U.S. internet tax legislation

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From the inception of the Internet until the late 1990s, it was free of regulation by government at all levels, and also free of any specially targeted tax levies, duties, imposts, or license fees. By 1996, however, that began to change, as several U.S. states and municipalities sought to re-interpret laws that had been on the books since long before the creation of the Internet in order to apply them to this new form of communications.

Current legislation


Congress preempted virtually all conceivable forms of Internet taxation.

The purpose of the 1998 Internet Tax Freedom Act was to prevent incipient taxation efforts. In the United States alone, some 30,000 taxing jurisdictions could otherwise have laid claim to taxes on a piece of the Internet.[1]

The enactment of this legislation coincided with the spectacular growth of the Internet. Its proponents have argued that the benefits of knowledge, trade, and communications that the Internet brought were worth the tax revenue losses, and that the economic and productivity growth attributable to the Internet may well have contributed more revenues to various governments than would otherwise have been received.

According to the act, no state or political subdivision should impose any taxes during the period beginning October 1, 1998 and ending 3 years after that date, including-- (1) taxes on Internet access, unless the tax was imposed and actually enforced prior to October 1, 1998; and (2) multiple or discriminatory taxes affecting electronic commerce. [9]

Opponents, on the other hand, have argued that the Internet would continue to prosper even if taxed, and that the current federal ban on Internet-specific levies denies government at all levels a much-needed source of revenue.[2]

Forms of Internet taxation

Telecommunications tax

Some states treat Internet access charges as telecommunications services, thus subjecting them to often high telecommunications taxes. Tennessee and Wisconsin are examples. A complication in the application of telecommunications taxes to the Internet is the disparate treatment that results from the current lack of uniformity in the application of such taxes to different forms of Internet access. Because of this, the method of accessing the Internet (regular phone, ISDN, DSL, cable, wireless, satellite) can dictate the level of taxation for what is essentially the same Internet service. This, in turn, can create unfair advantages or disadvantages for various market participants, as well as users. The often complex mix of local and state telecommunications taxes presents yet another layer of complexity.[3]

E-mail tax

The United Nations has in the past considered proposing an e-mail tax in an effort to raise funds to boost Internet technology access to poor countries. Citing a "knowledge gap" between the United States and underdeveloped countries, proponents of e-mail taxes believe that its potential redistributive effects make it an ideal tax for implementation on a global scale. According to a report by the United Nations Development Program entitled "Globalization With a Human Face," Internet users are mostly males located in the United States, a situation UN researchers suggest puts the world's undeveloped countries at risk of being left behind in a race for knowledge. "The literally well connected have an overpowering advantage over the unconnected poor, whose voices and concerns are being left out of the global conversation," the UNDP said in a 1999 press release. To "rectify the imbalance" between Internet users and non-users, the report's authors proposed a "tax of one US cent on every 100 lengthy e-mails," which they believed would generate $70 billion a year. Imposition of e-mail taxes by the U.S. government or any of its political subdivisions is banned by the Internet Tax Freedom Act.[4]

Conceptual issues of Internet taxation

There are many conceptual issues involved in the determination of which of several jurisdictions have the authority to tax the Internet, or transactions on it, in some way. Because Internet taxation has essentially been banned in the United States since 1998, the U.S. experience is limited to those jurisdictions that were grandfathered under existing federal law. Most of that involves Internet access taxes, franchise taxes, and telecommunications taxes, although a smattering of other forms of taxation currently exists.

Beyond the questions of direct taxation of the instrumentality of the Internet through levies such as bit taxes, bandwidth taxes, email taxes, and franchise fees, a related conceptual issue concerns the imposition of sales taxes on Internet sales of goods and services. This taxing activity is not prohibited by federal statute, but rather by a series of U.S. Supreme Court decisions including Quill Corp. v. North Dakota (1992). Those cases held that state taxation of in-state sales by vendors with no significant physical presence in the state violates the Commerce Clause of the U.S. Constitution. Because of this constitutional prohibition on collecting sales tax from so-called "remote" sales on the Internet, the issue of local jurisdictions taxing goods and services purchased from out of state by their residents using the Internet has not yet raised the conceptual questions discussed below. See tax-free shopping.[5]


The issue of location of the Internet user, the user's counterparties in a commercial transaction, the headquarters of any involved commercial entities, and even the servers and switches is important for tax purposes. For example, of the nine U.S. states that currently tax access in some manner, four make reference to location. In each case, both the provision of service and the billing must take place within the state. Connecticut places the burden of determining whether this is so upon the Internet service provider. But in general, there is no simple way to determine location, owing largely to the Internet's lack of boundaries. Users can and routinely do access their accounts from remote locations; providers are almost always located in multiple taxing jurisdictions; and the data traffic itself, via the Internet's packet-switched architecture, is routed through a myriad of locations. Such issues are important not only for practical reasons of determining the incidence of the tax and its enforcement, but also because the U.S. Constitution requires that a state or taxing sub-jurisdiction have "nexus" with the transaction in order to exert its taxing power, and that determination rests precisely upon such considerations.[6]

Setup v. monthly fee

In the United States, some states and taxing authorities distinguish between the initial setup fee for Internet access and the monthly, hourly, or per-minute billing fee for actual access. Nebraska taxes the initial setup, but only if software is provided. It does not tax subsequent monthly billing. Tennessee, on the other hand, taxes both.[7]

Good vs. service

A basic issue in determining whether Internet access and Internet usage of various kinds is subject to sales tax, use tax, telecommunications tax, a combination of these taxes, or no taxes at all, is whether Internet access and usage is determined to be a "good" or a "service." If access to the Internet or usage is deemed a service, in general no sales or use taxation applies, while the rates and variants of telecommunications taxes that apply can be different. However, if access requires downloading of user software, some U.S. states (e.g., Massachusetts) may deem that to be a "taxable sale" of goods for their residents.[8]


Collection of Internet taxes presents a complex array of issues. These include whether states themselves should collect the tax; whether the burden instead should be placed on the Internet service provider; the extent to which retailers or value-added intermediaries can be required to perform collection duties; and in all cases, the ways in which this collection can be accurately and meaningfully enforced by the taxing jurisdiction.[9][10]

Past legislation

109th Congress

Streamlined Sales Tax Simplification Act

In 2004, two pieces of legislation were introduced into the Senate (S. 2152 and S. 2153), which would endorse the "Streamlined Sales Tax Simplification" plan. This is an effort by states to collect sales tax on internet transactions.[11][12][13]

Neither bill became public law.

108th Congress

Internet Tax Nondiscrimination Act of 2004

The Internet Tax Nondiscrimination Act is the current U.S. federal law that bans Internet taxes in the United States. Signed into law on December 3, 2004 by President George Bush, it extended until 2007 the then-current moratorium on new and discriminatory taxes on the Internet. It also extended the federal prohibition against state and local Internet access taxes until November 2007. [14][15]

The law's co-authors were Rep. Chris Cox (R-Calif.), Sen. George Allen (R-Va.), and Sen. Ron Wyden (D-Ore.).

April 29, 2004
Passed, 93-3-7, view details
Dem: 43-3-2 in favor, GOP: 49-0-2 in favor, Ind: 1 in favor

The House of Representatives approved this measure (H.R. 49) by voice vote. Additional information may be found at the Library of Congress webpage here.

105th Congress

Internet Tax Freedom Act of 1998

The 1998 Internet Tax Freedom Act was authored by Rep. Chris Cox (D-Calif.) and Sen. Ron Wyden (D-Ore.), and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet. This law bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes. The law also bars multiple taxes on electronic commerce.[16]

The 1998 law also authorized establishment of a study commission to study national tax policy with regard to the Internet. The Advisory Commission on Electronic Commerce studied the issue from 1999 to 2000. The Commission was chaired by then-Virginia Governor James S. Gilmore, III, who led a majority coalition on the Commission to issue a final report opposing taxation of the Internet and eliminating the federal excise tax on telecommunications services, among other ideas.[17][18]

January 18, 2007
Passed, 96-2-2, view details
Dem: 42-1-2 in favor, GOP: 54-1 in favor, Ind: 0

The House of Representatives approved this measure (H.R. 4105) by a voice vote. Additional information may be found at the Library of Congress webpage here.

Articles and resources

Related SourceWatch articles


  1. Internet Taxation [1] published by Duke University
  2. Report of the Advisory Commission on Electronic Commerce [2] submitted to Congress in April 2000
  3. Internet Taxation [3] published by Duke University
  4. UNESCO Report, Globalization with a Human Face [4], presented to United Nations Educational, Scientific and Cultural Organization conference in Tokyo, Japan, July 2003
  5. Chris Atkins, "Important Tax Cases: Quill Corp. v. North Dakota and the Physical Presence Rule for Sales Tax Collection", Tax Foundation Tax Policy Blog, July 19, 2005.
  6. Internet Taxation [5] published by Duke University
  7. Internet Taxation [6] published by Duke University
  8. Internet Taxation [7] published by Duke University
  9. Internet Taxation [8] published by Duke University
  10. Chris Atkins, "Important Tax Cases: Quill Corp. v. North Dakota and the Physical Presence Rule for Sales Tax Collection" Tax Foundation, July 19, 2005.
  11. S. 2153 (109th): Streamlined Sales Tax Simplification Act
  12. S. 2152 (109th): Sales Tax Fairness and Simplification Act
  13. Brian Krebs, "States Move Forward on Internet Sales Tax", Washington Post, July 1, 2005.
  14. "Internet Tax Bills in the 108th Congress", Congressional Research Service, November 10, 2003.
  15. "Internet Tax Nondiscrimination Act Cost Estimate S.150" Congressional Budget Office, September 9, 2003
  16. "Internet Tax Legislation: Distinguishing Issues", Congressional Research Service, January 11, 2001.
  17. "Cost Estimate H.R. 3529 Internet Tax Freedom Act of 1998", Congressional Budget Office, June 23, 1998.
  18. "Cost Estimate S. 442 Internet Tax Freedom Act," Congressional Budget Office, July 30, 1998.

External resources

External articles