The Internet Taxman Cometh
By Lincoln D. Stein
October 21, 2001 was an important date in Internet history, but one that passed without much notice. This was the day that the temporary three-year moratorium on Internet taxes expired. Unless Congress acted to reinstate the moratorium after this article went to press, the Internet is now wide open to state, local, and federal taxation. In theory, at least, state governments are now free to enact laws that add a usage tariff to all Internet traffic that flows into or out of their state, tax e-commerce sales made by companies based in their state, or even try to collect taxes on e-commerce purchases made by state residents.
What happens now?
A Taxation Primer
Internet taxation is a vexing issue because the very nature of the Internet challenges the assumptions of the tax law. Roughly speaking, tax codes are designed to give every level of government the chance to cover its operating expenses by applying taxes to its residents.
For example, when I lived in Massachusetts, a state with a well-deserved reputation for creative tax policy, I paid local property taxes to the City of Boston for the privilege of owning a home, water and sewer fees for the privilege of flushing the toilet, and highway tolls for the privilege of entering and leaving the city.
At the state level, I paid sales tax to Massachusetts for the privilege of buying groceries, an entertainment tax for the privilege of eating at a restaurant, and an excise tax for the privilege of owning a car so that I could eat out from time to time.
