Discontent grows over Wisconsin's Internet taxes

Discontent grows over Wisconsin's Internet taxes

Republican lawmakers have called into question the state’s right to charge taxes on Internet access and purchases.
In his upcoming budget proposal, Governor Jim Doyle, a Democrat, has suggested charging sales taxes on more types of online purchases, such as music downloads. At the same time, Wisconsin maintains its 14-year-old tax on access to the Internet, despite a federal law passed last December that prohibits most states from doing so.
The state levies a flat 5 percent tax on Internet service providers as part of its telecommunications service tax, while the sales tax depends on the county where an item was shipped.

Taxing access

Wisconsin enacted its law permitting a tax on access to the Internet in August 1991, making it one of few states to be grandfathered under a federal law that prohibits such taxes. An amendment to the federal legislation requires any state that enacted its Internet tax law on or after October 1, 1991, to phase it out by next November.
So, while the federal Internet Tax Nondiscrimination Act of 2004 was meant to halt all taxation of Internet access, the state of Wisconsin continues to tax Internet service providers, generating an estimated revenue of more than $30 million per year.
Bryan Chan, owner of SupraNet, has first-hand experience with the access tax. His Madison-based Internet service provider, which started up in 1994, has always had to charge the Internet sales tax, making it harder to compete with ISPs in other states.
“We all choose to live in Wisconsin, so I guess … if the state has a deficit, we all have to do our part,” Chan said. “But, overall, additional taxes only hurt businesses in the long run. It puts smaller companies who aren’t quite functioning at capacity at a larger disadvantage.”
Doyle said Wisconsin’s internet access tax is not so bad. “It has not disadvantaged the state to this point,” Doyle said.
“I don’t think we have any fewer people connecting to the Internet than they do in other states,” he added.

Taxing sales

Whenever someone receives an item within the state’s borders, the county can charge sales tax, a Department of Revenue spokesperson explained. That applies to online purchases as well as offline ones. But because shipments can come from so many jurisdictions and it is unusual for sales taxes to apply to online purchases, many vendors do not report the tax.
When that happens, Wisconsin customers are supposed to report it themselves, but the law is very difficult to enforce and not many do.
Under the Governor’s proposed budget, the state’s sales tax on purchases made over the Internet will be expanded to certain audio and visual products provided to consumers online, such as audio downloads, video clips, movies, ring tones, clipart, and e-books.
This has led state Representative Scott Jensen, a Republican of Brookfield, to dub the tax the “IPod tax,” as many listeners stock their IPods with music they bought from Apple’s ITunes music store.
“I think it’s a money grab,” said state Senator Ted Kanavas, a Republican, also of Brookfield. “I would anticipate that some company like AOL or someone would ultimately sue on this. There would probably be a lawsuit over the fact that the state of Wisconsin is not complying with federal law.”
The Internet access and sales taxes affect not only the Internet service providers and online businesses which are directly charged, but also the consumers to whom costs are often passed on. Jensen further focused on small businesses.
“Actually, the people who are disadvantaged, in addition to the people who pay it, are the small businesses,” Jensen said. “AOL.com has not paid a dime, but local internet service providers get nailed by the department and they pay it. You have these small Mom-and-Pop internet service providers that are paying this tax, because they don’t have the revenue to push back against the Department of Revenue like AOL does.”

Points of contention

Kanavas and Jensen want to repeal the Internet access and sales taxes. Kanavas, a tech entrepreneur himself, argues that startup companies will move out of state rather than pay higher fees when they and positioning their products and services on the Internet.
“Representative Jensen and I are working with the leaders of the Joint Finance Committee to have them pull out Governor Doyle’s tax increase,” Kanavas said. “There’s a layer of cost here that isn’t present in other states. … In Wisconsin, our technology space is in its infancy. You don’t want to do anything that’s going to limit or inhibit its growth. This tax is an extraordinary inhibition that will limit long-term growth.”
Jensen, concerned about online commerce, has taken several steps to repeal the taxes on Internet access and online purchases. He authored a law to end the taxes in 1997 which passed through both houses, but was vetoed by then-Governor Tommy Thompson.
Since then, Jensen has encouraged U.S. Representative John Sensenbrenner, a Wisconsin Republican, to put pressure on Governor Doyle from the federal level. He has even encouraged members of the Federal Telecommunications Commission to sue the state.
“It’s clear that this is in its final days,” Jensen said.

Katy Williams is a Madison-based correspondent for WTN and can be reached at katy@wistechnology.com.

Jason Stitt contributed reporting on the governor from Madison.