Book Description

This report examines state taxation of Internet transactions as well as efforts to achieve uniform state sales and use tax treatment. There are at least two common misconceptions in the area of state taxation of Internet transactions. Contrary to popular belief, (1) states do have the power to impose a sales tax on in-state sales that are accomplished via the Internet, even after the enactment of the Internet Tax Freedom Act in 1998; and (2) states do have the power to tax transactions of their own residents where the seller is located outside of the state and has no real connection with the state. The Internet Tax Freedom Act placed a three-year moratorium only on imposition of new taxes on "Internet access services" (existing taxes on access services were grandfathered) or any "multiple or discriminatory taxes on electronic commerce" by state or local governments, not on application of a general sales tax to such transactions. The Internet Tax Nondiscrimination Act of 2001 extended this moratorium through November 1, 2003. In the 108th Congress, the moratorium was allowed to expire. But in its closing days, the moratorium was extended, retroactively from November 1, 2003, until November 1, 2007. In addition to Congress, other stakeholders are involved in Internet taxation issues. The Streamlined Sales Tax Project, which claims the involvement of 39 states and the District of Columbia, aims to achieve a more uniform sales and use tax scheme. While the Project's aim does not specifically pertain to Internet access taxes, it is inextricably related and has been widely discussed. Congressional action would be required to implement the Project's plan to require sellers to collect sales and use taxes based upon the buyer's home state rates.