The Proposal

The e-Freedom Coalition’s Proposal to the
Advisory Commission on Electronic Commerce
November 10, 1999

Electronic commerce has grown rapidly over the past several years. The Internet is changing the way the world does business. From the perspective of the online consumer, it does not matter if a purchase is made from a Web site in San Francisco, Boston, or Beijing — it only matters who offers the best product at the best price. Everyone — including government — gains from such increasing economic integration.

Unfortunately, the benefits of electronic commerce are threatened by the impulses of some elected officials to regulate and tax. Electronic commerce is changing daily in scope and scale: in the way the industry is structured, the ways information is formatted and transmitted, the ways in which exchanges are created and financed, and the ways in which privacy is protected. Every aspect of electronic commerce is in flux. We believe any effort to assert political control is an assault on this emerging medium. We believe taxes on remote sales will inevitably entail vast and invasive monitoring – Who would levy the tax; what level of tax and of record-keeping would be imposed; how would compliance and sales be monitored. Furthermore, tax proposals pose severe threats to the evolving privacy protections on the Internet such as encryption and anonymous digital money. The emergence of these technologies could be profoundly hampered by new tax collection schemes.

Those are reasons enough for caution. But the problems with e-commerce taxation go far beyond its invasiveness. Indeed, allowing state and local governments to tax across borders is fundamentally unjust. Remote taxation is, quite simply, Taxation without Representation on an unprecedented scale; a practice that cannot be tolerated in a democratic society. The proper role of taxation is to support those functions carried out within a governing jurisdiction. Such taxes cannot be levied on or collected from people who have no say in how the funds are used. Imposing tax collection responsibilities on remote firms violates those important principles by staking a claim on economic activity largely unrelated to the benefits provided by the taxing jurisdiction.

The advocates of new tax collection schemes rely on an increasingly irrelevant distinction between so-called “Main Street” businesses and online business. But the Internet is open to everyone. Even as the Commission deliberates, Main Street businesses are embracing the Internet in droves, through individual Web sites, online auctions, and such emerging forums as Amazon’s zShops and’s automated storefronts. In the name of the small number of Main Street businesses that would stifle rather than embrace the opportunities presented by the Internet, the proponents of new tax collection schemes are willing to sacrifice the ability of future Main Streeters to reach the world via the information highway. If the advocates of expanded taxation prevail, many main Street businesses will stay precisely that – never reaching their full potential in the increasingly global marketplace.

Proposals to apply “efficient” or “uniform” taxes to remote sales are especially distressing. A uniform tax is easily raised and high tax rates, even when administered on a neutral basis, are detrimental to economic growth and development. Electronic commerce empowers consumers to take advantage of competitive tax rates in other jurisdictions and thus serves as a necessary constraint on excessive government. The flexibility in moving capital and economic activities around the globe offered by the Internet, at last, makes it possible to sharpen those disciplining influences.

For those officials concerned about “leakage” from state and local taxes due to Internet commerce, the solution is a re-examination of their own tax-and-spending policies. The first priority should be to cut unnecessary expenditures and streamline tax collection systems. Indeed, it is abundantly clear in this time of unprecedented federal, state, and local budget surpluses that the last thing politicians need is new revenues.

Rather than impose new and onerous tax collection schemes, we take a more open approach that respects the sovereignty of both taxpayers and local jurisdictions.

Recognizing that a citizen’s ability to take advantage of all the Internet offers, including e-commerce, completely depends on the Internet’s accessibility, we begin this proposal with five recommendations to tear down and prevent the re-emergence of government-imposed taxes and regulations that serve only to drive up costs for consumers and retard the investments needed to strengthen and maintain the national information infrastructure. Specifically, we have identified five tax-related barriers to Internet access:

1.  Barrier #1: The federal 3% excise tax on telecommunications. The tax is an anachronism and should be repealed immediately.

2. Barrier #2: Discriminatory ad valorem taxation of interstate telecommunications. Fifteen states tax telecommunications business property at rates higher than other property, driving up costs for consumers. Federal protections against such taxes – already in effect for railroads, airlines and trucking — should be extended to telecommunications.

3. Barrier #3: Internet tolls – new taxes and fees levied on telecommunications providers and their customers when the cable is installed along highways and roads. These new taxes, which can run up to 5% of gross receipts, drive up costs for consumers and should be abolished. Congress should make clear that the 1996 Telecommunications Act intended only for state and local governments to be reimbursed for actual costs incurred for managing public rights of way.

4. Barrier #4: High state and local telecommunications taxes, complicated auditing, and filing procedures. Many governments are using consumer telephone bills as cash cows, imposing multiple and high taxes on services. Such taxes should be slashed to a single tax per state and locality, and filing/auditing procedures streamlined.

5. Barrier #5: Internet access taxes. The temporary federal ban on Internet access taxes should be made permanent. States and localities that imposed such taxes before the ban took effect should repeal any taxes on access to keep costs down for consumers.

Next, we propose that if sales taxes are to continue to be collected online, a pro-growth system for the collection of sales and use taxes by companies with a substantial physical presence within the taxing jurisdiction is appropriate. The system would affirm, update, and clarify existing constitutional law by setting clear jurisdictional standards that are relevant and easily understood in the “new economy.” Originally proposed by Commissioner Dean Andal, this proposal will encourage tax collection by minimizing the compliance burden while at the same time encourage the expansion of e-commerce by improving the certainty of state and local tax responsibilities.

In short, our proposal hinges on many of the principles that have prevailed in fostering the Internet’s own phenomenal growth: openness, fairness, accessibility, freedom, and the minimal involvement of political institutions. We now propose taking the Internet into the next century by increasing its accessibility, encouraging the growth of e-commerce, and enabling tax collection within proper constitutional guidelines.