The only sure things in life are death and taxes, as the old saying goes. While the Internet so far has escaped both, it seems implausible that it will remain free of the tax man's grasp in the long term.
Of course, proposed legislation on Capitol Hill attempts to extend moratoriums on taxing the Internet--that is, taxing goods and services sold via the Internet. But that remains a controversial issue and some legislators and traditional business owners say it will eventually result in the loss of significant government revenues and disadvantage bricks-and-mortar businesses.
Some politicians, meanwhile, see Internet access itself as an opportunity to raise new revenues.
Then there's the perennial discussion as to whether and when Internet traffic--specifically IP telephony calls--should be regulated as is voice traffic on the PSTN. (Internet telephony somehow fell under the classification of enhanced service, thus escaping landing fees that PSTN providers have to pay to terminate traffic on other carriers' networks.) Of course, IP telephony companies are lobbying against any new regulation, while some of the more traditional companies--being challenged by the long-distance arbitrage opportunity the enhanced services classification provides Internet telephony--are pushing for a more level playing field.
So local, state and federal lawmakers and regulators--many of whom are computer illiterate--are stuck trying to figure out when and how to set up a pricing structure for the Internet.
Taxing goods and services on the Internet appears to be on hold for the immediate future--due to the widely distributed nature of this marketplace if nothing else. (For example, if the e-tailer [a retailer who conducts business by electronic commerce] is in Ohio and the buyer in Idaho, what state collects?)
The reason that many e-tailers don't have to collect sales tax is because they aren't located within the states to which they ship goods. Under federal law, a retailer must have a physical presence in a state or city for that state or city to require a sales tax. The tax issue is further complicated by the fact that there are 45 states plus the District of Columbia that have a sales tax with their own rates, rules and forms. On the local level, there are more than 10,000 taxing jurisdictions, and small retailers may not be equipped to deal with the administrative complexity and cost of collecting sales taxes for every jurisdiction that they ship to. A uniform, nationwide sales tax system possibly could help, but the battle might be too large to wage, sources say.
But that's just in the United States. The European Union is headed in the opposite direction and hopes to create a level playing field by taxing U.S. Internet sales in Europe. One Internet consultant estimates that U.S. companies could lose $2 billion in the next five years to European Internet taxes. But the sales tax discourages e-commerce in Europe and essentially encourages a less efficient way of doing business, sources say. The good news is that such taxes would be hard to enforce. The bad news is that this situation could lead to a full-scale trade war on the Internet.
As for a tax on Internet use itself, that's unlikely, says Michael A. Spielman, a certified public accountant and an associate attorney in the tax group of law firm Shaw Pittman (www.shawpittman.com).
"Imposition of a tax on access and use of the Internet, whether at the federal or state level, is politically unpopular and, many believe, economically imprudent," he says. "Imposing a tax on the Internet just serves as a barrier to use and impedes the phenomenal economic development the U.S. economy has experienced as a result of the Internet."
It's also unlikely, Spielman says, that Congress will pass legislation imposing a value-added tax on e-commerce.
While Internet sales and access have escaped the hooks of the tax man, Internet telephony got snagged by a regulatory net this spring. That's when the U.S. House of Representatives (www.house.gov) approved H.R. 1291, which prohibits the FCC (www.fcc.gov) from imposing access charges on ISPs, but leaves open the door on assessing such fees on Internet telephony service providers. The reworked legislation included a rule that said the FCC wouldn't be prevented from imposing access charges on Internet telephony companies, "irrespective of the type of customer premises equipment used in connection with such services." The bill now is pending in the U.S. Senate (www.senate.gov).
"The original bill as introduced said nothing about IP telephony," says Jeff Pulver, president and CEO of pulver.com Inc. (www.pulver.com), the leading consulting and trade show business in this space. "The new bill distinguishes the use of the Internet for voice communications from other uses of the Internet and practically invites the FCC to regulate Internet telephony and impose old-fashioned access charges even on PC-to-PC applications."
Sources say this was a negotiated tradeoff that helped the Bells immeasurably. If ISPs weren't going to have to pay access charges, then somebody else would have to pick up the tab.
"The fact that the [House] voted overwhelmingly in favor of H.R. 1291 is just another example of a broken system at work," says Jan Horsfall, president and CEO of PhoneFree.com (www.phonefree.com), which offers PC-to-PC calling. "The special interests--in this case the legacy telephone companies--are legislating their own corporate welfare because they're unable to adapt their sprawling bureaucracies to the new market environment where the consumer wants value, not confusion."
Rep. Edward J. Markey, D-Mass., ranking member on the House telecom subcommittee, agreed and in late June introduced H.R. 4769, which would prohibit the FCC from authorizing per-minute access charges on Internet telephony providers. Making telephone calls over the Internet has a "bright future for telecommunications competitors and consumers, but only if we succeed in treating it from a regulatory standpoint in a way that is consistent with the flat-rate nature of the Internet itself," he said.
Keeping services such as Internet telephony unencumbered by government taxation sets a precedent against "worldwide regulation and restriction, which would harm the very essence of what the Internet could potentially create," says David Greenblatt, COO for Net2Phone Inc. (www.net2phone.com).
Table:
Internet Tax Proposals in Congress
