Internet Tax Freedom Act Proves a Successful Start-Up

This month marks the first anniversary of the Internet Tax Freedom Act--a three-year moratorium on new and discriminatory Internet taxes that I co-authored with Sen. Ron Wyden (D-Ore).

This milestone provides a useful opportunity to check on how the law has performed. Has it helped the Internet grow into a more useful tool for consumers? Has it, as some claimed it might, caused a falloff in tax revenue for states or cities?

You already know the answer to the first question. The growing Internet is bringing the benefits of knowledge, trade and communications to more people in more ways than ever before.

As for taxes collected by the government, they’re up--way up. In the first quarter of this year, sales tax collections in California were up 8.8% from last year. Most recently, in the second quarter of 1999, they were up 9.5%.

This increase in sales taxes, coinciding with the explosion of commerce and information on the Internet, comes as no surprise to Californians.

Even the tax collectors agreed: Both the State Board of Equalization, which collects sales taxes, and the Franchise Tax Board, which collects income taxes, have formally endorsed a permanent ban on new Internet taxes.

Then-Gov. Pete Wilson and current Gov. Gray Davis both have endorsed the Cox-Wyden law, as did state Treasurer Kathleen Connell. Locally, our county tax collector, John M.W. Moorlach, told Congress that it should pass the Internet Tax Freedom Act because “our county’s future tax base will depend increasingly on job creation and productivity gains from technology.”

Not everyone, of course, sees the future of the new economy so clearly; some even feel threatened by it. A handful of opponents to the Internet Tax Freedom Act have consistently argued that unless new Internet taxes are authorized, sales tax revenue to our cities and states would dry up. The tax-the-Internet lobby, however, hasn’t taken into account how the Internet is opening up new markets for Main Street businesses, or how it is contributing to new jobs, better wages and a stronger economy--all of which boost tax receipts.

The reason this works is that so-called “remote” sales, however large they may grow, will always remain just a fraction of total retail sales. In the latest full year, for example, the sales tax “lost” on Internet transactions amounted to barely one-eighth of 1 percent of total state and local government sales and use tax collections, according to a June 1999 study by the accounting firm of Ernst & Young. Meanwhile, technology-spurred economic growth has led to simultaneous increases in taxable sales of nearly 10% per year.

Experience with another invention that was once the latest in high-tech--the telephone--suggests that the Internet won’t kill off retail as we know it. As we close the 20th century, storefront retail sales continue to prosper side-by-side with “remote” catalog sales made over the phone. Today, despite the ease of calling 1-800-you-name-it, catalog sales amount to less than 3% of total retail sales. (Internet sales are even less than that: just 0.3% of total retail sales in the most recent year.)

The Internet Tax Freedom Act treats sales over the Internet the same as catalog sales over the telephone. It will have no effect on sales tax collections from either source, because the act did nothing to change current law on remote sales. It simply prevents new taxes. The U.S. Supreme Court, in deciding the cases that have given us our current tax distinction between “remote” and in-state sales, said that taxes can only be collected from people and firms with a substantial “physical presence” in the jurisdiction. That is just a fancy way of saying, “no taxation without representation.” It is sound public policy as well as good economics.

Now, Wyden and I are taking Internet Tax Freedom global. We have introduced new legislation supporting an international ban on all multiple, discriminatory, and special Internet taxes.

Already, the U.S. government has succeeded in obtaining a one-year global ban on new Internet tariffs. The new Cox-Wyden legislation instructs the United States to work to make that ban permanent.

The art of successful taxation has been compared to plucking a goose: the object is to get the greatest amount of feathers with the least amount of squawking. Recognizing that, policymakers will be wise to tread lightly when it comes to new Internet taxes, if the object is to protect and expand the tax base. Our legislation has been a useful means of ensuring that result.

Rep. Christopher Cox (R-Newport Beach) is chairman of the House Policy Committee. More information about the Internet Tax Freedom Act, including the study referred to in this column, is available at https://cox.house.gov.