Last week, the U.S House of Representatives gave edge providers a little love when the Republican-controlled chamber of Congress voted to make permanent a 1998 moratorium on Internet taxes. The moratorium, scheduled to expire on 1 November 2014, prohibits states or their political subdivisions from imposing taxes on Internet access or from applying multiple or discriminatory taxes on electronic commerce. The bill, H.R. 3086, is now in the U.S. Senate waiting for their review.
Needless to say, state and local governments have their underwear in a bunch over the bill. According to congressional estimates, states and local governments stand to lose hundreds of millions of dollars annually should the moratorium become permanent. For example, the Center on Budget and Policy Priorities argues that Congress has no business trying to boost the consumption of Internet access at the expense of state and local revenues. The Internet, according to the Center, is no longer the nascent industry that needs exemption from taxation in order to grow and flourish.
States that may be particularly hit the hardest are the states who were taxing Internet transactions before the moratorium was put in place and right before the first Internet bubble popped. These states collect taxes under a grandfather clause in the moratorium and include Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. In addition, Tennessee, Washington, and New Hampshire may also collect taxes but currently do not do so.
The National League of Cities argues that current tax policy advantages online retailers at the expense not only of revenue collection by localities but of main street retailers as well. In a statement released last June, the NLC argued that “Main Street retailers are the backbone of our local communities. These Brick and mortar shops need Congress to end the special tax status for online retailers and allow for fair competition.”
While the arguments made by the critics tug at the heartstrings, or I should say, reverberate the fiscal purse strings, they fail to take into account Congress’ responsibility to regulate commerce, the impact a failure to make permanent the moratorium will have on capital flow to edge providers, the very drivers of the Internet eco-system, the incentives presented to edge providers to move offshore that increased taxes would create, and the negative impact Internet taxes would have on broadband access adopters, the very adopters that create the derived demand necessary for a flourishing Internet eco-system.
First, Constitutional Law 101. The Congress has the power to regulate commerce among the states. The Internet is the conduit through which electronic commerce traverses and given the redundancy and virtual characteristics of the protocol that pushes data across some 67,000 globally connected computer networks, I think it’s safe to say that, at least inside the United States, the U.S. Congress has the option of regulating the Internet in a manner that promotes the consumption of Internet access.
Second, Economics 101. The real backbone of any economy, whether local, regional, or national are the consumers, not the retailers. Demand for goods and services are derived from consumer demand and more and more consumers are demanding goods and services via the Internet and at speeds that only high-quality broadband networks can provide. Kimberlee Morrison, in a post for SocialTimes, reports that e-commerce is a $220 billion industry driven by consumers that search online for products before either entering into brick-and-mortar stores to make a purchase or just purchasing online.
Chuck Jones, in a piece for Forbes.com, wrote last fall that mobile commerce or m-commerce is expected to grow to over $100 billion in sales in 2017, up rather appreciably from the estimated $47 billion in 2013.
In a sluggish recovery where 70% of gross domestic product is driven by personal consumption, why would municipalities and states want to retard the level of consumer spending online with taxes? And given the overindexing of people of color that use mobile broadband to access services online, is imposing a tax on Internet sales good economic policy?
According to the Pew Research Center’s Internet Project, 92% of African American adults have a cell phone and 56% of black adults have a smartphone. Mobile broadband access is the primary mode for accessing electronic commerce as evidenced by lower adoption rates among blacks for broadband at home. Pew reports that while 87% of white Americans make use of the Internet, 80% of blacks are traveling the information superhighway. The gap in broadband access is wider, where 74% of whites have adopted broadband at home while the percentage of blacks who are wired at home comes in at 62%.
But Internet taxation does not only impact consumption of e-commerce or broadband adoption by people of color. It impacts providers of services on the edge. On one extreme is Internet information and content provider Yahoo!, a multinational corporation based in Sunnyvale, California. Yahoo! is known primarily as a search engine, providing consumers with financial, entertainment, and cultural content.
Taxation is a threat to Yahoo!’s bottom-line according to its most recent 10-K filing. Yahoo! notes in their 10-K that they may have exposure to additional tax liabilities which could potentially impact their income tax provision, net income, and tax flow. Newly enacted tax law could have a materially adverse impact on the company’s cash flow. Yahoo! cites the possibility of several jurisdictions seeking to increase government revenues by either taxing Internet advertising revenues or by increasing general business taxes.
Smaller players would not be immune from this threat according to Melbourne, Florida-based entrepreneur, web designer, and software engineer Maurice Newton. Mr. Newton puts it succinctly and colorfully. “The tax is a big factor. Some companies will even go offshore to save money. The FCC is up to their ears in edge provider doo doo and the smoke will not clear for a long time.”
The U.S. Senate needs to follow the House’s lead and listen to Internet entrepreneurs, the industries larger players, and the consumers that use broadband to access services. A permanent moratorium on taxing Internet access will keep businesses here in the U.S. while encouraging further broadband adoption.