The Taxman Cometh
for Cyberspace
by ALAN HERRELL,
A
LIST APART
TAXATION IS AS OLD AS PROSTITUTION, only
much more lucrative. (Now you know where the phrase, "a
piece of the action," really came from.) From Tribute to
the King and Tithing to the Church, to Sales and Use Taxes,
enormous amounts of energy have been spent (as it were) on
creating taxes.
Taxation is used by governments to provide
services for the defense, safety, health and well being of the
taxed. At least that's the theory.
Taxation has the cachet of legality since
every government does it. (If you are not a government, it is
called extortion and severe penalties apply.)
Trade - or buying and selling stuff so there
is something to tax - has been the driving force behind the
creation of wealth since the beginning of recorded history.
Wars have been fought over it. Governments have used it as a
foreign policy weapon.
And we, the pixel mechanics of the world,
have screwed everything up for them in just a few years.
THE RISE OF e-COMMERCE is sending an
electronic shockwave (of the non-Macromedia variety) across
the world.
Virtual business has changed the landscape
and the rules of the game. Amazon.com
has changed the way we buy what we read. The landscape is
littered with the corpses of businesses that are not adapting
to the Internet.
Consider BYTE Magazine. Byte had been
the mainstay of the computing world almost since the beginning
of the personal computing revolution. As computer businesses
began to move to the web, the print advertising revenues began
to fall. A bit of code, graphics and 24/7 contact information
has a better return on investment than a print ad which has
half-life measured in days.
Not to worry, BYTE
is on the web.
Another signpost of this change is the
shopping mall. Malls used to be a place where you went to buy
stuff. Today malls are theme parks with ever-increasing
carnival atmospheres in order to get you to shop.
Are we becoming a world of electronic sheep
glued to the screen and forsaking contact with others? Hardly.
It's simply that the popularity of sites like Priceline.com
(where you can get hotels, airlines, car rental companies and
theme parks to actually bid for your business) is changing the
way business is done.
The Internet is having an enormous impact on
the lives of everyone on the planet. Even if you are not
connected to the Web, it is making its mark on your daily
life. Prices of goods and services are going down, the value
of internet companies is going up, and for the pixel mechanics
in the readership: you should be making money.
Most Web development is classified as a
service and therefore is not taxed. After all, a majority of
sites will fit on a floppy. At 10 cents apiece, the taxing of
this ''real good' would be a bit silly - even for tax men. But
the global nature of what we do and the businesses we serve
requires an examination of Taxation, not only for ourselves,
but for our clients as well.
Make no mistake, the Tax Men are coming. It
is time to think about them.
Whose Bright Idea are Taxes Anyway?
In the United States, the game was set up
from the git-go. Section 8 of Article 1 of the U.S.
Constitution states:[1]
"The Congress shall have Power To lay
and collect Taxes, Duties, Imposts and Excises, to pay the
Debts and provide for the common Defense and general Welfare
of the United States; but all Duties, Imposts and Excises
shall be uniform throughout the United States;"
Note that Taxation is established before
your freedom of speech. You don't get that until the First
Amendment. This is pretty close to the way other countries are
doing it as well.
You are already Paying taxes on the Web.
"A recent Progress & Freedom
Foundation study reveals that existing telecommunications
taxes dramatically raise the cost of reaching the Internet.[2]
The federal government makes logging-on
more expensive through three types of telecommunications
taxes:
A federal excise tax, first enacted as a
"luxury tax" to finance the Spanish-American
War, raises more money than any other excise taxes
excluding those on alcohol and tobacco.
The Federal Communications Commission
imposes $2.5 billion worth of taxes on telephone bills to
subsidize Internet access for favored customers.
Long-distance customers also pay
federally mandated "access charges" that serve
as a revenue source to subsidize certain callers’ local
telephone service.
States and local
governments pile on 37 additional types of taxes and fees;
including gross receipts taxes, utility taxes, 911 fees,
poison control fees(!?) and franchise fees. PFF calculates
that the tax burden accounts for 16 percent of the local
phone bill in the 20 highest-tax cities.
Richmond has the honor of
imposing the highest taxes – 36 percent of the local phone
bill. Net surfers in Tampa, Chicago, Corpus Christi, Dallas
and Baltimore have 25 percent of their phone bill siphoned
off as taxes.
Between 1986 and 1998, the
total tax burden on telecommunications rose from 10.7
percent to 17.6 percent. Between 165,000 and 2.9 million
households are priced out of the broadband market because of
taxes."
Source: Citizens for a Sound
Economy Tech Fact #5 [2]
The situation is worse in countries where
your online time is billed by the minute.
Taxation for Dummies
Thinking about taxes is almost as much fun
as slamming your hand in a car door. But, here we are. Ernst
and Young, one of the largest Accounting and Tax
consulting Firms on the planet, proudly proclaims, "In
fiscal 1998, our tax services practice grew at a rate of 22
percent." Gee how heartwarming! Nevertheless, E&Y has
one of the brightest groups of people on the planet thinking
about taxes.
Here are the two major taxes that have
everybody talking:
Tariffs and Domestic Consumption Taxes.[3]
Tariffs
A tariff is a tax applied to selected
categories of imports that is designed to raise revenue for
central governments and generally to provide a competitive
advantage for domestic businesses.
The tariff concept is used to 'protect'
domestic producers of widgets from foreign businesses who
could produce the same widgets, and get them into the domestic
markets cheaper, including the cost of shipping. The original
idea was to encourage businesses to make stuff to sell, so the
governments could make more money in taxes.
Tariffs are the political weapon of choice
of governments for inflicting pain on another country without
calling out the Marines.
Despite the best efforts of governments,
people are buying widgits from wherever they damned well
please.
Domestic Consumption Taxes
In contrast to tariffs; consumption taxes,
such as retail sales taxes in the U.S. and value-added taxes
(VAT) in the European Union, are mainstays of federal tax
systems in all developed countries.
(An example of this is the excise tax for
those of us committing suicide by cigarette. Drunks have their
own taxes as well.)
The biggest hue and cry is being made by
brick and mortar businesses and local governments as they
believe virtual business is sucking the tax blood from their
lives. Well right now, it ain't so.
Yet...
Another report by Ernst and Young revealed
that the local tax hit was less than 1/2 of 1% in 1998. But
with the growth of Virtual Business, this is going to change.
These two taxes have the most impact for the
Web, as they account for the largest income for governments.
You've picked a fine time to tax us,
Lucille.
Currently in the United States, a three year
moratorium on Internet Taxation is in place. But that is about
to change - and the incredible growth of e-commerce is what
will drive the change. (Nothing fails like success.)
Prior to opening the Web, goods and services
had a tangible form that could be touched, weighed, measured,
and taxed. The Web has tossed much of that out the window.
The taxing authorities are already looking
at the situation and find themselves in a bit of a panic: [4]
Maintaining taxes at current levels poses
"an increasingly difficult problem for tax
administrators as a result of new technologies," said
Joseph Guttentag of the US Treasury Department.
He warned that Americans may seek to
evade high income taxes by moving online and offshore.
(DUH!)
"We are going to closely monitor
the relationship of tax havens to electronic commerce...
Encrypted [communications] create opportunities for
untraceable transfer of assets and other activities that
will hinder audits"
(and thank you for explaining this to
us!)
Source: Wired
News 'Net Tax Stalemate'
Well, let me see here. If you were to make
the tax code SIMPLE and FAIR, you might save some money by
encouraging people to pay their taxes instead of
bitching about them or spending enormous amounts of moolah
looking for ways to avoid paying.
In a market economy, you produce stuff and
sell it to folks that want it. Make no mistake, the Internet
has turned the world into a gigantic marketplace and bazaar.
One of the proposals going around is the
flat-tax. Same rate for everyone. No deductions, no breaks, no
oil depletion allowance and No Favoritism. Same rate, 10
minutes tops, for calculating the tax and actually paying it.
Enter the Flat Tax.
Flat Tax
The most elegant proposal would be a
worldwide flat tax[5]. A flat tax based on
Sales. Tax it at the point of sale. If you are not a producer,
you are a consumer. Everybody buys stuff. One figure that is
being tossed around is 17% (you will see this material again).
17% seems like a lot, but when you examine
it, it has two very nice features. The first is that it is
truly fair. You don't tax income. You tax sales. More income,
more sales, more tax, more jobs.
Secondly; some of the things that taxes are
used for, like roads, will cost less to maintain. If you are
on your computer buying stuff, you are not driving your car.
Your insurance rates will go down, since you are not driving
as much, using as much fuel, creating air pollution and so on.
So this rate will decrease over time as well.
The money saved here can be used for other
things, such as social programs, or even another tax cut.
But a flat tax is about as likely as the
return of Elvis.
One of the biggest reasons I can see are the
special interest lobbies.
Incredible sums of money and energy are
devoted to avoid Taxation. This is called lobbying (the third
oldest profession, in case you were wondering).
"Washington's lobbying industry,
which is the largest private employer in the nation's
capital, generates $8.4 billion in revenue each year. If the
lobbying industry were its own economy, it would be larger
than the economies of 57 countries." [1]
One of the things we can use the tax money
for would be a jobs training program for lobbyists to make
them useful members of society.
You could, of course, write your elected
officials and tell them you think this is a Good Idea.
It's time to blame someone for this
mess...........
The envelope please.........
In the catagory of Changing the Face of the
World Without a Gun, the winners are.
Pixel Mechanics!!
Yep! This is your fault!!
Stand up and give yourselves a round of
applause.
With a little HTML and a few modems, you are
breaking trade barriers, enabling people around the world to
buy stuff and find information. You are creating a revolution
in the world!
Taxation - in the form of border duties,
excise taxes and trade embargoes - has been a tool of domestic
and foreign policy for years.
You are taking that away.
As international business is becoming
virtual, and the economies of scale increase in magnitude,
governments will have to come to the table and acknowledge
that we have arrived at the "global village" that
has been occupying futurists for a number of years.
This week, 30 November - 3 December 1999, in
Seattle, Washington the World
Trade Organization[6] with trade ministers from 135
nations are meeting. A meeting of this type, normally dull as
dirt, and one of the last things on a pixel mechanic's mind,
would not see any exposure outside of small mentions in
financial sections of newspapers.
However, the impact of the Internet has
raised the stakes of the tax game. [7]
In the U.S., electronic commerce totaled
just over $50 billion [$50,000 million] in 1998, and it is
projected to reach $1.4 trillion [$1,400,000 million] by
2003. By 2006, almost half of the U.S. workforce will be
employed by or intensive users of information technology
services and products. Worldwide, the number of people using
the Internet has grown from 3 million in 1995 to 200 million
users today, and may reach nearly 1 billion [1,000 million]
by 2005.
Source: Clinton
Administration Agenda for the Seattle WTO
These are serious numbers. The level of
interest and attention [8]
occurring in Seattle, over these simple "Trade
Talks" has ignited a firestorm of protest not been seen
in the United States since the anti-war movement of the early
70s.
As more sites come online and we become
exposed to a global society in all its diversity, while
celebrating the uniqueness of each, we also will begin to
realize that we are basically the same folks regardless of
where we are logging on from.
Well there we go again, thought control is
out the window.
Winston Smith, hero of George Orwell's novel
1984, would be proud.
So in building your next site, you may want
to step back and ask yourself,
"What would
you like to Change today?"
References
- Taxation
Authority Section 8 U.S. Constitution
- Citizens
for a Sound Economy Tech Fact #5 Jerry Ellig - Author
- Tariffs
and Consumption Taxes: Understanding the Differences.
Ernst & Young LLP
- Wired
News 'Net Tax Stalemate'
- Flat
Tax
- World
Trade Organization
- Clinton
Administration Agenda for the Seattle WTO
- Alternative
Events Calendar
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