Prepared by Annette Nellen
This page includes background papers on electronic-commerce taxation (also known as Internet Taxation) issues, statistics, work being done on the issues by various groups, and several points to consider in examining how various tax rules should (or should not) apply to e-commerce. Below are various links to several other e-commerce taxation papers, and well as legislative information.
NOTE: Some of the papers originally linked on this page have been removed by their author, likely due to currency. Sorry for any broken links.
Outlines and Reports Explaining E-Commerce Tax Issues by Annette Nellen
Legislative Proposals Related to E-Commerce Taxation:
Federal August 2004 Update on the Internet Tax Moratorium
Governmental Reports on E-Commerce Taxation:
Federal Government - Reports
California - Legislation and Reports
Federal Advisory Commission on E-Commerce Activities
This section includes a link to the ACEC report + summaries and links to e-commerce taxation bills and hearings of the 106th Congress
Organizations and Commissions - Reports and Activities
Streamlined Sales and Use Tax Project
International - reports from the OECD and various countries
Other organizations and reports
Other Links, Reports and Information About E-Commerce and Taxes (newsletters, reports on effect of e-commerce on sales/use tax collection, state tax updates, and more)
Overview to Internet Taxation Issues, published by Bloomberg BNA Internet Law Resource Center (April 2014)
E-Commerce Taxation - update presentation of 8/15/08
Internet Era Questions for Individual Clients, AICPA Tax Insider, 1/10/08
Overview to federal and state e-commerce tax issues presentation outline 11/3/06
Let's say goodbye to the Internet tax moratorium Silicon Valley/San Jose Business Journal, 8/10/07 and Portland Business Journal, 8/17/07
Chapter from the Internet Encyclopedia, 2004, 11 pages
Overview to E-Commerce Taxation [9-01] (fairly short)
Should E-Commerce Be Taxed? - answer to the question and some related background information (June 2001)
Overview to key activities in the e-commerce taxation area - March 2000 to March 2001 (there is a small amount of overlap with the above longer outline)
Internet Tax Bills in the 107th Congress: A Brief Comparison, December 2001
In 2001, the moratorium was extended to November 1, 2003 (P.L. 107-75; 11/28/01). It was extended once more, retroactively, to November 1, 2007 (Internet Tax Nondiscrimination Act, P.L. 108-435; 12/3/04). The 2004 extension also included the following provisions:
This change is due to confusion over whether DSL services are covered by the original moratorium language. Some states tax DSL on the basis that it consists of both Internet access services and telecom services. DSL providers argue that such treatment puts them at competitive disadvantage with cable modem and direct satellite providers.
H.R. 691 - "to provide a credit against income tax for businesses furnishing broadband services to underserved and rural areas"
H.R. 2267 - Internet Gambling Regulation, Consumer Protection, and Enforcement Act
H.R. 1675 and H.R. 49 (Cox) and S. 52 (Wyden) - makes the Internet tax moratorium permanent and removes the grandfather provision that about 8 states are under. Also see S. 150 (Allen) passed on 4/29/04.
S. 150 extends the moratorium and grandfather provision retroactively until 11/1/07. It also provides that the term "internet access service" does not include telecom services, except to the extent such services are purchased, used, or sold by a provider of Internet access to provide Internet access. S. 150 also calls upon the GAO to conduct a study due 11/1/05 on the impact of the moratorium on state and local governments and broadband deployment.
Cost estimate for H.R. 49 by the CBO (7/18/03)
Report on concern over potential revenue cost to the states - CBPP, 10/03
National Governor's Association concern over definition of Internet access (10/03)
H.R. 49 was passed by the House on September 17, 2003
Testimony on H.R. 49 before the Subcommittee on Commercial & Administrative Law of the Committee on the Judiciary on April 1, 2003:
The Honorable James S. Gilmore, III - former governor of Virginia
Jack Kemp, Co-director, Empower America
Harley T. Duncan, Executive Director of the Federation of Tax Administrators
Harris N. Miller, President of the Information Technology Association of America
Press release from Congressman Cox, 3/31/03
Testimony before the Senate Committee on Commerce, Science & Transportation on July 16, 2003.
H.R. 768 (English) - provides for a broadband internet access credit consisting of 2 components: (1) Current Generation Broadband Credit equal to 10% of the "qualified expenditures incurred with respect to qualified equipment providing current generation broadband services to qualified subscribers and taken into account with respect to such taxable year;" and (2) Next Generation Broadband Credit equal to 20% of the "qualified expenditures incurred with respect to qualified equipment providing next generation broadband services to qualified subscribers and taken into account with respect to such taxable year." Also see H.R. 267.
One bill becomes law! H.R. 1552 to extend the moratorium to November 1, 2003 was signed by President Bush on November 28, 2001 (Public Law No: 107-75) - click here.
Joint Committee on Taxation - Overview of Issues Related to the Internet Tax Freedom Act and of Proposals to Extend or Modify the Act, July 30, 2001, JCX-64-01.
S. 1567 (Enzi) - would extend the Internet Tax Freedom Act moratorium through December 31, 2005. It would specify that the definition of "Internet access services" means "services that combine computer processing, information storage, protocol conversion, and routing with transmission to enable users to access Internet content and services. Such term does not include receipt of such content or services." The bill includes a sense of Congress that the states and localities should work towards a streamlined sales tax system and specifies elements of such a system.
The bill also calls for a study: "It is the sense of Congress that a joint, comprehensive study should be commissioned by State and local governments and the business community to determine the cost to all sellers of collecting and remitting State and local sales and use taxes on sales made by sellers under the law as in effect on the date of enactment of this Act and under the system described in subsection (a) to assist in determining what constitutes reasonable compensation."
The bill also allows the states to enter into a Interstate Sales and Use Tax Compact providing for a streamlined sales tax system. For states joining the compact, and once 20 states have joined, authority may be granted by Congress (it must take action for this to happen) allowing such states to collect sales and use tax from remote vendors who do not qualify for a de minimis exception. Authorization for the Compact expires if the Compact is not been formed by January 1, 2005.
Finally, the bill includes a sense of Congress "that before the conclusion of the 107th Congress, legislation should be enacted to determine the appropriate factors to be considered in establishing whether nexus exists for State business activity tax purposes."
S. 1542 (Enzi) - would extend the Internet Tax Freedom Act moratorium through December 31, 2005. It would also clarify the definition of Internet access services to be: "services that combine computer processing, information storage, protocol conversion, and routing with transmission to enable users to access Internet content and services. Such term does not include receipt of such content or services." The bill also calls for a mechanism (a compact) to encourage states to streamline their sales tax systems with states being able to get vendors to collect use tax if a specified number of states adopt the new system. Also calls upon Congress to create nexus standards for business activity taxes before the end of the 107th Congress.
S. 1525 (Allen) - would extend the Internet Tax Freedom Act moratorium for another 5 years without any changes.
S. 1504 (Dorgan) - would extend the Internet Tax Freedom Act through June 30, 2002. Also includes a resolution: "It is the sense of the Congress that State governments and interested business organizations should expedite efforts to develop a streamlined sales and use tax
system that, once approved by Congress, would allow sellers to collect and remit sales and use taxes without imposing an undue burden on interstate commerce."
S. 1481 (Wyden) - would extend the Internet Tax Freedom Act without changes, through October 21, 2003. Includes a sense-of-congress statement that "State governments and interested business organizations should expedite efforts to develop a streamlined simplified plan for
protecting State revenues affected by Internet use without unnecessarily burdening interstate commerce."
H.R. 2526 (Goodlatte) - proposes to make the Internet Tax Freedom Act moratorium permanent and remove the grandfather provision that allowed states that were taxing internet access fees prior to October 1, 1998 to continue to do so. Also proposes guidance on when a multistate company is subject to business taxes in a state: "No State or subdivision thereof shall have power to impose, for any taxable year ending after the date of enactment of this title, a business activity tax on any person relating to such person's activities that affect interstate commerce, unless such person has a substantial physical presence in such State or subdivision." Guidance is provided on "substantial physical presence."
H.R. 2421 (Stearns) - proposes an exercise of congressional power under article I, section 8, clause 3 of the Constitution (to regulate commerce) to give sole responsibility and authority to the federal government to regulate digital commercial transactions. This would/could prohibit states from taxing digital commercial transactions.
H.R. 1552 ( Cox) - extends the ITFA moratorium through November 1, 2003.
Passed in House on October 16, 2001; sent to Senate. Passed in Senate on November 15, 2002. President signed on Nov. 28, 2001.
S. 664 (Gregg) - the "New Economy Tax Fairness Act" or NET FAIR Act provides that no state may assert any business activity tax or impose sales and use tax collection obligations on a vendor that does not have a "substantial physical presence" in the State. The bill provides a list of activities which do not constitute a substantial physical presence. The list of "protected" activities includes solicitation of orders by the vendor or the vendor's representative for the sale of tangible or intangible personal property or services if the orders are approved or rejected outside of the state and approved orders are filled by delivery from a point outside of the State, presence or use of intangibles (such as trademarks or electronic signals or web pages) in the state, use of a web site, and use of an unaffiliated contractor in the state to perform warranty or repair work on property sold by a vendor located outside of the State. The "protections" do not apply to a vendor incorporated in the state or any individual domiciled or a resident of the State. An agency relationship may constitute a "substantial physical presence" in the State. An agency relationship only exists if it "(1) results from the consent by both persons that one person act on behalf and subject to the control of the other; and (2) relates to the activities of the person within the State." The provision is effective upon enactment and so will not invalidate collection of any business activity tax imposed prior to that date (even though it violates one of the "protections'). If a vendor terminates its "substantial physical presence" in the State, the State can no longer after that point impose an obligation to pay a business activity tax or to collect and remit a sales or use tax upon the vendor.
Senator Gregg notes: "NET FAIR provides legal certainty for companies and consumers that engage in interstate commerce via the Internet, telephone, or mail order. This bill adheres to our Founding Fathers' tenet of 'no taxation without representation' by codifying fair taxation principles. We cannot stand idly by and allow this new economic avenue to be hampered with new taxes. This legislation does not preempt a State's right to tax commerce; however, it does protect businesses and consumers from unfair taxation on interstate commerce and from what could be a crippling effect on the growth of the new 21st Century economy." [Congressional Record of 3/29/01, S3172]
S. 664 is identical (other than the name was changed) to S. 2401 introduced by Senator Gregg in the 106th Congress.
S. 589 (Smith) - would make the Internet Tax Freedom Act moratorium permanent, but keep the grandfather provision which allows states to impose taxes on Internet access if such taxes were generally imposed and actually enforced prior to October 1, 1998.
S. 512 (Dorgan) - extends the Internet Tax Freedom Act moratorium on multiple and discriminatory taxes for 4 years (through December 31, 2005) and provides that states that sufficiently simplify their sales/use tax systems will be allowed to collect sales/use tax from remote vendors. S. 512 provides criteria for a simplified sales tax system. The bill also calls upon the States to take the lead in developing and implementing a simplified, non-discriminatory sales tax system. In addition, S. 512 calls for a "joint, comprehensive study ... by State and local governments and the business community to determine the cost to all sellers of collecting and remitting State and local sales and use taxes on sales made by sellers under the law as in effect on the date of enactment of [S. 512] and under the [streamlined sales and use tax system called for in S. 512] to assist in determining what constitutes reasonable compensation." Finally, S. 512 calls for a single uniform statewide use tax rate on all remote sales.
H.R. 1410 (Istook) - same as S. 512.
Testimony from the March 14, 2001 Hearing of the Senate Committee on Commerce, Science & Transportation (scroll down to find the testimony).
Testimony from the August 1, 2001 Senate Finance Committee hearing.
S. 288 (Wyden) - extends the Internet Freedom Act moratorium on multiple and discriminatory taxes for 5 years (through December 31, 2006) and provides a permanent ban on taxes on Internet access. S. 288 also includes a Sense-of-the-Senate resolution providing criteria for simplifying the sales and use tax, which if followed by states could enable them to collect use taxes from remote sellers.
S. 245 (Smith) - "To make permanent the moratorium on the Federal imposition of taxes on the Internet."
S. 246 (Smith) - "To extend the moratorium on the imposition of taxes on the Internet for an additional 5 years."
[NOTE: Consumers in states with sales and use tax still owe use tax on purchases of taxable property (generally tangible personal property) from out-of-state vendors who do not charge sales tax.]
`(1) Current Generation Broadband Credit equal to 10% of the qualified expenditures incurred with respect to qualified equipment offering current generation broadband services to rural subscribers or underserved subscribers.
`(2) Next Generation Broadband Credit equal to 20% of the qualified expenditures incurred with respect to qualified equipment offering next generation broadband services to all rural subscribers, all underserved subscribers, or any other residential subscribers.
The ITFA moratorium does not do much other than prevent state and local governments from applying taxes to Internet access. Thus, making the moratorium permanent will likely cause no appreciable harm to state and local governments (since most were not taxing Internet access prior to the ITFA).
Report from CBPP - "A Five-year Extension of The Internet Tax "Moratorium" Would Further Erode The Tax Base of States And Localities" (skim)
SEC. 8003. RATIFICATION OF INTERNET INTELLECTUAL INFRASTRUCTURE FEE. (a) The 30 percent portion of the fee charged by Network Solutions, Inc. between September 14, 1995 and March 31, 1998 for registration or renewal of an Internet second-level domain name, which portion was to be expended for the preservation and enhancement of the intellectual infrastructure of the Internet under a cooperative agreement with the National Science Foundation, and which portion was held to have been collected without authority in William Thomas et al. v. Network Solutions, Inc. and National Science Foundation, Civ. No. 97-2412, is hereby legalized and ratified and confirmed as fully to all intents and purposes as if the same had, by prior Act of Congress, been specifically authorized and directed.
(b) The National Science Foundation is authorized and directed to deposit all money remaining in the Internet Intellectual Infrastructure Fund into the Treasury and credit that amount to its Fiscal Year 1998 Research and Related Activities appropriation to be available until expended for the support of networking activities, including the Next Generation Internet.
Information from Congressman Terry, sponsor of H.R. 749.
Query: Is this a tax on Internet access? Perhaps, but it was in place and approved by Congress prior to enactment of the Internet Tax Freedom Act.
Extended on September 26, 2001
SB 394 was signed by Governor Davis on 9/26/01 to extend the California ITFA to "until January 1, 2004 ... provided that the interim report required by Section 38066 [SB 1933] is submitted to the Governor and the Legislature on or before December 1, 2002. If the interim report required by Section 38066 is not submitted to the Governor and the Legislature on or before December 1, 2002, this part shall remain in effect only until January 1, 2003, and as of that date is repealed."
Obtain full text of SB 394 (Chapter 343) by searching for SB 394 - click here.
HTML Adobe Acrobat
Accompanying Report Supplements: HTML, Acrobat
The GBDe is a group of international companies working together to resolve various issues surrounding e-commerce.
A group of CEOs from 12 computer companies (including HP, Sun, Apple, IBM and Dell) that advocate positions on certain public policy matters.
S.Con.Res. 52 (106th Congress) proposes a sense of Congress opposition to a bit tax on Internet data mentioned by the U.N. It notes that Americans would be disproportionately affected by a global Internet tax. Also see H.Con.Res. 172.
Sales Tax Q & A (on nexus, compliance, exemptions, drop-ship, internet taxation, taxability)
Summary: About 80% of the sales on-line are between businesses. The June 1999 E&Y study concluded that 63% of business-to-consumer online sales were non-taxable (such as airline tickets, gambling, and interactive games). Of the remaining 37% of business-to-consumer sales, sales tax was paid on 4% (4% of the 100% of business-to-consumer sales), and 20% was a substitute for other remote sales for which no tax was collected, leaving 13% of total business-consumer sales untaxed. The study applied an average state and local sales tax rate of 6.5% to determine that the estimated sales tax loss was $17 0 million for 1998, representing one-tenth of 1% of total state and local sales tax collections.
Critique: While the dollars of lost sales and use taxes is very small now, there is concern that with the rapid increase in e-commerce volume, the loss will escalate, harming states and cities which often have restrictions on how to raise revenues.
Summary: Application of existing sales and use taxes to e-commerce could reduce the number of online buyers by 25% and decrease the amount of online spending by 30%.
Other e-commerce taxation papers by Professor Goolsbee - click here.
- Arthur J. Cordell (Canada) paper: "New Taxes for a New Economy"
- Luc Soete and Karin Kamp (The Netherlands) paper: "The 'BIT TAX': the case for further research"
- The Federation of Electronics Industry paper against a bit tax: "FEI position paper on the 'Bit Tax' Proposal"
In late 1999, the SEC sent a letter to the EITF listing several types of transactions of Internet companies and seeking guidance on how they should be reported. Several of these items are listed below. The status can be tracked at the FASB web site.
Issue No. 99-14, "Recognition of Losses on Firmly Committed Executory Contracts"
Issue No. 99-17, "Accounting for Advertising Barter Transactions"
Issue No. 99-19, "Reporting Revenue Gross versus Net"
Issue No. 99-O, "Accounting for the Costs of Developing a Web Site"
Issue No. 99-P, "Application of AICPA Statement of Position 97-2, Software Revenue Recognition, to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware"
Issue No. 99-V, Remaining Issues from the SEC's October 18, 1999 Letter to the EITF
Issue 00-2, Accounting for Web Site Development Costs (consensus reached in March 2000)
The links below are not intended as endorsements of any of the sites, but just as examples of what exists online to assist e-commerce businesses.
Safeselling.org - information from the ABA Business Law Section
Safeshopping - information from the ABA Business Law Section
Digital Commerce Center from USC
Congressional Research Service (CRS) Report - Internet and E-Commerce Statistics: What They Mean and Where to Find Them on the Web, by Rita Tehan, October 2000
Congressional Research Service (CRS) Report - Internet: An Overview of Key Technology Policy Issues Affecting Its Use and Growth (2006)
GAO - International Electronic Commerce (3/02)
Progressive Policy Institute report on the New Economy, June 2002
Doing Business on the Internet - Library of Congress
Last updated October 13, 2018
The views and opinions expressed in this page and its attachments are strictly those of Professor Annette Nellen. The contents of this page have not been reviewed or approved by San Jose State University.Last Modified: Oct 14, 2018