Broadly speaking, Internet transactions include sales conducted over the Internet (think about the last time you bought a book over the Internet or your company bought 100 computers over the Internet), sales of Internet access (that bill that shows up every month), and sales of services used in connection with Internet access (e.g., Web page design and hosting).
So, what happened this year? Lots of discussion of the issues, lots of suggestions, but no final answers. The Advisory Commission on Electronic Commerce (ACEC), established pursuant to the 1998 Federal Internet Tax Freedom Act, held several contentious meetings, including one in Dallas earlier this year. However, on most of the key issues, the ACEC was unable to reach the two-thirds majority required by Congress for formal recommendations. Nonetheless, a simple majority of the ACEC made specific tax suggestions to Congress, including a proposal to prohibit tax on sales of digitized goods and products, and on their nondigitized counterparts. Thus, downloading a digital CD from the Internet for a $15 fee wouldn’t trigger a sales tax, nor would buying a "traditional" CD from your local store.
Although Congress is unlikely to adopt any significant Internet legislation this year, Texas may very well enact legislation addressing Internet-related taxation. Of the several groups that studied Internet taxation this year, one of the most active is Texas’ E-Commerce and Technology Advisory Group (E-TAG).
Formed at Comptroller Carole Keeton Rylander’s request, E-TAG set out to analyze Internet-related tax policy issues and make recommendations to the comptroller and the Texas Legislature. E-TAG’s report, which should be final by year end, is expected to recommend several legislative changes to encourage expansion of Internet access to people and areas without adequate access (e.g., by raising the amount of the monthly Internet access fee that is eligible for sales tax exemption and by offering incentives in connection with certain business equipment) and to encourage the development and use of Internet services in Texas (e.g., by continuing a phase-in of an exemption for certain Internet-related services like data processing).
E-TAG has already recommended that Texas become a "participating state" in the streamlined sales tax project, a multistate project trying to develop tax policies that could be adopted by multiple states, and Texas was certified as a participating state this November. So the next time you buy that book or CD over the Internet, remember that taxing authorities across the country are working to find just the right tax policy for all those Internet sales.
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