Don't tax big commercial ISPs; tax their subscribers.
That's the conclusion of what may become a controversial white paper issued by the Interactive Services Association on possible tax policies for the Internet. The industry trade group is trying to stave off onerous tax policies that may hurt the group's more than 150 members, which include Internet service providers America Online, AT&T, CompuServe, Microsoft, IBM, and Netcom.
The proposal comes as a growing number of states are implementing or considering taxes on ISPs.
"Our position may be that taxes are inevitable," said Sara Fitzgerald, a spokeswoman for the group. "We've seen states viewing the Internet as a potential gold mine. If you're eyeing us as this revenue source, please take time to understand what makes sense."
The industry task force that commissioned the report concluded that the only type of tax that could be applied effectively would be a "transaction tax" imposed on subscribers, not the ISP. Such taxes might be applied to subscriber fees and to services and products sold over the Net.
The group also suggested that any taxes should be based on uniform definitions adopted by all states and that rates should also be uniform in every state because of the difficulty of determining the physical locations of buyers and sellers operating through the Net.
The idea that taxes be levied directly on users could draw ire from some customers, however. Typically, companies and their customers share the pain of taxation; for example, the telecommunications and oil industries ultimately pass along taxes to consumers but shoulder at least some of the burden out of their profits.
The group argues that the potential for generating sizable tax revenue from ISPs is less than many observers think. Sales of tangible property on the Net now stand at about $500 million, while revenue from Net access is estimated at $1.6 billion to $2.2 billion annually.
Many analysts predict that those figures will increase sharply in coming years, making them a prime target for taxation, but the group says it's premature to milk ISPs.
"If states move too quickly, they will risk creating, rather than resolving, major problems," cautions the report's executive summary. "A deliberate and cooperative approach will avoid dangers that could hinder the development of the industry."