Internet Tax Freedom Act: A Bad Idea?

1998: Should the Internet be a tax-free zone?

President Clinton thinks it’s a good idea. Anyone shopping on the Internet is inclined to agree. Why would anyone oppose the Internet Tax Freedom Act?

For starters, it’s pretty presumptuous of Clinton to think he can dictate a policy to the entire world, as leaders of the European Union are quick to point out. America doesn’t own the Internet and should stop acting as though it does.

Outside the United States, national sales taxes and value added taxes (VAT) are a way of life. Governments depend on those revenues to survive. Now Americans want to take that away.

Then there are fifty states, a few territories, and thousands of municipalities, each with their own tax code. In most of these, the government is funded through a combination of income tax, sales tax, value-added tax, property tax, millages, lottery tickets, and who knows what else.

In a state with no sales tax, the Internet Tax Freedom Act (ITFA) makes no difference. But what of a state with sales tax but no income tax? Has the White House considered the negative impact this could have on states and municipalities that depend on sales tax to balance their budgets?

This is one reason the League of Cities opposes ITFA.

Then there’s the question whether Congress has the right to ban states and cities from requiring a specific class of businesses to collect sales tax – particularly when they would be taxed for walk-in, phone-in, and/or mail order purchases.

Another argument against ITFA is that it is shortsighted. As a nation, Americans are engaged in an ongoing dialogue on tax reform. “Should we have a national sales tax instead of an income tax?” “Would it be better to have a VAT or a national sales tax?”

If the Internet is declared a tax free zone, it throws off the entire discussion. E-commerce is growing rapidly. How large a portion of otherwise taxable business will be untaxable if ITFA passes? And if it passes, will it be possible to end the tax-free status as Clinton proposes? What negative impact will that have on Internet businesses who have been untaxed for years?

Considering the international, local, and national implications of the Internet Tax Freedom Act, not to mention the legal costs entailed when the European Union, state governments, and municipalities take the US federal government to court (legal costs to all involved governments regardless of who wins), passing ITFA would be foolish.

Update, March 20, 1998

Well, it looks like people in Washington are listening to the concerns of states and municipalities. Read more about it in the San Francisco Chronicle and Washington Post (no longer online).

This still hasn’t addressed international concerns, but it shows that Congress and the White House are prepared to work toward a more equitable solution.

Update: ITFA was passed by the House and Senate, and President Clinton signed it into law on October 21, 1998. As passed, the law banned federal, state, and local taxes on internet access, as well as the creation of internet-only taxes within the US. ITFA also says that the same rules that apply to mail-order and phone-order businesses apply to internet-based businesses: If the organization has a physical presence within a state, it must collect an applicable taxes from its customers.

States have found some very creative ways to establish that Internet-based businesses, in particular, have a physical presence so they can collect sales tax on purchases.

IFTA was initially passed for a 10-year period, renewed several times after that, and made permanent in 2016.