From declan@well.comMon Dec 9 08:51:48 1996 Date: Mon, 25 Nov 1996 21:38:35 -0500 (EST) From: Declan McCullagh To: fight-censorship@vorlon.mit.edu Subject: Read my bits: No New Internet Taxes, from The Netly News The Netly News http://netlynews.com/ Read My Bits November 25, 1996 By Declan McCullagh (declan@well.com) The sound bite would have made George Bush proud: "No New Internet Taxes." At least that's how articles in c|net and the New York Times described the recommendations of a Treasury Department report released last Thursday. The Times quoted Deputy Treasury Secretary Lawrence Summers as saying, "The key message of the report is, no Internet taxes." Indeed, the 46-page draft sketches out the Clinton administration's tax policy for the Internet and says that no additional taxes should be imposed on the Net. But, dear reader, you have to read the fine print. Which I did. That's where one finds the very clear suggestion that existing tax laws must be extended to encompass the Internet -- in the kind of clumsy and misinformed way that has typified federal forays into legislating online behavior. The theme of the report is clear: Since taxation is largely based on physical presence, the nature of the Net represents a threat to the taxman. Not surprisingly, the IRS could well return the favor by increasing its role in cyberspace. Just how will existing tax regs be "extended" to the Net? The devil is in the details -- not all "extensions" are wise ones. After all, in perhaps the most infamous example to date, Sen. James Exon (D-Neb.) claimed the now-moribund Communications Decency Act merely "extended" existing broadcast indecency regulations to cyberspace. One of the more ominous sections of the report discusses how the IRS may regulate online identities. The draft says: "[T]he IRS may be required to develop standards for issuers of digital IDs and certify issuers. In order to do so, the IRS may be required to issue its own digital IDs to issuers of digital IDs so that they can electronically prove that they have received IRS certification." Consider what this means. When you want to buy something online, you might need to purchase an "Internet Driver's License" that would be certified by the IRS. To get the driver's license from a shop that would be approved by the IRS, you'd need to hand over proof of identification. So much for anonymity online. And so much for privacy. The scheme hands everyone's least favorite agency far more power than it enjoys in the real world. It raises questions about how much access the IRS will have to records of online transactions -- in a worst-case scenario, will the taxman be able to access every one? The report also says: "It will be necessary to consider whether a foreign person who owns or utilizes a computer server located in the United States should be deemed to have a U.S. permanent establishment." (For tax purposes, a "permanent establishment" is a place where business is conducted.) In other words, a businessman in Canada could be subject to U.S. taxes if his web site is on the U.S. side of the border. In response, the Canadian will quickly move his web site to a more friendly jurisdiction -- like Belize or Anguilla-- depriving the IRS of cash and the U.S. Internet provider of revenue. That's why the IRS proposal is a bit like the now-legendary example of a tax on windows. Under that brain-dead plan, the government raised little money from the tax and people gained even fewer benefits. Why? To avoid paying taxes, people chose to board up their windows and build darker homes instead. Broad taxation of online commerce might lead to the same result, says Solveig Bernstein, a lawyer at the Cato Institute. "As much as they possibly can, people will change their behavior and move the servers out of the country. It will result in a lot of situations where people change their behavior to avoid the taxes," Bernstein says. Federal officials stress that the report is only a working draft. Darren McKinney, a Treasury spokesman, says the paper is "careful not to draw conclusions" but that the need to answer questions posed by the Net "is inevitable." He says: "This is good government, anticipating the need to answer these questions and building consensus on these questions." McKinney adds, however, "I would be lying through my teeth if I said no one in this building had any preferences along those lines. They'd argue pretty vigorously for them." So the Net is at a crossroads. Down one path lies increased government regulation, other CDA-type attempts at censorship and a digital turf grab by an alphabet soup of federal agencies. Plus international treaties to muzzle the Net -- we saw the beginnings in July at a G-7 summit meeting. The process continues on Wednesday, when a G-7 expert group meets in Bonn to determine "approaches to combating misuse in international data networks." Down the other path lies reduced government regulation, more individual freedom and -- well, lower taxes. The Treasury Department is accepting comments on its paper via email: TAXPOLICY@treas.sprint.com. ###