Renewing the Internet tax moratorium, as the U.S. House of Representatives voted to do earlier this month, could cut state and local revenue collections by at least $4 billion and as much as $8.75 billion a year by 2006, a study by the Multistate Tax Commission says.
This means, the study added, that the collections loss is far more than the $500 million figure estimated in the original language of the bill that would extend the moratorium, language "that courts could interpret as providing a blanket exemption from non-federal taxes for the telecommunications industry, granting it an unprecedented 'church-like' status."
The MTC study further concluded that their estimation of the actual state and local revenue shortfalls are "conservative," because they don't include "the full impact of services, information, and content that can be exempted from tax by being bundled with Internet access or offered as a service over the Internet."
If the language of the House bill "were amended to conform to Congress's intent of pre-empting only sales taxes on solely Internet access to customers, including broadband," the study continued, "and extending the pre-emption to 'grandfathered' sales taxes of certain states, the cost to state and local governments would be limited to approximately $500 million in 2006."
Tennessee Revenue Commissioner Loren Chumley said "intent" doesn't count when tax matters come to court.
"(S)tate tax officials have many decades of experience living with the effects of laws passed by Congress<" Chumley said in a statement. "Our legal reading of the new expansive language in H.R. 49 is that it will effectively rope off the telecommunications industry from local and state taxes. It does not matter if the legislation's proponents insist that was not their intention here. Intention doesn't count in court when it comes to tax matters. All that counts is what the bill says -- and this bill provides a roadmap for the telecommunications industry to sidestep as much as $9 billion annually by 2006 in taxes and succeed in doing what no other industry has done: get Congress to relieve it of potentially all local and state taxes."
Critics of Internet taxation say among other things that the real debate should be whether state and local sales and use taxes should be imposed on goods and services bought online, and whether the telecommunications industry should be "singled out for unique tax burdens and levies that other industries do not face," as the Cato Institute, a libertarian think tank and longtime critic of Internet taxation, puts it.
"Regrettably, the debate over Net taxation is largely an effort to simply roll the out-dated state and local sales tax structure of the Industrial Age onto the fast-paced Information Age economy," said Cato telecommunications studies director Adam Thierer, in an earlier take on the question. "While some state and local representative groups profess to believe they can create a 'simplified' system of sales tax administration that will could be applied to Internet, such claims seem dubious.
"But even if this claim is taken at face value, it is important to understand that the simplification process which these groups advocate is, in reality, an attempt to create a collusive multi-state tax cartel," Thierer continued. "Such a result would betray the Founding Fathers' intended model of competitive federalism and would greatly discourage tax competition between the states. In that sense, such 'simplification' proposals can be seen as little more than an attempt to create an Articles of Confederation-style tax system for e-commerce."
