The Honorable Robert C. Smith
United States Senate
Washington, DC 20510
 

Dear Senator Smith:

          On behalf of the 300,000 members of National Taxpayers Union, I am pleased to offer our support for your legislation, S 328, to make permanent the moratorium on the imposition of taxes on the Internet.

          As you know, National Taxpayers Union strongly supported the Internet Tax Freedom Act that was drafted in the 105th Congress. We offered this support with the clear understanding that a permanent ban was preferable to the temporary moratorium that was eventually signed into law.

          Our original position remains unchanged. Although state and local governments have complained of being denied the growing potential revenue source of Internet sales and services, the truth is that all state and local taxes, including traditional sales taxes, have been growing faster than inflation for the past several years. Clearly, these governments are not starved for revenues so much as they are hungry for more “cash cows” to fund wasteful and unnecessary projects.

          In addition, the consequences of Internet taxation remain equally if not more adverse, and may ultimately prove fundamentally impossible to resolve. Internet businesses and “servers” can be located anywhere, and can respond to taxation by moving out of the U.S. Attempts to tax Internet services or to put up “tax gates” on millions of websites under thousands of government jurisdictions would lead to administration nightmares beyond those created even by Value Added Taxes. And as with mail orders, taxing Internet orders presents the same fairness question: why should an individual pay taxes to a state from which he or she receives no services, especially when the firm located in that state pays taxes on its own income or property?

          E-Commerce, and by implication the Internet, continues to grow in large part because governments have been prevented from enacting predatory tax policies. In the words of your colleague, Senator McCain, it would be unwise to “choke this baby in its cradle.” Indeed, because business responds so well to a stable and predictable tax climate, it only stands to reason that making the temporary moratorium a permanent ban would encourage this economic growth.

          Finally, the implications of new technologies in general, and the Internet in particular, have consistently confounded the predictions and policies of governments. Even “Main Street” businesses are wiring into the Internet at an astonishing rate, leading some to question whether there will be any divisions between traditional and online firms. Likewise, the issue of tax “equitability” between on-line and in-person purchases will become even more complex and elusive of a practical solution.

          Americans are already confronted with an array of hidden taxes that disguise the true cost of government and make it impossible for citizens to rationally debate the level of services they believe they can afford. According to a study by our research affiliate, National Taxpayers Union Foundation, hidden taxes in America total some $639 billion annually. Internet taxation would only encourage this deceptive practice. Accordingly, National Taxpayers Union urges your colleagues to support S 328, and we look forward to working with you in obtaining passage of this important legislation.