internet tax freedom act

[This was an assignment for a course I took in law school - not an actual letter]

April 13, 2000
Honorable John McCain
Committee on Commerce, Science and Transportation
United States Senate
104 Hart Senate Office Building
Washington, D.C. 20510
Honorable Bill Archer
Committee on Ways and Means
United States House of Representatives
1236 Longworth House Office Building
Washington, D.C. 20515

Re: S. 1611 & H.R. 3252 � Bills to amend the Internet Tax Freedom Act to broaden its scope and make the moratorium permanent, and for other purposes.
Dear Chairman McCain and Chairman Archer:
I am writing on behalf of in support of Senate Bill 1611 and House Bill 3252 ("the Bill"), which would amend the Internet Tax Freedom Act (ITFA, or "the Act") by broadening the coverage of the Act and make the moratorium permanent.
    I. Background of the Act and Bill
The Internet Tax Freedom Act imposes a moratorium against state and local government taxes on internet access, and prohibits multiple or discriminatory taxes on e-commerce. The Act is presently scheduled to end on October 21, 2001. Senate Bill 1611 and House Bill 3252 would broaden the scope of the ITFA, and make the moratorium permanent.
    II. Benefits of the Act and Bill
Last year, e-commerce accounted for approximately $51 billion in on-line sales, a figure that is expected to grow to more than $1.3 trillion by 2003, according to Forrester Research estimates. This expansion of the high-tech economy is currently the engine of the sustained economic growth which our nation has enjoyed over the past decade. However, the inherent susceptibility to discriminatory and multiple taxation of electronic commerce requires Congress to act to ensure that state, local, federal and foreign tax policies promote rather than interfere with the free flow of Internet traffic. Extending the moratorium on e-commerce taxation will ensure that this increase and prosperity will continue.
A reasonable policy on taxation of electronic commerce will give all retailers, both large and small, the opportunity to incorporate on-line commerce into their businesses. All retailers will be able to use it to their advantage. This follows the evolution of the industry, and a sound policy for taxing electronic commerce will enable retailers to expand opportunities in a fair marketplace.
In the words of Chairman John McCain, "Commerce conducted through the internet is experiencing tremendous growth. This growth helps our nation�s economy by creating new jobs and new opportunities for businesses."
In addition to protecting the growth of e-commerce, the ITFA provides uniformity of taxation among multiple jurisdictions. This standardization provides a large degree of simplification for business which operate in more than one state.
    III. Why Taxes And The Internet Don�t Mix
There are numerous reasons why taxing internet commerce would have detrimental effects for the growth of e-commerce, and our nation�s economy. The cost of compliance alone would likely put many internet companies, including, out of business. To small businesses, the compliance costs have been estimated at 6.47% of the taxes collected. For medium businesses, the amount is 3.35%, and for large businesses, .97%. This averages out to 4.23% weighted by number, or 1.42% weighted by dollar.
These costs are extremely significant when one considers that most e-commerce companies presently operate with razor-thin profit margins, and many with no profit margin at all. As an example, looses money on many of the products it sells, breaks even on others, and makes a profit on only a few. is not alone. Most of the large retailers on the internet, including and PeaPod, are presently operating with a negative profit margin, and recent news reports indicate that they are on the verge of bankruptcy. And these represent some of the most successful e-commerce companies. Imposing additional expenses on these businesses would seriously threaten their ability to survive in e-commerce.
Mark Doll, an e-commerce consultant at Ernst & Young, stated in an April 13, 2000 press release that of the 30,000 retailers presently on the internet, he expected 25,000 of them to no longer exist in one year. Forrester Research explains that this attrition is due to high expenses and poor funding, and that there is presently a rush of e-commerce companies entering the initial stages of bankruptcy, struggling to stay alive. This is hardly the environment in which introducing a new tax scheme would permit e-commerce to prosper.
Many cite technology as a miracle cure for the complexities of the tax code and e-commerce taxation. Yet technology which has been proposed to perform tasks other than tax rate calculation has neither been developed nor tested, and is still in the concept stages.
Apart from the costs of collection, assuming that jurisdictions are able to agree on some sort of method for collecting sales tax, the technology of the internet is likely to stay one step ahead of the taxman and preclude effective collection and enforcement. The internet was built on the premise of anonymity and an inability to track messages to their origin. To put it bluntly, the infrastructure of the internet is simply not suited for the present sales tax system. While most internet servers for e-commerce companies are presently located in Mountain View, California, they can be moved off-shore with little cost or effort. Traditionally, stores which failed to comply with tax regulations could be shut down and their assets seized, but such a remedy is impossible on the internet.
Buyers can just as easily disguise their location by using services such as This allows purchasers of goods and services to remain completely anonymous to the vender, which makes collection and remittance of sales tax impossible, because the nexus of the purchaser is never known to the vender. As the use of e-cash becomes more prevalent and more goods and services become digitalized, tracking transactions, or even knowing if they existed in the first place, will become extremely difficult if not impossible.
The Department of Commerce reports that e-commerce accounts for less than 1% of retail sales, but has fed the growth of a national high-tech sector which has accounted for 35% of our real economic growth over the past three years. This growth would be dramatically slowed by an e-tax. One study indicates that a tax on internet transactions would decrease on-line spending by 30%, and simultaneously increase tax collection costs for businesses.
Finally, and possibly most significantly, any e-tax would certainly entail the creation of an entirely new tax collection system. The current system is ill equipped to handle the taxation of a transaction in which a California resident orders a $10 bag of coffee from a retailer in New York using a credit card issued by a Delaware bank, from a server in Canada. The costs of enforcement and compliance are surely not worth the insignificant revenue which would be generated from this type of bureaucracy.
    IV. Impact on State and Local Governments
One of the arguments against the Bill is that the ITFA restricts the ability of state and local governments to collect sales or use taxes on taxable transactions conducted over the internet. Opponents of the Bill argue that any extension of the ITFA would dry up the revenue bases of state and local governments. This argument proceeds from the false premise that the internet has created some new problem for taxing authorities that did not previously exists.
The fact of the matter is that the ITFA did not change the powers of the state and local taxing authorities other than with respect to specific and narrow taxes on internet access and multiple or discretionary taxes. The inability of local taxing authorities to force sellers to collect sales taxes from vendors in distant localities predates the internet, and is a problem which cannot and will not be solved by allowing taxes on e-commerce.
The ITFA does not prohibit states and local governments from collecting sales or use taxes on otherwise taxable transactions. Thus the existing moratorium does not impact the ability of state or local governments to collect tax from the vendor or the consumer (in the case of use tax). If state and local governments wish to impose sales tax on purchases made using the internet, they have been free to do so, subject only to the restrictions imposed by the Supreme Court, i.e. Quill. The Bill codifies the restrictions which already existed by clarifying that sales taxes may not be imposed on e-commerce. While this has not been codified in the past, the result is no different from under the ITFA and even before the ITFA existed.
According to the Supreme Court, states cannot collect sales tax from retailers which do not have a physical presence or "nexus" within the state. This decision largely exempts online-only retailers, such as, from sales tax collection in almost every state. This is not a situation novel to the internet. Indeed, if were a mail-order company, the tax collection procedures would be no different than as a dot-com.
The question then becomes one of whether e-commerce has so increased these "remote seller" transactions that Congress should now act to force these sellers to collect and remit taxes in these transactions. Proponents of such action believe that such taxation would generate a significant amount of tax revenue for state and local governments. This is simply not the case.
Even if the ITFA moratorium did not exist, almost everything sold on the internet would be exempt from sales tax. Ernst & Young has determined that 80% of current e-commerce is business-to-business sales that are either not taxable or which are being effectively taxed. This category of transaction represents the fastest-growing segment of internet commerce. Of the remaining 20% of e-commerce, 63% is for intangible services, such as travel and financial services, or exempt products, such as groceries and prescription drugs. As a result, only 13% of total e-commerce retail sales are potentially taxable. Much of these retail sales are either inherently untaxable, such as software and music delivered through the internet to potentially anonymous purchasers, or comes at the expense of mail order sales which are already non-taxed.
The bottom line is that for many states, revenue is being "lost" from one source they cannot tax to another source which they also cannot tax, and thus the revenue lost is illusory. Ernst & Young recently conducted a study which showed that the taxes being lost to e-commerce amount to only one-tenth of one percent of total state and local sales and use tax collections. That is hardly a revenue crisis, but the panic is understandable given the publicity which e-commerce is receiving.
With regards to the types of taxes which the ITFA does actually impact, at this point, states and local governments are not actively pursuing the possibility of taxing internet access should the ITFA moratorium be lifted. This is likely due to the unpopularity of such a tax, as well as the technical problems which would be nearly insurmountable in imposing such a tax.
Many venders of internet access, such as Yahoo!, Altavista, K-Mart and dozens of smaller companies, currently provide such access to users on an anonymous basis and completely free of charge, which would preclude collecting sales tax on such transactions. Continuation of the ITFA and the prohibition on taxing internet access would be of no cost to state and local governments, since internet access has never been subject to any form of tax, and thus there is no revenue stream to cut off. Additionally, telecommunications taxes are already among the highest levied on any industry. Any additional taxes will only serve as a detriment to a society dependent upon information exchange and communication.
    V. Improvements to the Bill
We would like to propose two additions to the Bill: A explicit restriction on any future "bit tax", and a public policy statement.
The ITFA and the Bill prohibit the imposition of internet access charges, which we believe is fundamental in an information economy. We would like to propose that the Bill explicitly prohibit any form of taxation of access, including but not limited to a "bit tax." This type of tax would be charged according to the quantity of data transferred across the internet by the user. We believe proponents of such a tax could argue that a bit tax, because it relates to the quantity of information transferred and not merely access to such information, is not included in the prohibition against taxing "internet access." It is our position that this type of tax, and any tax on access to information, is extremely harmful and counterproductive in an information economy.
Second, we believe that Congress should include a statement of public policy in the Bill. Such a statement would be to the effect that it is the public policy of the United States that access to information and commerce on the internet shall not be hindered by the imposition of government taxes. This policy statement would be beneficial in terms of negotiating with other countries regarding their internet policies, as well as in resolving judicial challenges to the implementation of this Bill.
We believe that this Bill is vital to the continuation of the e-conomy, and therefore the continuation of prosperity which has been witnessed in America in the past decade. It may very well be that there is an alternative taxation scheme which would suit the new e-conomy and increasingly service-oriented economy better than the present nexus-based sales tax. Such a scheme is beyond the scope of this letter and the Bill, and if the results of the Advisory Commission on Electronic Commerce meetings are any indication, such a solution will come only after much lengthy debate.
Sincerely yours,
Travis A. Wise

Popular posts from this blog

power elite vs pluralist explanation models

big 4 vs. law firm comparison from an industry perspective

california bar exam primer