Congress Must Stop States From Taxing Internet Use

State and local officials have for years been fending off rumors they were about to tax e-mail service, a shocking idea that understandably got the public riled.

Until recently, our good representatives in Washington were exactly right in scoffing at these rumors, which cited a non-existent bill that supposedly was on the verge of enactment. But not any more. The expiration of the Internet Tax Moratorium (search) has opened the door to state taxes on Internet access (search), and the states—many facing severe fiscal crises— are gearing up to tax the Internet every way they can. Even more disturbing, states are aggressively moving to threaten, cajole and compel their citizens to pay so-called ‘use tax' (search) on out-of-state purchases, including Internet purchases. Both these trends could easily pave the way to an e-mail tax as well.

Allowing the Internet Tax Moratorium to expire was a brazen bypass of constitutional jurisprudence, specifically the misinterpretation of both the 10th Amendment (search) and the Commerce Clause (search) by Sen. Lamar Alexander (search) and a group of like-minded colleagues. Alexander says the national government shouldn’t restrict state taxing power over the Internet, since the Constitution reserves to states those powers not enumerated in its text. But the Commerce Clause (thanks to the Founding Fathers) gives Washington plenary power over interstate commerce. The power to regulate interstate commerce is an enumerated power sine qua non. The point is to bar states from beggaring their neighbors and putting sand in the gears of the national economy.

But states, having overspent their surpluses in the ‘90’s, are looking for every last dime of revenue to avoid facing the terrors of (God forbid) reining in public spending. Many states are taking this opportunity to use income tax filings to compel taxpayers to report so-called ‘use tax.’ Now, use taxes are not new. They were created for the express purpose of taxing out-of-state purchases, in spite of constitutional constraints, by creating the useful fiction that in-state ‘use’ of goods purchased were the subject of the tax.

For example, say you live in Illinois but buy a car in Kentucky. When you register the car in your home state you will also be assessed a tax on your 'use' of the car in driving around Illinois (this is a traditional application of use tax). Note that use-tax states, such as California, ask you to pay for this so-called in-state use even if you may have paid sales tax to the vendor's state!

For years, it’s been common wisdom that collecting use tax on every little purchase made by mail, telephone or (now) on line was administratively impossible, or at least not cost effective. No longer. As Mark Schwanhausser reports in the San Jose Mercury News, “This year, however, the tax isn’t as easy to duck, because now California is one of 21 states to designate a line for the use tax on the standard income-tax forms.”

California makes clear that its use tax is imposed on tangible goods, but logically there is no reason why it (and other states) couldn’t extend use tax to intangibles like e-mail. And if they are desperate for revenue, why wouldn’t they? This is bad tax policy, bad technology policy, and bad constitutional law all rolled into one. A recovering economy doesn’t need more sand in the gears.

The Internet is a great catalyst of economic activity in every state, and it does more than its share in generating revenues. Constitutionally, states cannot infringe on interstate commerce, and Congress is absolutely within in its rights in asserting authority over Internet taxation (that the Commerce Clause has been abused in other areas is no reason to ignore it when it’s properly invoked). State use taxes are a perfect example of anti-growth, anti-technology intrusions on national commerce, at least when they are aggressively enforced against the average citizen. While they’ve never been ruled unconstitutional, they make no more sense than state taxes on Internet access or on e-mail.

If we don’t stop this new wave of anti-constitutional money-grubbing by states, an e-mail tax is just around the corner. The first step in the right direction is to revive the national Internet Tax Moratorium, and start putting some sand in the gears of the state revenue police.

George Pieler is a visiting scholar at the Institute for Policy Innovation, a public policy organization.