Death and Taxes

A colleague told a government-inefficiency story over lunch the other day. He’d moved to a new state and needed a driver’s license. He got to the motor vehicles office at 8:00 a.m., hoping to beat the crowds and make it to work. The line was already 50 deep. At 9:30 he wasn’t anywhere near an agent. He left without a license to make a 10:00 meeting.

Someone commented, “Death and taxes.” We assumed he was referring to Daniel Defoe’s famous, “Death and taxes are two unavoidable evils while nothing else in life can be guaranteed.” We didn’t get the correlation. Our friend enlightened us with his spin on Defoe, “They’re the only things our government has mastered. The military has mastered death, the IRS has mastered taxes. The government can’t do anything else very well.”

If Congress doesn’t act to reinstate the Internet tax moratorium that expired at midnight on October 31, our government may have found a way to combine their two core competencies: It will tax the Internet to death.

The federal Internet tax moratorium was passed in 1998. It prevented local, state, and federal governments from taxing Internet access. A few states had preexisting taxes and were allowed to continue collecting them but were prevented from imposing new ones. The Internet tax moratorium is the reason there’s no tax on monthly subscriber fees for dial-up or high-speed Internet access (while tax is applied to DSL, it’s due to a loophole in the original law that could be corrected with more careful wording).

Most people agree the Internet tax moratorium is a good idea. The Internet is still in a nascent stage. Many of its enabling powers have been identified: communication, information, education, commerce. Surely, many more are yet to be discovered. The Internet is unprecedented in magnitude and potential. It deserves to grow freely, without taxation that’s sure to stunt its growth by limiting its accessibility.

Senator George Allen said it best on the senate floor, “The Internet should remain as accessible as possible to all people in all parts of the country.”

But this is the government. With Internet penetration at over 60 percent, some legislators see it as a pot of honey. They can’t wait to get their hands in the jar. Many states face budget shortfalls. California’s is the reason Arnold Schwarzenegger was elected as governor. There’s hardly a state in the nation not looking for creative ways to raise revenue. California alone could raise a cool $43 million annually by instituting a 2 percent tax on Internet access, assuming 60 percent of households are connected and pay an average $25 per month. The tax adds only $0.50 to a monthly bill.

It’s the kind of tax politicians love. It raises gobs of money but can be hidden as just pennies a day.

The expiration of the Internet tax moratorium is an opportunity state and local governments have been waiting for. If Congress fails to reinstate the moratorium before year’s end, we’re sure to see a host of legislation next year that puts Web access in the crosshairs.

That’s bad news for all Internet marketers.

In last week’s Wall Street Journal, David Quam, director of state-federal relations for the National Governors Association, said, “The biggest problem I have with this moratorium is Congress spending state tax dollars subsidizing the Internet. If states want to subsidize the Internet, they should be allowed to make the decision.”

Since when did preventing state and local governments from instituting new taxes become “subsidizing”? A subsidy is a government handout. Does AOL (or any ISP) receive a subsidy for providing access? Absolutely not.

This should send a shiver up marketers’ spines. Once taxing authorities are unleashed, they won’t stop at 2 percent. We could see taxes based on the number of email messages sent and received; number of minutes connected; and amount of Internet bandwidth consumed. The proposals are guaranteed to be outrageous.

Consider this real-world example applied to the Internet. States impose income tax on pro football players who play within state lines, regardless of where the player resides. Warren Sapp plays for Tampa Bay. This year, he’ll play one game against the Eagles in Philadelphia. By law, he’ll pay personal income tax to Pennsylvania on the money earned for that one game. He plays 16 regular games each year, so he must divide his annual salary by 16 and multiply that number by Pennsylvania’s personal income tax rate of 2.8 percent. Assuming he earns $8 million per year, he’ll pay Pennsylvania $14,000 for the privilege of playing one football game in the state. He has no voice against the politicians who instituted the tax. There’s that whole taxation without representation thing, but I digress.

What’s to stop a similar law in respect to the Internet? State governments could draft creative tax legislation that applies to nonresidents, thus protecting their electoral base. Virginia could levy $0.01 for each email passing through a server in the state. It just so happens every message sent to AOL users passes through AOL headquarters in — you guessed it — Virginia. The windfall would be enormous.

Worse, Virginia could tax all AOL subscribers, regardless of where they reside. They all connect through AOL in Virginia. The desire to tax, combined with the Internet’s virtual nature, could create ridiculous taxation gambits.

Don’t let Congress sit on its hands and allow state and local governments to stunt the Internet with a patchwork of taxes on our lifeblood. If Congress wants such a tax, it should impose a clear, federal tax that’s applied universally. No politician was ever elected by raising taxes on his own constituents. Better to let someone else do it for you.

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