The Future of Internet Taxation

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 like—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, SmartFlix.com, and comic book store, HeavyInk.com, 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."

Aside from the burdens of an access tax, access itself will be changing. Allen Kupetz, author of Future of Less, says the three things you always have with you (keys, wallet, and phone) will converge into a multi-use device. "You'll have a wristwatch or bracelet or a pendant," which will allow connection to a cashless system. And that device will be able to recommend a place to eat lunch at noon based on where you are and your food preference.

But "the dark side of this," Kupetz says, is that all our activity will be interconnected—the way an Amazon purchase may create ads for similar products, in the future, insurance companies and employers might have access to your online activity. "It does cause some alarm because 'customization' can be another word for 'stereotype,' " Kupetz says. Asked if there's any hope of avoiding that, he says, "Hope's not a good business strategy.... Most of these things are inevitable."

Internet neutrality. A fundamental change in the way we use the Internet could come with President-elect Barack Obama. Net neutrality, or the idea that everyone gets the same information at the same speed, has been getting increasing political attention. In 2007, speaking to Google employees in Mountain View, Calif., Obama said, "We could see the Internet divided up between the highest bidders." An alternative, he said, is to ensure free and full exchange of information that starts with an open Internet.

But that might not be good for big business. And experts say there is bound to be a hierarchy of Internet speeds. Douglas Raybeck, a Hamilton College professor of anthropology and author of Looking Down the Road: A Systems Approach to Futures Studies, says, "there will be a secondary level to the Internet—one that will carry more, faster, and better. And that will be pricey."

E-mail. One bit of the Internet that seems safe for now is E-mail. When the United Nations proposed an E-mail tax (one U.S. cent for every 100 E-mails) to benefit developing countries in 1999, the outcry was so great it canceled the plan. Portugal, the Philippines, and France have attempted similar SMS taxes, though none have been passed so far. But E-mail is more likely the exception than the rule And as we continue through the digital age, when the timing and scale of the Internet's regulation and taxes are still being hashed out, it seems certain we can be sure to expect death and, now, Internet taxes.