Taxing the internet
By Charles Miller

Several times in recent months this column has been devoted to a discussion of net neutrality. Equally important to the future of the internet is the role played by government taxation of the internet.

On October 21, 1998, the Internet Tax Freedom Act (ITFA) was signed into law in the US. The ITFA established a three-year moratorium on taxes for internet access and discriminatory taxes on internet-based commerce. The act also enjoined state and local governments from levying any new taxes on internet access or internet commerce.

The ITFA has been renewed and extended, most recently on December 3, 2004 when President George W. Bush signed the Internet Tax Nondiscrimination Act extending the moratorium until November 1, 2007.

The moratorium applies to taxes on your internet access, regardless of whether the tax might be imposed on you the consumer or on your provider of internet access. The law also prohibits governments from taxing items sold online in a different manner than those sold at brick-and-mortar stores.

As this goes to press, the “Permanent Internet Tax Freedom Act of 2007” appears to be stalled in the US Congress. A debate is warming up between state and local governments looking for new tax revenues, and the communications industry that wants no new taxes.

The communications industry giants have long backed making the ban permanent. They correctly point out that the growth of the internet in the last decade was in part fueled by the tax moratorium.

Various state and local government representatives do not want to see the moratorium become permanent. They say it would deprive them of vital revenue sources indefinitely. They also point out that the original purpose of the law was to aid the nascent internet to achieve commercial viability, and that this goal has now been accomplished.

A separate taxation issue is what to do about the collection of sales taxes on the internet. Legally, companies doing business on the internet are required to collect taxes for the one state where they are physically located, but not required to collect taxes from customers in other states where the businesses do not have a physical presence. This means that many internet-based sales go legally untaxed, and the governments want to change this.

Still one more tax issue is the possibility of new taxes being levied on internet phone users or Voice over Internet Protocol (VoIP).

In the US, telecommunications companies pay taxes into the Universal Service Fund. The USF was created to fund the creation of communications infrastructure, particularly in rural locations where such investment was less economically viable. The theory behind the fund was essentially the same as the theory that the post office should not charge more for rural mail delivery even though it costs more to deliver out on rural routes than in the city.

The dramatic decrease in traditional long-distance traffic and the corresponding increase in the use of VoIP has drained the USF. Some lawmakers want to see VoIP users pay their fair share since they are using the communications infrastructure paid for by the USF.

The bottom line to all this is that the internet has seen its phenomenal growth encouraged by the absence of new taxation. Now that the internet is a viable commercial presence, governments want to find a way to get more taxes from it.

Charles Miller is a freelance computer consultant, a frequent visitor to San Miguel since 1981 and now practically a full-time resident. He may be contacted at 044-415-101-8528 or email FAQ7@SMAguru.com.