Digital Matters - Issue 32

Officially, it's called the Advisory Commission on Electronic Commerce. Created by Congress in 1998 as part of the Internet Tax Freedom Act, the commission is studying "Federal, State and local, and international taxation and tariff treatment of transactions using the Internet and Internet access." There is now a moratorium in the United States on all taxation of Internet transactions. In April, the commission will release a recommendation on whether that moratorium should be extended beyond its October 1, 2001 expiration date.

Like all blue-ribbon panels, the commission is an august body comprised almost entirely of government officials and industry representatives, all of whom take their work very seriously. Indeed, the commission describes its task as "producing what is arguably the most important policy initiative of the information age." But the real question is this: Can the commission agree on what the most important policy initiative of the Information Age should be?

Politically, the commission is divided into three camps. One group opposes Internet taxation of any kind, arguing that Internet technology has been the locomotive of American economic growth and that doing anything that might slow down that train would be insane. This group also raises a practical point: The myriad state, county, and local sales-tax laws are so convoluted that, with most Internet transactions, it would take at least two major accounting firms to figure out who owed what to whom. For good measure, commissioners in this faction argue that granting states, counties, and localities the right to tax Internet transactions would violate the Interstate Commerce Clause of the Constitution and would potentially compromise the personal privacy of all Internet shoppers.

The second group of commissioners is not opposed to Internet taxation per se, but it views the thousands of state, county, and local sales taxes as a maze through which smaller companies cannot realistically be expected to navigate. These commissioners are sensitive to the charge that the Internet-tax moratorium gives e-companies an "unfair" advantage over traditional brick-and-mortar businesses. This group's mission: to find a "global solution" -- a uniform system of sales taxation that could be applied across state, county, and city lines and across all distribution networks (including retail, wholesale, catalog, and Internet channels).

The third group of commissioners is adamant about treating Internet transactions as "regular" commercial transactions. Global solution or not, those in this camp want (and believe that they need) sales-tax revenue. This group includes just two people -- the governor of Utah and the mayor of Dallas -- but they represent a large number of state and local officials who live and die by sales taxes. Most states and municipalities rely on sales taxes for about a third of their revenue -- and some of them are dependent on such revenue to an even greater degree.

Talk to those ubiquitous "Washington insiders," and they'll tell you that the second group's proposal of a uniform global solution for sales taxation will prevail. But the more relevant "outsider" information is this: If the commission proposes a sales tax on Internet transactions, Congress will soundly defeat it. Even if the commission unanimously recommends such a tax, Congress will vote it down. The reason is simple: When it comes to taxes, the full potential of "Internet political power" will be felt. And the magnitude of that force will simply overwhelm everything and anything in its path.

Although largely unreported at the time, Internet political power was on full display in 1998. The issue at hand was the impeachment of President Clinton. Most congressional leaders wanted to cut a deal that would allow them to sanction the president without having to cast an actual vote as to his guilt or innocence. Various schemes were floated. Each was shot down by hundreds of thousands of emails from enraged conservatives who insisted that Clinton be held accountable for his actions.

As the 1998 midterm elections approached, Republican lawmakers had no desire to alienate the conservatives who formed their core constituency. So they deferred all talk of "censure deals" until after the November balloting. After the votes were counted, it turned out that Democrats had run surprisingly well across the country and had come very close to recapturing control of the House. The mood among GOP lawmakers shifted accordingly, and they were suddenly open to various suggestions regarding censure. But, in hundreds of thousands of emails, their core constituents insisted that the impeachment process go forward. And so it did.