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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.
  • 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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