Brazil: Brazilian and U.S. Power to Tax Internet Access

Last Updated: 9 July 2003

By Roberto Greco de Souza Ferreira, associate with Stroeter, Royster & Ohno - Advogados (associated with Steel Hector & Davis LLP), São Paulo.

There has been worldwide debate involving Internet taxation, including taxation of access to the Internet, regardless of the infrastructure used by Internet service providers to furnish such access.1 Moreover, in each country’s legal system there also has been debate concerning which level of the government (federal, state, or local) can impose taxes on access to the Internet.

Not surprisingly, legal controversies involving taxation of access to the Internet are not different in the United States or in Brazil. The purpose of this paper is to make a brief comparative analysis between taxation of access to the Internet in each country, focusing primarily on the power of the states of both countries to tax these activities.

Taxation of Access to the Internet in Brazil

The Brazilian Federal Constitution is the starting point to analyze the legal issues faced by the Brazilian states with respect to taxation of access to the Internet.2

The Brazilian Constitution extensively enumerates all taxes that may be imposed by each level of the government.3 The Brazilian Constitution grants states the power to impose taxes on the sale of goods and the performance of communication services, and grants local governments the right to impose taxes on the performance of services of any nature.4

Taking into consideration the existing legal structure, the controversies involving taxation of access to the Internet are limited to two points of view; both depend upon the nature of services rendered by ISPs. First, assuming that ISPs perform communication services by linking the Internet user to the World Wide Web, they may only be subject to a communication tax imposed by the states. Second, assuming that ISPs perform common services that cannot be considered communication services (ISPs use an existing communication infrastructure — dial-up or cable modems — to link the Internet user to the World Wide Web), they may only be subject to a service tax imposed by the municipalities.

Moreover, apart from taxation, the Brazilian Congress passed a statute, the General Telecommunications Law, in which Internet access is not defined as a telecommunications service, but rather as a value-added service.5

Both standpoints already have been confronted by the Brazilian courts. In the beginning, there was no consent among the lower state courts. However, despite the General Telecommunications Law stating that Internet access is a value-added service, in 2001, the Superior Court of Justice, Brazil’s second highest court, ruled that ISPs render communication service and, hence, are subject only to a communication tax imposed by the states.6 More recently, the Superior Court of Justice upheld its first decision, ruling that two large Brazilian ISPs are subject to a communication tax on the ground that the nature of their services are essentially communication.7

Unless such an understanding is overruled by the Federal Supreme Court, Brazil’s highest court, the theory that ISPs render communication services, for tax purposes, will prevail. Therefore, the Brazilian states most likely will have the power to impose taxes on access to the Internet.

Taxation of Access to the Internet in the United States

Similar to the Brazilian tax system, the starting point to understanding the legal issues faced by the American states in taxing access to the Internet is the United States Federal Constitution. Unlike the Brazilian Constitution, which lays out all taxes that may be imposed by each level of the government and, therefore, grants explicit tax jurisdiction to both the states and the local governments, the United States Constitution limits the liberty of such political entities to impose certain restrictions on the power to tax, the most important clauses being the Due Process and Commerce clauses.8

Although the structure of the United States tax system does not permit constitutional conflicts between states and local governments on the power to tax access to the Internet, many legal controversies have arisen because there is no uniform policy on the taxation of access to the Internet among the states. While some states tax access to the Internet as a telecommunications service, others tax access to the Internet as an information or data-processing service. Others simply do not tax access to the Internet. 9

In an effort to minimize such a disparity concerning taxation on access to the Internet, the United States Congress passed the Internet Tax Freedom Act. Among other things, the act imposed a three-year moratorium on state and local taxes on access to the Internet until October 21, 2001.10 Such a statute grandfathered state and local taxes "generally imposed and actually enforced prior to October 1, 1998".11 Accordingly, many states such as Connecticut, Iowa, Nebraska, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, and Wisconsin that were taxing access to the Internet prior to October 1, 1998, continued to do so.12

It should be noted that Internet access is not a telecommunications service under the Internet Tax Freedom Act. Instead, it is defined as "a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may include access to proprietary content, information and other services as part of a package of services offered to users".13 This definition does not include telecommunications. Curiously, such a definition is similar to the Brazilian Congress’ definition of Internet, but different from the Brazilian courts’ approach.

Unable to solve the debate over taxation on access to the Internet, the U.S. Congress passed the Internet Tax Nondiscrimination Act, extending the moratorium on Internet access taxes until November 1, 2003.14 Accordingly, the ability of the U.S. states to tax access to the Internet remains unresolved since definite resolution by Congress is pending.


Despite the differences between the Brazilian and the U.S. tax systems, it is clear that taxation on access to the Internet is a controversial subject in both countries. While the ability of the Brazilian states to tax access to the Internet depends upon a decision from the Brazilian Supreme Court, the ability of the U.S. states to tax access to the Internet depends upon a political decision from Congress. In the meantime, since judicial and legislative decisions may take a long time, the lack of guidance may harm taxpayers in both countries who will have to comply with rules emanated from some taxing states.


  1. See Organisation for Economic Cooperation and Development (OECD), Electronic Commerce: Taxation Framework Conditions (1998), at
  2. Constituição Federal [C.F.] [Constitution] (1988) (Braz.).
  3. Id. at arts. 149-162.
  4. Id. at arts. 155, II, and 156, III.
  5. Law No. 9.472, de 16 de julho de 1997, D.O.U. de 17.07.1997, arts. 60-61.
  6. Superior Tribunal de Justiça [Superior Court of Justice], STJ, RESP No. 323358, Relator: Ministro José Delgado, 21.06.2001, D.J.U. 03.09.2001.
  7. STJ, SS No. 1084, Relator: Ministro Presidente do STJ, 03.02.2003, not published yet in the D.J.U.
  8. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), wherein the Supreme Court ruled that the following four-part test must be satisfied before a tax can pass a Commerce Clause challenge: 1) a tax must be applied to an activity with a substantial nexus with the taxing state; 2) a tax must be fairly apportioned; 3) a tax must not discriminate against interstate commerce; and 4) a tax must be fairly related to the services provided by the state.
  9. See also Quill Corp. v. North Dakota, 504 U.S. 298 (1992), wherein the Supreme Court ruled that the Due Process Clause requires some nexus, definite link, or minimum contact between a state and the person, property, or transaction it seeks to tax.

  10. See Mary Clare Fitzgerald, Kenneth H. Silverberg & Mark Foster, Starting and Managing an Online Business, Chapter 4. Taxation, 1 Internet Law and Practice § 4:8 (2002).
  11. Internet Tax Freedom Act, Pub. L. 105-277, Div. C, Title XI, §§ 1100 to 1104, 112 Stat. 2681-719 (1998).
  12. Id. § 1101(a)(1).
  13. See Janet E. Moran & Jeffrey Kummer, U.S. and International Taxation of the Internet, 712 PLI/Pat 405 (2002).
  14. Id. § 1104(5).
  15. Internet Tax Nondiscrimination Act, Pub. L. No. 107-75, 115 Stat. 703 (2001).

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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