The spectre of Internet taxation is rearing its ugly head again in the wake of the abortive World Trade Organization conference in Seattle.

The Advisory Commission on Electronic Commerce is meeting this week in San Francisco in another attempt to hammer out a policy on Internet taxes.

The warring interests on this issue are basically e-commerce players who unsurprisingly want the Internet to remain tax-free, versus traditional storefront operators who argue that they are being placed at a competitive disadvantage by tax-free e-commerce, as wel as state and local governments who are concerned about Internet business eroding their tax-base.

However, I think the traditional interests are fighting a losing battle here. Even if they are successful in getting an Internet taxation regime in place, the potential for circumvention and avoidance is as boundless as, well, the Internet itself.

There is nothing to stop e-merchants from setting up their online operations in offshore tax-havens, and while it would be theoretically possible to set up a bureaucracy to collect state and local taxes on imported or drop-shipped merchandise, that would be another level of bureaucratic inefficiency putting the brakes on the economic engine of e-commerce. For example, there are reportedly more than 6,000 separate sales tax jurisdictions in the U.S.

In short, the old, top-down solutions don’t work any more in a wired world. If the government and regulatory agencies take a forward-looking perspective on these issues, they will nix the idea of Internet taxation. Taxes, while a necessary evil, are also efficient killers of economic growth.

For an insightful report on the issues involved, check out Graham Lea’s article at The Register:

http://www.theregister.co.uk/991214-000001.html

Charles W. Moore

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February 09, 2010