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Digital Matters – Issue 32

“Congress and the states have the authority to tax Internet transactions — but they don’t have the votes.”

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.

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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.

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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.

Politicians live by three sets of numbers: the amount of campaign money that they can raise, the most recent polling data that they can find, and the tabulation of opinions as expressed in the mail that they get. Money is important because it’s hard to raise — and it’s even harder to run against someone who has more of it. Polling data are significant because going against prevailing public opinion on important issues can cost a politician votes. And the daily mail is particularly consequential because anyone who will take the time to write will probably take the time to vote and, generally speaking, will probably vote in the primaries as well. In some ways, the mail yields the most important data available to politicians — because it contains the concerns of their most active constituents.

Conservatives used the Internet to force Congress to vote on Bill Clinton’s conduct. And every time a Republican representative tried to finesse the issue or stepped forward to say, “Maybe we should just cut a deal and be done with it,” conservative constituents hit the keyboard and pushed the “send” button — and Capitol Hill snapped to attention. The House managers didn’t speak for their colleagues so much as for the 35% of Americans who believed that Bill Clinton should be impeached. And those 35% of Americans were heard because the Internet provided them with a megaphone.

That percentage may not seem adequate to get the job done, and indeed it wasn’t when the final votes were tallied in the Senate. But 35% was enough to require everyone to stand up and be counted. On the issue of Internet taxation, there are perhaps 60 million voters — more than half of the electorate — who believe that the Internet belongs to them. Most of those 60 million believe that the Net should remain a free-trade zone. And that constituency grows daily — with every new AOL account, every new iMac purchase, every new piece of hardware that connects a user to the Web .

What, exactly, are the numbers? Since the introduction of Netscape Navigator in 1994, the Internet constituency has grown at a dizzying clip. According to the Voter News Service, 25% of 1996 Election Day voters were connected to the Internet. Roughly 40% were online in 1998. And by November 2000, 66% of the electorate is expected to be wired. It took only about one-third of the electorate to force a vote on Bill Clinton’s guilt or innocence, so imagine what two-thirds could do to a public-policy initiative on taxing or regulating the Internet.

The tools needed to empower this constituency are already being brought to market. One such tool is Vote.com, a Web site created by Dick Morris. (Morris was chief strategist and adviser to President Clinton during the 1996 election season — until he was fired for consorting with a prostitute.) The idea behind Vote.com is simple: Every day, the site asks visitors to vote on a particular public policy or political issue. About three months ago, the site asked whether people favored or opposed taxation of Internet commerce. An overwhelming number of respondents opposed the idea.

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In most respects, Vote.com is no different from any other unscientific Internet poll. But it does go a step further: After users cast their vote, Vote.com asks them whether they would like to have their opinion passed on to an appropriate government official. If the answer is yes, Vote.com sends an email either to the president or to a voter’s representative and senators, depending on the issue. Once a voter answers yes, all of that person’s future votes are automatically passed along in that fashion. The morning after I answered yes, I received three “auto responses” from elected officials.

Vote.com is a fairly crude instrument. But it doesn’t take a lot of imagination to realize that better-funded, more sophisticated operations could overwhelm the electronic inboxes of every member of Congress. Should the commission decide to tax Internet commerce, dozens of new-and-improved versions of Vote.com will pop up to exhort opponents of Internet taxation to send an email to Congress. It’s one thing for a representative to get 500 pieces of mail in one day. It’s something else for that representative to get 25,000 emails — all saying the same thing about the same issue.

Congress and the states have the authority to tax Internet transactions — but they don’t have the votes. And that is why every GOP presidential candidate has supported the moratorium on Internet taxation, and why some have even called for extending it indefinitely. These presidential hopefuls know the size of the Internet constituency, and they’re well aware of one thing: If they get on the wrong side of those constituents, they risk losing not only the job they seek but also the job they have.

The truth is that matters of public policy will soon be largely decided by Internet referendum — which is not to say that representative government will no longer exist. But the Washington-insider game of special interests will be a thing of the past — as will the reign of congressional-committee chairs who decide which legislation passes and which legislation never gets out of committee.

Important matters of public policy will have to pass two tests: the old one that asks, “Can legislation make its way through the checks and balances of representative government and be signed into law by the president?” and the new one that asks, “Can it cut the mustard with the public in ongoing Internet referenda?”

No matter what the commission proposes, the moratorium on Internet taxation will continue. The Internet really is the growth engine of today’s economy. Why fix something that works like a charm? The states don’t need the money; their coffers are bursting with revenues generated largely by the Internet economy. Brick-and-mortar companies are only at a temporary disadvantage, and anything that drives them to create their own e-commerce sites will benefit the economy as a whole. Most important, the Internet is bringing traffic into these brick-and-mortar businesses just as television increased newspaper and magazine readership. The issue isn’t about “fairness”; it’s about politicians grasping for more revenue.

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John Ellis (jellis@fastcompany.com), a writer and consultant, is based in New York City. Learn more about the Advisory Commission on Electronic Commerce on the Web (www.ecommercecommission.org).

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