The Future of Internet Taxation

Unstoppable fees very likely to spread across the Web.

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The Internet used to be a haven from taxes and fees. Legislators didn't want to stunt the growth of E-commerce, plus collecting taxes or other levies was technologically tricky way back in the 1990s. But better E-commerce technology and the boom in online sales have made the Internet a tempting target for the government taxman and companies trying to grab more user dollars. Then again, what's wrong with a little taxation? Shouldn't our governments receive a sliver of what we spend on the Web just as they do every time we buy at brick-and-mortar shops? But prominent libertarian David Friedman says that users hit by higher taxes will vote with their feet and switch states or even countries: "Unless [governments] are willing to put up a Berlin Wall, or the equivalent, if their tax rates are high or their regulations are oppressive, or something their citizens don't likeā€”lo and behold, they'll find someplace else."

Here are three aspects of Internet taxation and fee collection, and how they might affect you in the near future:

Internet sales. Online shopping has grown to $136 billion per year. To get in on the cash flow, Web sales taxes have popped up in 22 states, with plenty more considering it. But that's scaring some online businesses and consumers. Thanks to higher gas prices, the Internet has become an important tool for savings on transport of goods. Ordering online and paying a minimal fee for postage is well worth the few days' wait for many. But higher taxes could change all that.

"I don't mind paying for services that are delivered. But I don't see any connection between Internet sales tax and any service that the government is providing," says Travis Corcoran, one of the more than 27 million small-business owners potentially affected by Internet sales tax. Starting in his Arlington, Mass., house, Corcoran created two online businesses from scratch. His DVD rental service,, and comic book store,, now bring in about $1.25 million per year. Even as his companies grow, Corcoran says Internet sales tax "might wipe out my ability to run these firms."

And an Internet sales tax could encourage exporting jobs to different states, just like the foreign offshoring found in the manufacturing sector. Gene Hoffman, chairman and CEO of the online payment management company Vindicia and cofounder of the online music store eMusic, says relocation is a real and increasing problem for states. "Things that make a state less appealing to telecommute from are going to make or break whether businesses and workers want to live there." He reminds that "Microsoft didn't start in Seattle," and the relocation process is easy now as many companies are Web-based, like Corcoran's.

Businessmen like Corcoran might be able to sway state decisions on sales taxes as they conduct more and more of their business online. Chris Clark, chief operating officer of the remote work technology supplier Fiberlink Communications, says computers will soon allow users to "taste an orange or smell the fermentation in a particular wine ... We'll even experience a handshake over an Internet appliance," making the states businesses are based in almost irrelevant.

Internet access. Beginning next year, France will tax Internet access to replace lost revenue from the new ban on commercials on prime-time television. President Nicholas Sarkozy backed the plan, which will tax phone and Internet providers by 0.9 percent of their turnover. Last year in the United States, there was a unanimous vote in both houses of Congress to extend an Internet access tax moratorium. But the ban was not made permanent, and will expire in 2014 if not renewed. Rep. Roy Blunt, a Missouri Republican, said last year that Democrats know that "new taxes on our digital economy right now is unpalatable, but that resurrecting the plan sometime in the future may hold greater promise." Problem is, says Vindicia's Hoffman, laws are harder to avoid than bad service. "If Comcast or my DSL provider [bills for access], I can spend $50 to switch ... To 'switch' away from California passing a dumb law that taxes Internet access at $10 a month costs me at least hundreds of thousands of dollars."