Is it Time to Tax the Internet?

There is a law advancing in the Maryland legislature that would tax Internet advertising. The law, if enacted would collect taxes from online advertising done by Google, Facebook, and others. The tax would immediately be challenged in court due to our history of not taxing things related to the Internet.

The idea of not taxing the Internet began with the Internet Tax Freedom Act in 1998. That law grandfathered taxes imposed in 13 states on Internet access but prohibited it elsewhere. The law also prohibited local governments from imposing taxes on electronic commerce. The law imposed a 3-year moratorium on such taxes and was extended eight times until the tax prohibition was made permanent in the Trade Facilitation and Trade Enforcement Act in 2015.

There are other precedents for not taxing electronics commerce. For example, the Supreme Court ruled in 1967 that requiring remote vendors to collect sales taxes would impose an undue constraint on interstate commerce. The prohibition against sales taxes for out-of-state sellers was strengthened in 1992 in the Supreme Court’s ruling in Quill Corporation v. North Dakota that prohibited a state from collecting sales taxes unless a business has a physical presence in a state. These prohibitions were assumed to also apply to sales made over the Internet if the seller lived in a different state than the buyer.

However, such rulings change over time and the Supreme Court reversed the older decisions in 2018 in the case of South Dakota v Wayfair, Inc. The Court effectively ruled that states can require remote sellers of any kind, including online sellers to collect state sales taxes. Since that ruling, many states have imposed sales taxes on Internet sales.

Opponents of the tax on advertising say that the proposed law would violate the intent of the Internet Freedom Act to not tax electronic commerce. The application of a tax to advertising is different enough from a sales tax that the Supreme Court ruling won’t automatically apply. If the law is passed it will likely have to go to the Supreme Court. To a non-lawyer like me, it seems the issue is similar enough to sales taxes that there is a good chance that at tax on advertising would be allowed. Even if it allowed, such a tax has the significant challenge of identifying the advertising revenue that applies to a given state. For example, what portion of nationwide advertising for Ford trucks would apply to Maryland?

The Maryland law does freshly raise the question of whether it’s time to tax the Internet. The original Internet Tax Freedom Act was an attempt by Congress to protect the fledgling broadband business. It’s debatable if the growth of the Internet would have been slowed had there been a few dollars of taxes applied to broadband bills like were applied to landline telephone bills. But the new Internet companies were the darlings of Wall Street, and Congress decided to keep broadband products free from taxation.

The broadband tax that’s most needed is a surcharge on broadband to help fund the FCC’s Universal Service Fund. Many states also have similar funds. The USF is currently being funded by fees charged to landlines and cellphones. The purpose of the fund is currently to promote broadband for places that don’t have it. The fund will be paying for the $20.4 billion RDOF grants for rural broadband and the $9 billion 5G Fund grants to improve rural cellular coverage. It’s silly that we aren’t charging a small fee onbroadband users to help pay for rural broadband – everybody in the country benefits when there is broadband everywhere. I can’t fathom a justification for having landlines users pay for rural broadband but not broadband customers.

Congress is often mystifying. I can understand the initial ban against Internet taxes, although I don’t believe such taxes would have hampered the explosive growth of broadband. But I can’t think of any justification in 2015 for making the ban on Internet taxes permanent. Considering the huge problems that lack of rural broadband just caused during the COVID-19 crisis, there is no justification for not increasing the funding for the Universal Service Fund, and the easiest way to do so is to tax broadband customers.

The Fastest and Slowest Internet in the US

The web site HighSpeedInternet.com has calculated and ranked the average Internet speeds by state. The site offers a speed test and then connects visitors to the web pages for the various ISPs in each zip code in the country. I have to imagine the site makes a commission for broadband customers that subscribe through their links.

Not surprisingly, the east coast states with Verizon FiOS ranked at the top of the list for Internet speeds since many customers in those states have the choice between a fiber network and a big cable company network.

For example, Maryland was top on the list with an average speed of 65 Mbps, as measured by the site’s speed tests. This was followed by New Jersey at 59.6 Mbps, Delaware at 59.1 Mbps, Rhode Island at 56.8 Mbps and Virginia at 56 Mbps.

Even though they are at the top of the list, Maryland is like most states and there are still rural areas of the state with slow or non-existent broadband. The average speed test results are the aggregation of all of the various kinds of broadband customers in the state:

  • Customers with fast Verizon FiOS products
  • Customers with fast broadband from Comcast, the largest ISP in the state
  • Customers that have elected slower, but less expensive DSL options
  • Rural customers with inferior broadband connections

Considering all of the types of customers in the state, an average speed test result of 65 Mbps is impressive. This means that a lot of households in the state have speeds of 65 Mbps or faster. That’s not a surprise considering that both Verizon FiOS and Comcast have base product speeds considerably faster than 65 Mbps. If I was a Maryland politician, I’d be more interested in the distribution curve making up this average. I’d want to know how many speed tests were done by households getting only a few Mbps speeds. I’d want to know how many gigabit homes were in the mix – gigabit is so much faster than the other broadband products that it pulls up the average speed.

I’d also be interested in speeds by zip code. I took a look at the FCC broadband data reported on the 477 forms just for the city of Baltimore and I see widely disparate neighborhoods in terms of broadband adoption. There are numerous neighborhoods just north of downtown Baltimore with broadband adoption rates as low as 30%, and numerous neighborhoods under 40%. Just south of downtown and in the northernmost extremes of the city, the broadband adoption rates are between 80% and 90%. I have to guess that the average broadband speeds are also quite different in these various neighborhoods.

I’ve always wondered about the accuracy of compiling the results of mass speed tests. Who takes these tests? Are people with broadband issues more likely to take the tests? I have a friend who has gigabit broadband and he tests his speed all of the time just to see that he’s still getting what’s he’s paying for (just FYI, he’s never measured a true gigabit, just readings in the high 900s Mbps). I take a speed test every time I read something about speeds. I took the speed test at this site from my office and got a download speed of 43 Mbps. My office happens to be in the most distant corner of the house from the incoming cable modem, and at the connection to the Charter modem we get 135 Mbps. My slower results on this test are due to WiFi and yet this website will log me as an underperforming Charter connection.

There were five states at the bottom of the ranking. Last was Alaska at 17 Mbps, Mississippi at 24.8 Mbps, Idaho at 25.3 Mbps, Montana at 25.7 Mbps and Maine at 26 Mbps. That’s five states where the average internet speed is at or below the FCC’s definition of broadband.

The speeds in Alaska are understandable due to the remoteness of many of the communities. There are still numerous towns and villages that receive Internet backhaul through satellite links. I recently read that the first fiber connection between the US mainland and Alaska is just now being built. That might help speeds some, but there is a long way to go to string fiber backhaul to the remote parts of the state.

Mostly what the bottom of the scale shows is that states that are both rural and somewhat poor end up at the bottom of the list. Interestingly, the states with the lowest household densities such as Wyoming and South Dakota are not in the bottom five due to the widespread presence of rural fiber built by small telcos.

What most matters about this kind of headline is that even in the states with fast broadband there are still plenty of customers with lousy broadband. I would hope that Maryland politicians don’t look at this headline and think that their job is done – by square miles of geography the majority of the state still lacks good broadband.