Florida has set off a blitzkrieg of protest with an unprecedented proposal to tax Internet access, a move that could open the door to other forms of taxation nationwide including tariffs on electronic commerce.
The Florida tax is aimed at Internet service providers and businesses using the Net and could add as much as 17.5 percent to access charges if it goes into effect as scheduled this summer, according to the Florida Chamber of Commerce, which is spearheading the protest. Some 4,500 protest messages from ISPs, businesses, and individuals have been faxed and emailed to the chamber, which taped them together to form a banner unfurled last week in front of the capitol in Tallahassee.
The Florida Department of Revenue has scheduled a hearing on the tax this Monday to determine the validity of its attempt to apply current taxes on "computer exchange service" to Internet access, according to reports in the Associated Press. The tax regulation provision that applies to computer exchange services would allow the state to levy a 2.5 percent gross receipts tax on ISPs and a 7 percent telecommunications services sales tax on business users of the Internet. Although the tax is aimed at businesses, residential Internet customers could be effected if ISPs raise their rates to compensate for the new taxes.
Protesters, unsurprisingly, argue that the older tax laws cannot be applied to the new breed of computer-based services including Net access.
"The Department of Revenue claims it has the authority to levy this tax, but the law they are depending on dates from 1974 and applies to teletype machines," said Fran Conaway, vice president of communications for the chamber. "The Internet didn't even exist then. This new tax is sending the message that high tech isn't welcome in Florida."
The Florida legislation is being monitored across the country as other states consider similar Internet access taxes, including New York and Ohio. And as new digital communications continue to proliferate, state, federal and even European officials are examining not only how they can tax Net access but electronic commerce as well.
Proponents of an even wider use of the Internet argue that such taxes would only stymie acceptance at a time when the government should be encouraging companies to lay down a new digital infrastructure.
"I think this is an expected but stupid action on the part of the [Florida] government," said J. Neil Weintraut, managing director of Internet research at brokerage house Hambrecht & Quist. "Maybe at some point in the future [the Internet should be] used as a source of revenue for municipal and state governments, but now is too early. Now is the time to keep barriers as low as possible."
Besides, huge legal questions still remain. Beyond the question of which current tax laws might be extended to the Net and electronic commerce lies the broader problem of jurisdiction.
For example, if a Web site run by a vendor in Georgia sells products to a consumer in Nebraska, which state's tax laws would apply and how would the state tax agency collect? The question of crossing national borders electronically is even more complicated. And like online merchants, an ISP can maintain local points of presence throughout the nation while maintaining headquarters in only one state.
"On a general basis, those companies should be taxable somewhere, but they may be located in a state without taxes," said Nilesh Shah, national director for KPMG, an international accounting firm that recently concluded a study on Internet-related tax issues. "People can have a Web site in a zero-tax state like Nevada."
"Whichever government comes up with a system, every government is going to try to protect its tax base. That will lead to dispute," said Shah. "We're trying to use laws created in the Industrial Age and apply them to Information Age. It's pretty hard to do that."