- The Washington Times - Sunday, April 4, 2004

Everyone has heard the “e-mail tax rumor” that has been circulating on the Internet several years. Our elected representatives are frustrated trying to rebut constituent complaints about this mythical new tax. For the public, though, better to smoke out a rumor than get socked with a new tax.

Unfortunately, like the boy who cried “wolf,” the e-mail tax rumors may disappear just as tax threat gets real. The e-mail tax isn’t here yet, but it could be soon if states aren’t stopped from taxing the Internet any way they can.

The Internet Tax Moratorium expired last fall, thanks to legislative maneuvers and deliberate constitutional misinterpretation by Tennessee Republican Sen. Lamar Alexander and his colleagues.

Right now the door is open to state taxes on Internet access, while states are moving aggressively to browbeat their citizens into paying so-called “use tax” on out-of-state (including Internet) purchases. This interference with interstate commerce ignores centuries of constitutional jurisprudence and could pave the way to an e-mail tax too.

Most states overspent their surpluses in the 1990s, and now want every last dime of revenue to avoid the terrors of reining in public spending. Many states use income tax filings to compel reporting of so-called “use tax.”

“Use” taxes are not new: They were created to collect revenue on out-of-state purchases, despite constitutional constraints, by creating the useful fiction of taxing in-state “use” of goods purchased elsewhere. You’re taxed not on the purchase (or sale, actually, with the seller bound to remit the tax), but because you are using a product purchased out of state. But common sense tells us collecting use tax on every little purchase made by mail, telephone or on line was administratively unrealistic, not cost-effective.

So now the “use tax” is newly deployed to bypass constitutional constraints on taxing cross-border sales in the era of e-commerce. Mark Schwanhausser reported in the March 8 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’s tax is on tangible goods, but logically there is no reason states couldn’t extend “use” tax to intangibles like e-mail: And if desperate for revenue, why wouldn’t they?

That’s why Mr. Alexander’s newly discovered version of “states’ rights” matters. Mr. Alexander says the national government shouldn’t restrict state taxes on the Internet, since the 10th Amendment reserves most powers to the states.

The senator ignores the Commerce Clause, which the Founding Fathers designed to give Washington plenary power over interstate commerce. Otherwise states could beggar their neighbors and put sand in the gears of the national economy.

Mr. Alexander’s novel “states’ rights” makes bad tax policy, bad technology policy and bad constitutional law all at once. A recovering economy doesn’t need more sand in the gears. Internet commerce generates economic growth in every state, and generates more than its share of revenues. The Constitution does reserve to states powers not assigned to Washington: But the power to regulate interstate commerce is the national power sine qua non, and Congress is unquestionably empowered to assert authority over Internet taxation. (The Commerce Power has been abused, but that’s no reason to ignore it when properly invoked.)

Specious states’ rights arguments used to end the Internet TaxMoratorium emboldened states to move aggressively on “use” taxes, and on the so-called “streamlined sales tax” cartel that would divvy up new revenues from taxing your mail order and Internet purchases. But why stop there? E-mail service is subject to the same pro-tax arguments and is a very juicy tax target: It’s already proposed on grounds of stopping “spam.”

“Use” taxes are a quintessential anti-growth, anti-technology intrusion on national commerce. While never 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.

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