California Escapes Free Speech Tax--For Now

California lawmakers have rejected a bill to establish a new $500 million tax on Internet commerce, which some have dubbed the "iTax" because of its application to Apple's iTunes digital music store.

Despite the mid-April vote rejecting the bill in the Assembly's Committee on Revenue and Taxation, it is likely to return. And Assemblyman Charles Calderon (D-Whittier) is targeting more than just songs.

In reality, AB 1956 was a "free speech tax" imposing fees on something most Internet users take for granted: the free and unfettered exchange of ideas.

For 75 years, Californians have paid state sales tax only on "tangible" items, defined by law as "property which may be seen, weighed, measured, felt, or touched." According to Calderon, this is an "industrial-era construct" that no longer applies. The Internet has spurred a revolution in commerce where transactions consist of invisible streams of data bouncing across an interactive online network.

Though digital information may not be "tangible," the legislature, now facing a ballooning budget deficit, between $8 billion and $16 billion by some estimates, hopes these strings of zeros and ones will add up to substantial revenue for state coffers.

Taxing All Things Digital

Calderon wants to expand the sales tax beyond "tangible" items to include "electronic transmissions of information." This would not only enable taxation of "digital property" such as downloaded music, movies, and e-books; regulators could soon scrutinize every revenue-generating activity on the Internet.

By targeting "electronic transmissions," Calderon discriminates against e-commerce and discourages digital technologies. Why should doctors participate in e-health initiatives if online consultations are taxed while traditional practices are not? Why should schools invest in online courses if students would be hit with a "knowledge tax" on their tuition?

Ironically, even e-filing your tax return would incur a tax under AB 1956, whereas paper filing would not.

Calderon's "free speech tax" not only targets direct transactions between vendors and customers but potentially punishes all forms of online communication.

Many sites that promote free speech and the open exchange of information are supported by advertising. If California taxes the "electronic transmissions" between Web sites and advertisers, sites could pass on these costs to their users. As a result, innovative free services such as blogs, social networks, e-mail, and online video might soon be forced to set restrictions and charge for participation.

Erecting such fences on the Internet would chill one of California's greatest engines of economic growth.

Stealth Measure

A study released in April by AeA (formerly the American Electronics Association), the nation's largest technology trade association, declared California the top "cyberstate." California boasts more than twice the tech jobs of any state, and these workers earn more than twice the median private-sector income.

Successful entrepreneurs and their employees not only pay income tax but also contribute to local communities and the state economy. If the legislature adopts heavy-handed policies seeking to wrench every last penny from the Internet, these innovators will flee California with the state's thriving tech sector in tow.

To prevent lawmakers from recklessly imposing new taxes without considering the consequences, such bills require support from two-thirds of the legislature. Because he knew AB 1956 could not meet this burden, Calderon resorted to trickery. Only a majority vote is needed to modify definitions in the tax code, so Calderon camouflaged the $500 million tax as a minor, non-substantive administrative change.

Veil of Secrecy

Calderon further amended his bill in March to allow regulators to act under a veil of secrecy. While the public would ordinarily have the right to view and comment on new rules, Calderon wants to declare California's taxing authorities "hereby exempted" from all public accountability.

No lawmaker should operate above the law and beyond the public's reach. The extraordinary measures taken by Calderon are a testament to his proposal's unpopularity and a violation of the voters' trust.

The Assembly Committee on Revenue and Taxation was right to reject this bill. The legislature was right to reject the "free speech tax" and let data flow.

Daniel Ballon, Ph.D. (dballon@pacificresearch.org) is a senior fellow in technology studies at the Pacific Research Institute in San Francisco, California. An earlier version of this article appeared in the Eureka Reporter. Reprinted with permission.