Editorial: Congress can, and should, sort out the Internet’s tax structure

At the dawn of the broadband era, Congress recognized that the Internet was becoming so fundamental to communications and the economy that it barred states from taxing the services that enabled people to log on. But some anti-tax groups and online businesses have hijacked the “Don’t tax the Internet” rallying cry for a specious argument: They say companies that sell taxable goods online shouldn’t have to collect sales taxes from out-of-state buyers. The two issues are intersecting in Congress this year, and lawmakers should renew the ban on new and potentially duplicative taxes on the Internet while also helping states enforce the sales tax laws that already apply to online purchases.

Local governments have long taxed phone and cable TV services, and as residential Internet accounts proliferated in the 1990s, a number of jurisdictions started to tax those as well. Congress responded in 1998 by temporarily banning any additional jurisdictions from taxing Internet access services, on the grounds that such costs would deter Americans from getting connected. The measure also put a temporary halt to “multiple or discriminatory” levies on online retailers. The moratorium was extended in 2004 and 2007, but it’s due to expire Nov. 1. With nearly 30% of U.S. homes still not connected via broadband, now is not the time to add fees that will push the Internet further out of some families’ reach.

Lawmakers appear to agree. The House approved a permanent extension of the moratorium on July 15, and there’s strong support in the Senate for at least a lengthy renewal. Senate Democratic leaders, however, want to tie the no-new-Internet-taxes bill to a measure that would let states require online retailers in other states to collect sales taxes for them. This proposal wouldn’t impose any new taxes on the Internet — shoppers there already owe “use” taxes on purchases from out-of-state retailers. It’s just that they typically don’t pay them. Technological advances have made it easy for websites to collect sales tax from any shopper despite the many differences in local rates and rules. As long as lawmakers streamline the submission and auditing of tax payments, it’s reasonable to require online retailers to collect sales taxes from out-of-state buyers. The change would also eliminate an unfair advantage that e-tailers enjoy over their brick-and-mortar competitors.

Strong bipartisan support carried an Internet-sales-tax collection bill through the Senate last year, but it has been bottled up in a House committee. Some conservative critics deride it as a money grab by state and local governments. Yet the real issue is whether people will be able to continue evading the taxes they owe with the help of online retailers. That evasion costs state and local governments billions of dollars, which they make up by imposing higher taxes on other things. Congress should close that loophole while continuing the ban on new taxes on the Net. Those policies are complementary, not contradictory.

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