Taxation of Internet Transactions
Updated: October 22, 2003
Issue:
The Congressional moratorium on the imposition of "discriminatory"
state and local taxes on Internet access expires on November
15, 2003. The House of Representatives has passed a bill that would
make the moratorium permanent, and a similar measure is waiting
final Senate approval.
Separately, local government officials and off-line retailers
complain that
the growth of what are essentially tax-free online sales is eroding
local sales tax collections, thereby harming budgets for local police,
fire and school services which rely on sales tax revenue. Forrester
Research reports that states lost $2 billion in 2001 by being unable
to tax remote sales, and that this number will grow to $5.6 billion
by 2004.
National Perspective:
This complaint is similar to a decades-long dispute over imposing sales
and use taxes on mail-order sales. A 1992 U.S. Supreme Court decision,
Quill vs. North Dakota, held that a state could not require an out-of-state
merchant to collect taxes on sales into that state if the merchant
lacks substantial local physical presence. The Court reasoned that
if states could tax businesses beyond their borders, they would be
regulating interstate commerce, and only Congress can authorize such
taxation.
Retailers who have customers in more than one state worry about
the complexity of complying with the sales and use tax laws in the
7,500 state, county, city and special taxing jurisdictions in the
US. If these jurisdictions were to simplify and make uniform their
sales and use taxes, they would strengthen their case for requiring
Internet and mail order retailers to collect these taxes.
Governmental Activity:
- In 1998, Congress enacted the Internet Tax Freedom Act, which
established a three-year moratorium on the imposition of "discriminatory"
state and local taxes on Internet access and on Internet commerce.
On November 15, 2001, Congress extended the moratorium for two
years.
- Over thirty states have participated for the past three years
in the Streamlined Sales Tax Project, which has developed an agreement
that simplifies state sales tax rates and product definitions.
The agreement has been submitted to Congress as a basis for seeking Congress'
approval to require out-of-state sellers to collect use taxes
from local residents.
- For background on the Streamlined Sales Tax Project, see:
- Prior to 2003, Massachusetts did not participate in the Streamlined
Sales Tax Project. The three previous Governors opposed the taxation
of Internet commerce and called for Massachusetts to be an "Internet
Tax Free Zone."
- In early 2003, Massachusetts enacted legislation that authorized
the Commonwealth to participate in the Streamlined Sales Tax Project.
Software Council Position:
The Software Council supports the position of the
Internet Tax Fairness Coalition.
The Coalition is an alliance of business, consumer, retail, technology
and communications companies and associations that promote clear
and simple tax rules for the borderless marketplace. The Coalition
supports neutral tax treatment of Internet commerce; it does not
support the creation of a "tax-free" zone for Internet
commerce.
The Coalition supports federal legislation that would:
- permanently ban taxes on Internet access;
- encourage states to enter into a Congressionally-approved interstate
- compact to simplify and unify their sales and use tax systems;
- provided that a sufficient number of states enter into the interstate
compact, authorize the states to require out-of-state sellers
to collect sales and use taxes on goods or services delivered
in-state; and
- prohibit states from imposing business activity taxes upon
sellers with no physical presence in the state.
[The work of the Internet Tax Fairness Coalition has been absorbed
by the Business Roundtable.]
Software Council Activity:
Because the Software Council believes that electronic
commerce should be treated as a mainstream economic activity,
the Council has supported the recent Massachusetts legislation
that authorized the Commonwealth to enter into the agreement simplifying
state sales tax laws adopted by the Streamlined Sales Tax Project,
while avoiding the imposition of onerous administrative burdens
being placed upon small companies.
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