Get that Internet tax right

Posted: Oct 22, 2001 12:00 AM
Congress is up against it: What to do about Internet commerce?

To return to an example given earlier in this space, you have a mother living in Hartford, Conn., who is looking for a new mattress and spots one on the Web site of a producer in Massachusetts. The feel of it is right, and so is the price, so the $500 order is placed. The mattress crossing the border is not taxed, because in writing the Constitution in Philadelphia in 1787, it was decided: No tariffs within the 13 states. Interstate commerce would be regulated only by Congress.

Which is all to the good, but Connecticut takes the position that the family living happily in Hartford has to pay its share of the cost of government, which entitles the treasury to a use tax. If the mother in Hartford who sent out for the mattress in Massachusetts were a perfect citizen, she would write a check for $30 (6 percent) to the state of Connecticut and sleep at complete ease with her conscience.

What she does do is sleep at complete ease with her conscience without sending in the check for $30. The reason for it is that taxes of that order are pretty well uncollectable. An uncollectable tax is one that would cost more to exact than profit from the yield. There is, in addition, the political question. People wouldn't like it when Big Brother stared into every out-of-state package, inquiring whether there is something in it for city hall.

So that one part of the pressure building on Congress is collectivist: to let states come in with a transfer tax. But a second pressure is from merchants who see themselves affected by untaxed transactions. The mattress maker in Connecticut is willing to compete with the company in Massachusetts, but does not like it if out-of-state businesses are, in practical terms, subsidized. That's what the non-tax amounts to. Local concerns are complaining about traffic in mattresses and books and records and computer equipment that, ordered through the Internet, come in, so to speak, duty-free.

Three years ago, Congress voted to continue until 2001 the tax-free character of interstate commerce. This meant not only a prospective loss of tax to the affected states, it meant also something on the order of a benediction on a staggering development in technology. The Internet is the happiest intellectual, journalistic and educational development in history, and the thought of letting the weeds of prehensile government crawl about it struck some as on the order of enforced shutters on sunlight, or taps on waterfalls.

But, sigh, that was three years ago, which in the Internet business is three millennia ago. The estimated commerce done by the Internet in 1998 was $9 billion. Last year it was $26 billion. That means we have to come to Earth and face homespun economic truths. If the advantage of tax-free Internet commerce marginally closes out local industry, reforms are required.

The mechanics of reforms call on holding not the buyer, but the seller responsible. It still won't be possible to target the mother in Hartford directly when the mattress arrives, but the exporter of it in Massachusetts can be required to add $30 to the cost of the mattress and send the check off to Connecticut Internal Revenue. It is, finally, impossible for Congress to wrestle with the problem without yielding to legitimate demands of the states spending the money on education, police and fire departments, and deprive them of revenue.

The question has not come up in the current welter of proposals, but we have to watch carefully to prevent the U.S. Postal Service from getting into the act. The most calamitous exposure of the Postal Service since the days of mail-train robberies is of course the fax and the Internet. These are, for all intents and purposes, absolutely free transactions. One hundred messages can be sent out, or for that matter 1,000, for less than the cost of a first-class postage stamp.

A rumor swept about the medium, a year or so back, that a proposal was making way that would charge 5 cents for every communication sent out on the Internet. The very idea is heretical, like charging for Communion wafers. To tax the Internet for the benefit of the Postal Service is unsupportable reasoning. The Postal Service needs to survive from its own revenues. If there is a shortfall, the government can come up with it, as required, on the same principle as rural free delivery. But to attempt to relieve its problems by contaminating the Internet is something that any congressman who has taken an oath to right reason is bound to oppose.