Taxation :: Internet Tax Freedom Act
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Editors note: This article has not be revised to reflect the amendments of the 2007 law.
The mantra of Washington is No New Taxes, and this has been applied to the Internet. The Internet Tax Freedom Act, was been celebrated for making the Internet a duty free zone. In fact, what the Internet Tax Freedom Act does is very modest.
The Internet Tax Freedom Act established a moratorium on the imposition of state and local taxes on
- Internet access (ie no bit tax) - the monthly fee paid to an ISP for service cannot be taxed nor can Northern Virginia, for example, tax the transport of Internet traffic (a huge portion of Internet traffic still gets routed threw Northern Virginia, home to the Pentagon, NSI, UUNET, and MAE-East). or
- multiple or discriminatory taxes on electronic commerce (taxes specific and unique to e-commerce).
Originally, the Act established a three year moritorium. This time period has been extended twice and is currently set to expire Nov. 1, 2014. [Tax Act 2004]
What the Act does not do, as frequently mistaken, is create some type of tax free zone. If taxes would apply to the transaction in the physical world, then it applies in the electronic world. If buying a sweater from the corner store would have tax consequences, then so would buying that sweater online.
The moratorium does not apply to such things as income taxes, corporate taxes, business licenses, franchise fees, property taxes, or fees on your telephone bills.
It also does not apply, pursuant to the Grandfather clause, in those states that beat the clock and have already imposed bit taxes. "Although the 2004 amendments extended grandfathered protection generally to November 2007, grandfathering extended only to November 2005 for taxes subject to the new moratorium but not to the original moratorium." [GAO 2007 p 7]
During the tax moratorium, Congress has, of course, requesting that studies be conducted.
Multiple & Disciminatory
"A tax is a multiple tax if credit is not given for comparable taxes paid to other states on the same transaction; a tax is a discriminatory tax if e-commerce transactions are taxed at a higher rate than comparable nonelectronic transactions would be taxed, or are required to be collected by different parties or under other terms that are more disadvantageous than those that are applied in taxing other types of comparable transactions. Generally, states and localities that tax e-commerce impose comparable taxes on nonelectronic transactions. States that have sought at one time to require that access providers collect taxes due—a process that might have been thought to have been discriminatory—have backed away from that position. Moreover, although interstate commerce may bear its fair share of state taxes, the interstate commerce clause of the Constitution requires there to be a substantial nexus, fair apportionment, nondiscrimination, and a relationship between a tax and state-provided services that largely constrains the states in imposing such taxes. Quill Corp. v. North Dakota, 504 U.S. 298, 313 (1992). " [GAO 2007 p 7]
"Internet Access Service"
"Since its 1998 origin, the moratorium has always prohibited taxing the service of providing Internet access, including component services that an access provider reasonably bundles in its access offering to consumers. However, as amended in 2004, the definition of Internet access contains additional words. With words added in 2004 in italics, it now defines the scope of nontaxable Internet access as
“a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. The term ‘Internet access’ does not include telecommunications services, except to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access.” (italics provided)
"As shown in the simplified illustration in figure 2, the items reasonably bundled in a tax-exempt Internet access package may include e-mail, instant messaging, and Internet access itself. Internet access, in turn, includes broadband services, such as cable modem and DSL services, which provide continuous, high-speed access without tying up wireline telephone service. As figure 2 also illustrates, a tax-exempt bundle does not include video, traditional wireline telephone service referred to as “plain old telephone service” (POTS), or VoIP. These services are subject to tax. For simplicity, the figure shows a number of services transmitted over one communications line. In reality, a line to a consumer may support just one service at a time, as is typically the case for POTS, or it may simultaneously support a variety of services, such as television, Internet access, and VoIP." [GAO 2007 p 8]
"Our reading of the 1998 law and the relevant legislative history indicates that Congress had intended to bar taxes on services bundled with access. However, there were different interpretations about whether DSL service could be taxed under existing law, and some states taxed DSL. The 2004 amendment was aimed at making sure that DSL service bundled with access could not be taxed." [GAO 2007 p 9]
"Figure 3 shows how the nature and tax status of the Internet access services just described differ from the nature and tax status of services that an ISP acquires and uses to deliver access to its customers. An ISP in the middle of figure 3 acquires communications and other services and incidental supplies (shown on the left side of the figure) in order to deliver access services to customers (shown on the right side of the figure). We refer to the acquisitions on the left side as purchases of “acquired services.” For example, acquired services include ISP leases of high-speed communications capacity over wire, cable, or fiber to carry traffic from customers to the Internet backbone." [GAO 2007 p 10]
"Purchases of acquired services are subject to taxation, depending on state law, because the moratorium does not apply to acquired services. As noted above, the moratorium applies only to taxes imposed on “Internet access,” which is defined in the law as “a service that enables users to access content, information, electronic mail, or other services offered over the Internet.…” In other words, it is the service of providing Internet access to the end user—not the acquisition of capacity to do so—that constitutes “Internet access” subject to the moratorium.
"Some providers and state officials have construed the moratorium as barring taxation of acquired services, reading the 2004 amendments as making acquired services tax exempt. However, as indicated by the language of the statute, the 2004 amendments did not expand the definition of “Internet access,” but rather amended the exception from the definition to allow certain “telecommunication services” to qualify for the moratorium if they are part of the service of providing Internet access. A tax on acquired services is not a tax directly imposed on the service of providing Internet access.
"Our view that acquired services are not subject to the moratorium on taxing Internet access is based on the language and structure of the statute, as described further in the appendix. We acknowledge that others have different views about the scope of the moratorium. Congress could, of course, deal with this issue by amending the statute to explicitly address the tax status of acquired services." [GAO 2007 p 10]
Even the Internet Tax Freedom Act deals with child protection. In its final days before the Senate, Sen. Coats successfully added an amendment removing the benefit of the tax moratorium from those commercial web sites that engages in the business of selling material that is harmful to minors unless such sites utilize the defenses mentioned in COPA (i.e., use of credit cards). In addition, the tax moratorium does not apply to ISPs unless they offer to their new customers, either for a fee or a no charge, "screening software that is designed to permit the customer to limit access to material on the Internet that is harmful to minors."