The Good and Bad News of Internet Taxation

David Williams

September 19, 2012

It is tempting to give the Federal Communications Commission’s (FCC’s) credit for backpedaling from a proposal to tax broadband Internet service.  According to The Hill , “In April, the FCC suggested a number of ideas for reforming the [Universal Service] fund’s contribution system, including adding a fee to broadband Internet service. The commission also sought comments on taxing text messages, as well as levying a flat fee on each phone line, instead of the current system, which is based on a portion of the revenue from interstate phone calls.”  The FCC has decided not to move forward with the proposal.

Even partisan blame games and finger pointing can’t dim the bright light that shines as a result of this announcement.  Such a significant shift in a policy discussion like this one cannot be overstated.  It’s a big win for taxpayer advocates across the country.  As noted in The Hill, one FCC official “said an Internet tax is ‘politically toxic.’”  And he is absolutely right; our voices were heard.  With this news comes an implicit recognition that enough is enough, and the existing tax burdens American consumers currently carry is plenty.  More important than the political issue is the financial issue of levying another tax in a struggling economy.

Perhaps the FCC is finally coming to realize that there are other ways to fix broken government programs than by constantly turning to taxpayers and consumers demanding more, more, more.  FCC Chairman Genachowski even seems to understand the tremendous negative effects that more taxes can create.  According to a news article, a colleague of Genachowski noted that “Genachowski was always skeptical about a broadband fee because he feared it would discourage people from adopting the technology.”

But victories, just like this one, are far too often short-lived, and when it comes to matters of public policy, it’s frequently the case that one step forward is followed by two huge steps back.

The state of California missed this memo, and as of this past Saturday, September 15, the state has begun collecting taxes on internet purchases.  No longer can the state’s residents enjoy a tax-free internet.  A state law is now in effect that “requires state residents to pay sales taxes when ordering goods or services over the Internet.”  An NPR segment explained the specifics well; “Every out-of-state business that sells more than $1 million in merchandise to California customers will be required to collect sales tax and ship it back to state coffers. Before, that was only true of companies with a store in the state, like Target or Wal-Mart.”

This shouldn’t be too surprising that California is looking for additional sources of revenue considering its desperate budget predicament requires drastic acts. As Politico aptly noted, “For the Golden State, which has faced budget deficits for the past several years, there is hard cash to look forward to — as much as $300 million annually collected by as many as 400 retailers.”

For a long while now, store front merchants have complained that internet retailers enjoy an unfair advantage because consumers who purchase their goods sold online do not have to pay taxes.  Such assertions miss an important fact: brick and mortar stores pay taxes and in turn, the taxes are used to maintain roads, offer police protection, provide public transportation, etc.  All of these public services benefit the stores with a “physical” presence.  Internet retailers neither need such services (due to e-commerce) nor should they or consumers who purchase their goods online be required to pay for them.

Governor Brown and California’s legislature disagree.  They’re certainly living up to the idiom that if it moves, the government will tax it.  Apparently that now applies to “moves” your computer mouse makes.

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