Session Four Summary:
Internet Tax

Harvard Law School Professor Oliver Oldman joined the class for this session on Internet tax. Students Michelle Spaulding and Alice Johnson helped lead the discussion. Johnson, a Minnesota state legislator, introduced a bill proposing taxation on the sale of Internet services.

A possible objection offered by OO to a tax on Internet service is that it would apply to Internet services used as a business input. The tax is added into the price of consumer goods, which are then taxed again when sold. If the focus of a sales tax is ostensibly consumer consumption, then such a scheme yields double taxation. OO acknowledged that, while there are tax exemptions for some business inputs, they are far from exhaustive. So, as JZ noted, a sales tax on Internet service could be seen as leveling the playing field between Internet services and most other services. Most of the class agreed that the bill is not very objectionable, unless one takes the extreme position that nothing having to do with the Internet should ever be taxed. Class members were much more concerned with schemes to tax goods sold via the Internet. One student noted that such taxes have much greater potential for double taxation (by the state in which the seller resides and the state in which the buyer resides) than taxes on Internet services (which no state other that the buyer's home state is likely to try to collect).

JZ turned the class' attention to the possible constitutional conflicts with some Internet tax schemes. The Commerce Clause, which grants Congress the power to regulate interstate commerce, has been read to imply that a state may not regulate interstate commerce in ways that place undue burdens on interstate commerce or discriminate against out-of-state businesses, nor regulate activities that have no connection to the state. This doctrine is applied to state tax schemes by determining whether what is being taxed has an adequate "nexus" with the taxing state. Because the doctrine is concerned with keeping states out of an area over which Congress has been granted authority, the contours of nexus can be altered by congressional fiat. One of the readings for this week suggested that Congress should pass a law establishing that Internet activity and contracts for service are insufficient to constitute nexus. Moreover, the Senate is considering "The Tax Freedom Act," which would place a moratorium on some forms of state Internet taxation.

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