What do Internet taxes and your privacy have in common? Well, more than most of us would care to imagine. In fact, as Californians are finding out, Internet taxation might as well be called Internet surveillance.

California’s mini Internet-tax experiment got its impetus from last November’s passage of Proposition 10, which allowed for a 50-cent hike on cigarette taxes.

But besides creating a nest egg on the backs of California smokers, Prop 10 had the more interesting effect of spurring California’s tax collectors into tracking down the sale of out of state tax-free smokes over the Internet—thereby inadvertently compromising the privacy of a growing number of Californians.

Because of a 1992 Supreme Court decision called Quill, states are normally barred from collecting taxes from out of state merchants if those merchants have no physical presence in the state. However, exceptions to Quill do exist because Congress has the power to legislate in the area of interstate commerce.

It’s one of these laws—the Jenkins Act—that has allowed California’s taxmen to morph like changelings into virtual peeping toms. A call to California’s Board of Equalization (BOE) proved revealing.

The very helpful bureaucrat explained to me how Prop 10 motivated his minions to track down and target Internet sites selling "tax free" cigarettes on the web. Once done, letters were sent to these unsuspecting web-based vendors demanding they hand over the names and addresses of all their California customers that bought the so-called "tax free" cigarettes. In addition, the businesses were required to hand over information about the brands that the consumers preferred and how much of each was purchased.

Armed with these smoking profiles and addresses, the BOE sent out 3,200 letters spilling the news that Big Brother was watching and could they please send a check in the amount of, on average, $110. Predictably, tech-savvy smokers weren’t impressed.

"You’re paying the freight to get them here. Why the … do you owe the state taxes?" one outraged customer told reporters. But more disturbing than the actual cost of the taxes are the privacy implications. "It’s like a prelude to 1984" said one disgruntled smoker, "this could be the Achilles heel of Internet commerce."

First, the government creates profiles of smokers’ behavior, next they’ll be collecting data on our grocery, prescription, and other purchasing behavior. Time and again consumers rank privacy as their number one concern with shopping on-line. California’s mini-experiment with on-line taxes should send a clear message to governments everywhere.

There are other obvious reasons why Internet taxes are a wrong-headed idea — from stifling on-line growth to the fact that they are unfair because they allow taxation without representation. But these concerns aside, privacy violations scream out as the number one problem with taxing the net.

After all, while many people don’t mind paying some taxes, no one really wants a government-mandated list of all their on-line purchases. Fortunately, a handful of political leaders have realized that taxing the Internet would be harmful beyond anyone’s imagination.

Recently, California Assembly Member Bill Leonard (R-San Bernardino County) has introduced legislation to eliminate California’s sales tax for both on- and off-line businesses. Senator Ray Haynes (R-Riverside) has proposed exempting the Internet from sales and use taxes. But this is hardly a partisan issue.

Senator Barbara Boxer (D-CA) has bravely spoken out against Internet taxation on the national stage. California Governor Gray Davis recently declared that "I do not favor the application of the sales tax for the Internet, because I certainly don’t want to kill the golden goose that is laying the egg."

Now there is something to cut and paste.
Better to kill the possibility of peeping Toms before they damage the Internet and those who use it.

* Sonia Arrison is director of the Center for Freedom and Technology at the California-based Pacific Research Institute and was an expert witness at the last meeting of the Advisory Commission on Electronic Commerce.

For additional information, contact Sonia Arrison at (415) 989-0833.