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Internet Taxation: Just Say No!

By Trey Fleisher
Reprinted with permission from Independence Institute

On October 16th, Congress passed H.R. 1552, the Internet Tax Non-Discrimination Act which sought to extend the Cox-Wyden moratorium on Internet taxes for another two years. Our own Governor Owens, who
spoke recently at Citizens for a Sound Economy, a free-market think tank in Washington D.C., publicly reaffirmed his call to permanently ban Internet taxes. Interestingly, yet unfortunately and not surprisingly, Owens is one of only a handful of governors to oppose Internet taxes.

Also unfortunately Senator Byron Dorgan of North Dakota objected to a vote on H.R. 1552 which effectively killed the moratorium. Of course
Dorgan did so because “all that revenue” could be used to finance schools. The last refuge of the regulator - when in doubt, insist it’s “for the children.”

The Supreme Court’s 1992 decision, Quill Corp. v. North Dakota, reaffirmed that states could not compel mail-order catalogue companies to collect sales and use taxes if the firm did not have a physical
presence within the geographical area of the buyer. This decision also indirectly included Internet purchases. Most states and localities were
none too happy with this interpretation and, like my cat Felix when he’s hunting crickets in the garage, were poised to pounce on the chance to establish the “bright line” that says Internet purchases should be taxed.

Yet there was this little revolution a couple of hundred years ago related to some issue surrounding “taxation without representation.” A
few of us may remember this. Who is “representing” a company that exists only on the Internet? Astonishingly, the Court in Quill agrees.

State and local bureaucrats say these tax revenues are for critical needs, especially those of children. A National Governors Association study projects that states could lose up to $20 billion in tax revenues
from cyber purchases through 2003. But, state revenues are overflowing already, with many states’ citizens asking for tax cuts to ameliorate the foreboding prediction of an economic slowdown or, even worse, a

States have seen revenues propelled upward more than 5% per year on average over the last decade. Is there really a need for even more revenue? Similar to an overweight person at the grocery store, states
and localities see the Internet as another gluttonous meal to scarf down as fast as possible. Who would have thunk? Ain’t it just like a government entity to detect a new taxing source (its life blood) and try
and bloat up further to satisfy its insatiable appetite?

The cries for more revenue are pleadings from a group that always screams that the sky is falling. H. L. Mencken noted, “The whole aim of practical politics is to keep the population alarmed (and hence
clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”

The pro-Internet taxation gurus also allege that they care deeply about fairness. Is this tax regime fair? No. As the Reverend Robert G. Lee of
Memphis stated, “Fair is what you pay when you ride the bus.” Or, “fair is where you go when you want to see the pigs race.”

It is unfair that the brick and mortar companies are taxed at local rates and cyber firms (without a local presence) get off scot-free. Yes, it is unfair. But there is a most important egg to crack. The lower tax
rate on cyber goods will force states and localities to lower their revenues in turn. People and firms can vote with their feet if they don’t like the ombination of state/local taxes and services. Just ask businesses and individuals in New York City, for instance, who have been overtaxed and over-regulated for the last 30 years. However, it may be difficult to find and ask them because they have disappeared from New York. Between 1970 and 1995, New York had the highest per capita state spending and lowest employment gains of any state in the extended Northeast (D.C. to Maine). Coincidence or conspiracy?

A no-taxation system of Internet purchases sets up a natural constituency to fight for lower tax rates - those ’unfairly’ taxed brick-and-mortar businesses and their customers. These firms/customers will be the engine to lower tax rates. To stay competitive they will lobby the taxing authorities to push sales taxes down. This is the real reason why we should continue to push for a permanent ban on Internet taxes.

Again, H. L. Mencken was prescient when he said, “The only good bureaucrat is one with a pistol at his head. Put it in his hand and it’s good-bye to the Bill of Rights.” Taxation is just one of the pistols that the government has in its armament. By taking away at least one of the bullets from its cache, there is a good chance that the bureaucrat may lose even more power. It is the right thing to do.

Internet taxation: Just Say No.

Research Associate Trey Fleisher wrote this article for the Independence Institute, a free market think tank in Golden; http://www.i2i.org

article, from the Independence Institute staff, fellows and research network, is offered for your use at no charge. Independence Feature Syndicate articles are published for educational purposes only,
and the authors speak for themselves. Nothing written here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative
action. Please send comments to: Editorial Coordinator, Independence Institute, 14142 Denver West Parkway, Suite 185, Golden, CO 80401. Phone
(303) 279-6536 or FAX to (303) 279-4176; e-mail is webmngr@i2i.org

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