Can We Tax the Internet?

July 25, 2005

According to Senator Blanche Lincoln (D-Ark) the answer is yes — at least if your internet business happens to provide adult content.

The Los Angeles Times reports that Sen. Lincoln will "propose a new 25 percent federal tax on Internet pornography and new requirements for adult Web sites to help prevent children from looking at them."

The bill is expected to be introduced this week and would affect all for-profit adult websites operating in the United States. The money collected would be used for the Internet Safety and Children Protection Act of 2005, which would help prevent minors' access to pornographic websites.

Contrary to popular belief, the Federal Internet Tax Freedom Act of 1998 doesn't totally exempt on-line businesses from tax. It applies to the application of state telecommunications taxes on internet access. Lincoln's internet porn excise tax, however, would be the first federal internet excise tax on the books.

Lincoln's proposal, though well-intentioned, may only cause a mass-exodus of adult websites off-shore, raising little tax revenue in the short run and possibly giving rise to increased tax disputes internationally as domestic companies move websites to offshore servers.

There is also a neutrality issue with Lincoln’s proposal, as the 25 percent excise tax may in fact shift the sale of pornography back toward brink-and-mortar stores as an unintended consequence.

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