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Sales On The Internet
A company which is selling goods over the Internet and has a presence in the state of delivery, ie has established nexus in that state, will be required to register to collect sales tax on all taxable goods.

International Internet Sales
There is little certainty about the effect of current US legislation on the taxation of sales made from non-US web-sites.

The Internet Taxation Moratorium
Since 1999 there has been a moratorium on the imposition of Internet access taxes.


The Internet Taxation Moratorium

Since 1999 there has been a moratorium on the imposition of Internet access taxes. Taken together with the prohibition on taxation of inter-state sales, absent 'nexus' in the taxing state on the part of the seller, the result has been a rapidly increasing loss of revenue for the states as Internet sales have begun to grow.

Congress, for its part, has refused to lift the inter-state taxation ban until the states got their act together in terms of simplification of sales taxes. That led to the Streamlined Sales Tax Program, (SSTP or SSUTA) which after more than five years of effort now seems to be having results.

Without any ability to put taxes directly on inter-state Internet commerce, many states would have wanted to tax the Internet directly; but the moratorium has effectively prevented that.

With the moratorium due to expire at the end of 2003, the House of Representatives passed legislation extending the moratorium on a permanent basis to all forms of internet access, and removing the grandfather clause contained within the temporary moratorium which allowed the 10 states which began to levy taxes on internet access prior to the enactment of the moratorium to continue to do so; however a similar bill stalled in the Senate over concerns about the potential cost to state authorities.

Senator Lamar Alexander (R-Tennessee), one of the main opponents of the Senate bill, which was sponsored by Senators Ron Wyden (D-Oregon) and George Allen (R-Virginia), had put forward proposals whereby the language of the lapsed temporary moratorium would be extended by two years, and would be changed to cover DSL internet connections. However, the grandfather clause allowing his and other states to collect internet access taxes would have remained.

The stand-off continued in 2004, and by mid-year it still seemed that an extension of the moratorium would be hard to achieve. The same applied to the attempt to repeal the ban on sales taxes on inter-state supplies, which the states hoped would be accepted by Congress in response to the SSUTA initiative to create a harmonised sales tax regime. By July, 2004, 46 states had joined the initiative, and most were working to bring their laws into compliance with SSUTA's standardized regime. Once states representing 20% of the population are fully in compliance, the initiative was due to come into force, something that happened during 2005.

In November, however, in a 'lame duck' session of Congress, the Senate voted unanimously to extend the moratorium on the taxation of internet access for four years. Under the legislation, local and state governments are restricted from levying taxes on internet access services, including broadband and wireless services.

However, other services such as internet mobile phones remain outside of the legislation’s remit, as will the sale of goods and services made over the internet. Expanded provisions covering high speed broadband services had initially sparked fears from local officials that their ability to collect taxes at the local level would be severely curtailed, although a last minute provision allowing them to continue assessing existing telephone taxes assuaged these fears somewhat.

Welcoming the Senate’s approval, Sen. George Allen (R., Va.), who co-sponsored the legislation noted: "I'm glad to see the majority of Congress stands with those who want to see the Internet continue to grow and flourish as a tool for information, opportunity, prosperity and commerce."

The House followed the Senate, and in December, 2004, George W. Bush signed the bill into law. The moratorium will be in place until November 1 2007, and is also retroactive to cover the year of 2003, during which the previous moratorium had lapsed. In fact, the states had by and large refrained from imposing new access taxes during that period.

The move was welcomed by internet service providers such as America Online and Time Warner, as well as by representatives of the telecommunications industry. “With forward-looking policies that encourage real competition, like the Internet tax moratorium, consumers and the nation’s economy will benefit from increased investment and innovation in the telecom sector,” enthused Walter B. McCormick, Jr., President and CEO of the United States Telecom Association, shortly after Mr Bush signed the bill.

However, not everyone was happy with the access tax ban on internet services, especially municipal and state governments which are particularly upset over the expanded provisions covering broadband services.

In February 2007, legislation was introduced into the House of Representatives to permanently extend the moratorium on internet access taxes and duplicative taxes on internet commerce.

"Americans across the country utilize the Internet for communication, commerce, business, education and research," observed Congresswoman Anna G. Eshoo (D - Calif), who introduced the Permanent Internet Tax Freedom Act of 2007.

"Because of the tremendous value it brings to all aspects of our lives, we need to encourage its usage and do everything we can to ensure that Internet access is universal," she added.

"Passage of this legislation will ensure, once and for all, that the growth of Internet access and e-commerce will not be hampered by unwarranted taxation," said Eshoo, a Member of the House Energy and Commerce Subcommittee on Telecommunications and the Internet.

According to Eshoo, a 2006 report by the Pew Internet and American Life Project demonstrated that 73% of those polled were Internet users, up from 66% in a similar 2005 survey, while in 2006 alone, online retail exceeded $100 billion, increasing 24% over 2005. However, Internet usage still lags behind in rural and lower income areas of the US, and the country has fallen from 4th to 16th in broadband penetration worldwide since 2001.

"In order to reverse this trend, we need to ensure that access costs are kept to a minimum. Prohibiting unnecessary access taxes will help accomplish this goal," Eshoo told the House.

"We also need to allow unfettered access to the products and new services that are only available through the Internet and prevent multiple layers of state and local taxes. Otherwise, we will open the door to a myriad of barriers to Internet commerce that will drive consumers from a web-based marketplace and stifle innovation," she argued.

Meanwhile, in the Senate in May 2007, US Senators Tom Carper (D-Del.) and Lamar Alexander (R-Tenn.) introduced legislation that would extend the current ban on Internet access taxes for another four years.

The Internet Tax Freedom Extension Act of 2007 seeks to improve the existing moratorium by closing tax loopholes, and clarifying the definition of "Internet access" to better protect essential goods and services provided by state and local governments.

The Carper-Alexander bill alters the definition of 'Internet access' to ensure that a consumer's connection to the Internet, including email and instant messaging, remains tax-free. At the same time, the bill closes a loophole in the original 1998 moratorium that could allow an Internet Service Provider to bundle Internet access with other services and make them all tax-free. The Senators said that closing this loophole is important because it could harm the traditional tax base of state and local governments.

In 2004, the last time Congress extended the ban, Congress exempted voice-over-Internet-protocol services from the moratorium because of fears that states and localities could lose billions of dollars in revenue as telephone services migrated to the Internet.

As the Internet continues to grow and more services migrate to the Internet, Senators Carper and Alexander said that it makes sense to close that loophole and define Internet access exclusively as the connection between a consumer and the Internet Service provider. Such clarity will continue to ensure that Internet access is tax free, while also ensuring state and local governments do not have to come up with new - and potentially more burdensome - sources of revenue to pay for teachers, firefighters and health care services, they explained.

"Our bill would ensure that consumers continue to enjoy tax-free access to the Internet, including email and instant-messaging," stated Sen. Carper. "In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don't completely erode the tax base of state and local governments."

"We should not undermine the ability of governors and mayors to pay for goods and services that everyone depends on. A temporary extension, as we have in our bill, will allow us to keep Internet access tax free, while giving Congress more time to understand the Internet's evolution and what it means for state and local governments," he added.

"This is a common sense compromise that would extend the moratorium for another four years without blowing a hole in the budgets of state and local governments," Sen. Alexander announced. "A permanent moratorium would create a massive federal unfunded mandate, which members of Congress have repeatedly promised not to do. When the federal government starts restricting Tennessee's ability to raise revenue that means increased tuition, higher sales tax on food and even a state income tax are just around the corner."

In addition, the legislation extends the original "grandfather" clause, thereby allowing the nine states that collected revenues from Internet access before the 1998 tax moratorium to continue to collect those taxes.

The other bill cosponsors are Sens. Michael Enzi (R-Wyo.), Dianne Feinstein (D-Calif.) and George Voinovich (R-Ohio).

Among this legislation's supporters are the National Governors Association, the National League of Cities, the US Conference of Mayors and the National Association of Counties.



BACK TO TOP

Sales On The Internet
A company which is selling goods over the Internet and has a presence in the state of delivery, ie has established nexus in that state, will be required to register to collect sales tax on all taxable goods.

International Internet Sales
There is little certainty about the effect of current US legislation on the taxation of sales made from non-US web-sites.

The Internet Taxation Moratorium
Since 1999 there has been a moratorium on the imposition of Internet access taxes.



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