June 27, 2004

Taxing Issuers

G&SR/e-gold, an issuer of digital gold currencies, faces a new tax from the Florida state within which it has located its network operations [1]. (Or, an old tax, newly applied?) It's hard to see the logic of this one, but I suppose one has to bear in mind that Florida is one of the small handfull of states in the USA that has no state income tax.

Governments will tax, and one has to accept, grudgingly, that they a) exist and they b) provide some modicum of services that are quite convenient and well utilised, even by the most rabid of anti-government types. Given that premise, a question much debated in economics circles is what is the best way to raise taxes? Skipping the difficult questions of what goals we are seeking, and how we measure, it does seem that most thought these days has moves from income based taxation to transaction based taxation.

I.e., VAT, where hopefully it is used to displace other forms of taxation. (And, Russia, Slovakia and other countries successes in levying flat income taxes also count as a move in that direction.)

How then to tax Issuers? Any tax should be proportional to the activity, so it would seem that the fee based value is the place to look. Most taxes are based on the total value of the transaction, but this is insufficiently precise, as the company never sees the total value of the transaction, it only sees its component. Hence, VAT is constructed in a waterfall of adding and subtracting down the value chain. It results as a netted small slice that is proportional to each supplier's activity, which is a good thing. Against this, the bad thing about VAT is that it is a nightmare to administer.

No such need exists with Issuers - the fee income is quite clear and easily calculable. Issuers therefore should think in terms of negotiating a transaction tax on the basis of a percentage of all the fees collected. In this way, Issuers are free to lower and raise fees according to business perogatives, and they won't be so easily tempted to move operations to some lesser jurisdiction that offers no transaction tax.

Still, the day when transaction taxes apply to Issuers is far off. First, they have to be successful enough to be household names, and the legislators take notice. Which means we have to get some size and some robustness, both things lacking in the current IG market.

[1] Wired News - Florida to Tax Home Networks
By Michelle Delio
Story location: http://www.wired.com/news/business/0,1367,63962,00.html
02:00 AM Jun. 24, 2004 PM

Florida state officials are considering taxing home networks that have more than one computer, under a modified 1985 state law that was intended to tax the few businesses that used internal communication networks instead of the local telephone company.

Officials from Florida's Department of Revenue held a meeting on Tuesday to see whether the law would apply to wired households, and exactly who would be taxed. About 200 people attended, including community and business representatives.

In 1985 the state passed a law to tax businesses using their own communications networks, because otherwise the state could not collect tax revenue on the businesses' local telephone service. In 2001, that law was expanded to make "any system that is used for voice or data that connects multiple users with the use of switching or routing technology" taxable up to 16 percent.

The law is so broad that it would apply to networked computers, wireless services, two-way radios and even fax machines -- or "substitute communications systems," as the state calls them. The tax would be applicable (PDF) to the costs of operating such a substitute communications system, not to the purchase of the system's components.

In some cases, it appears the tax would be collected by the providers of communications services such as wireless companies or voice-over-IP firms. The tax would be added to the user's bill and then turned over to the Department of Revenue.

But some substitute communications services don't require a service plan. For those, the state could take the tax from the amount deducted on business, and perhaps personal, tax filings.

"According to my accountant, the way the law is written, if my tax filing includes deductions for the repair or maintenance of my two computer and one printer network, those costs will be subject to state communication taxes," said graphic artist Linda Kellman, who works from home. "Self-employed people get slammed with insane taxes everywhere, and I've sadly but grudgingly accepted that. But this tax, if they ever try to collect it, would be the last straw. Can I outsource my network to a more sensible state, do you think?"

Florida businesses and residents -- and even some officials in the Florida Department of Revenue -- agree that the wording of the law is too broad.

In May, the Florida Senate unanimously passed a bill that would have prevented collection of the tax until 2006, during which time the law could be carefully reviewed. The bill was then sent to the House, but wasn't voted on before the summer break, clearing the way for officials to begin collecting the tax.

As a result, the Florida Department of Revenue, which, according to local newspaper reports, was in favor of the bill to delay the collection of the tax, must now begin to address how the tax should be implemented.

"The tax language is so broad that virtually any communication technologies in your home or office could be subject to this tax," said Chris Hart, spokesman for ITFlorida, a not-for-profit industry organization for the state's technology professionals. "It's difficult to imagine a more anti-technology, anti-business tax. It directly attacks the efficient use of information technology."

Florida businesses aren't in favor of the tax.

It also could tax almost any Florida resident who uses any sort of modern communications technology, something that Florida's battalions of retirees on fixed incomes have just begun to become aware of, according to Hart.

"Information on this issue is starting to reach the general public, and it probably isn't widely understood just yet," he said. "However, once people do realize how this tax could impact them on a personal level, they wake up very fast."

"All my life, I've willingly paid my fair share of taxes in exchange for community services," said 73-year-old George Fedoro, a retired engineer who now lives in Boca Raton. "But this tax is not fair and could turn senior citizens into criminals, because no one that I know can or will pay it."

Florida Gov. Jeb Bush would have to approve any rule the tax department suggests. Bush has said he isn't in favor of the tax, but many fear he may be swayed by city and county government officials. The tax would go, in part, toward school construction and other projects.

Additional meetings on the proposed rules for the tax will be held in other locations around the state later in the year, Department of Revenue officials said.

If the law is implemented, Florida would have the most wide-reaching state tax on technology. But it may not be the last -- state officials estimate enforcement of the tax could bring in more than $1 billion a year in revenue for the state.

Posted by iang at June 27, 2004 06:43 AM | TrackBack

Taxing my usage of a device I purchased will never work since how do you know I have more than one? So if I have more than one device ala a network then how do you know I have networked them? If I have deducted the cost to repair the networked devices I have all but told you I have them so I am offering information about how you may elect to tax me.

My device is a tractor that just happens to have an LCD screen and keyboard, in fact I have two. So two tractors that communicate using what might be understood to be a computer is a viable taxable event, or maybe if my cars talk to each other in the same way.

What sounds more likely to occur is the threshold for determining if a device is taxable or a network of devices is taxable will need to be refined and built out. By the time they have figured that one out the hardware will change.

Posted by: God's Gift to whomever at June 27, 2004 07:21 AM

Yes, the logic looks faulty to me. The article said they would collect the info from tax forms that claim deductions. Seems like there will then be a simple calculation as to whether the deduction is worth the added hassle.

What do your two tractors do when they are talking to each other?

Posted by: Iang at June 27, 2004 07:50 AM

Tractors randomly exchange data in the hopes of finding the solution to the maximized yield for soybeans and the grade of soil compaction. In doing this activity they are required to exchange IM protocol elements and allow for other devices to act along in this process if they wish.

So a P2P Tractor network ermerges allowing outsiders to participate. Maybe other information other than the designed intention gets passed around as well, maybe even in another protocol that allows the participants to talk without the added cost of a long distance bill. Maybe suburban folks use their lawn tractors and urban people use their roof top garden irrigation system. The point is computing in strict terms has already broken the boundaries that can confine it to legal terms. The only thing that can be taxed is that which can be made clear and obvious or what already is in that state.

The governance of the unseen will never work. In fact the more complex the tax code is (meaning the more it trys to reveal and clarify) the more unclear it becomes. Simple structures that are easily understood for tax purposes are best when a simple person understands the system and how they pay for it, they tend to respect it as their own not of some outside entity.

Organic in nature and simple in design. As well, taxes should be collected in real time; the deadline and calendar event are foolish notions and cost more in the end. Real Time Taxes make for less errors and mistakes in commerce. Taxes can be a beneficial means of introducing good governance in commercial transactions. If the a real time method of doing transactions and collecting the taxes were part of the culture the complexities of the Federal Reserve's Economist would be considered foolish since what is would be known.

Taxes at subaccount and participant level in a transaction model. That might be the killer application, handling taxes as they occur rather than reliance on accrual accountants and their bullshit netting. The ultimate customer is the government that needs information in a real time manner since properly informed they can over spend anyway.

Posted by: God's Gift to whomever at June 27, 2004 09:34 AM