Tax Analysts Blog

I Like the Internet, Taxed or Not

Posted on Aug 14, 2013

As State Tax Today reported recently, U.S. Senators Ron Wyden, D-Ore., and John Thune, R-S.D., introduced legislation to make permanent the ban on state and local jurisdictions taxing Internet access. This will turn the Internet Tax Freedom Act into the Internet Tax Freedom Forever Act (get it?). I do not like taxes. But come on. We are still trying to give a special tax break to the Internet? The original Internet Tax Freedom Act was enacted in 1998. It was terrible policy then, it is worse policy now. The act was renewed three times and is set to expire in 2014. Basically, the act forbids state and local governments from imposing taxes on Internet access. The high tech industry was behind the original act. Everyone who was selling or planning on selling services over the Internet lined up in favor of limiting state taxing authority. Their argument at the time was that the Internet was an infant industry and needed protection and nurturing. That was hogwash of course. No one really believed that imposing a sales tax on Internet access would deter people from going on-line. Wyden and Thune cannot use the infant industry argument anymore. Their new argument is that the Internet is an economic engine that needs protecting from the jaws of government taxation. They are actually arguing that the Internet is so important its access should not be taxed. Can't we make the same argument for energy? Agriculture? Manufacturing? It is a silly argument. In fact, the argument that the Internet needs protecting from government is even less valid today than it was in 1998. And it was not valid then. Neither the politburo in Red China nor the mullahs in Iran have been able to stop the Internet. Yet, Alabama's 4 percent sales tax might?

The Federation of Tax Administrators and National Conference of State Legislators courageously opposed the original law. I hope they do so again. The federal government should not interfere with state taxing authority. More importantly, there is no tax or economic reason for exempting internet access from tax. It represents the purchase of a service, like auto repairs, tattoos, or dog grooming. The Internet is not going to collapse if it is taxed. Wyden and Thune are merely doing the bidding of the Internet providers. That kind of cronyism represents all that is wrong with modern tax policy.

Read Comments (3)

edmund dantesAug 15, 2013

The absence of state taxes doesn't protect the internet providers, it protects
consumers by keeping internet access affordable. Everyone needs that access.
We like that it is tax free. Internet taxes won't raise much money--if they
did, we couldn't afford to keep our access.

Let's tax the interest on muni bonds instead. That perk only benefits the
rich, and it encourages municipalities to overborrow by artificially lowering
their costs below market. You should decry the cronyism that keeps muni bonds
tax free as loudly as internet tax freedom, as it is a far more serious example
of bad tax policy.

David BrunoriAug 15, 2013

Edmund, As usual, you are very insightful. There is no tax or economic policy
for exempting internet access from tax. Therefore in a "good tax policy", broad
base, low rate kind of way, it should be taxed. I happen to agree with you on
the exemption for muni bonds. The exemption is devoid of policy value and the
benefits inure to the people who need it least.

emsig beobachterSep 25, 2013

The exemption of interest on muni bonds may not even help munis (I include
states in this category). If munis were taxable, yields would probably rise,
but state and local governments with excellent credit ratings would find a
wider national or international market for their debt. If the U.S. Treasury
were to peovide a grant for some of the additional interest, some state and
local governments would come out ahead if they issued only taxable debt
instruments.

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