Congress extends the moratorium for five additional years now, without addressing the Internet sales tax issue, it could send a signal to retailers that Congress is not willing to assist the states in their efforts to devise and implement a workable system that allows even-handed sales taxation."1 Clearly, this is a call for those in Congress who favor taxing e-commerce to hold up renewal of the Internet Tax Moratorium in exchange for legislation allowing the states to set up an e-commerce taxation regime. This threat should not be taken lightly. The debate over e-commerce taxation will test modern interpretations of federalism and our leaders’ views on interstate commerce. This paper explores the competing proposals and their attempts to define the proper relationship between government and the Internet. Background
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