Federal Law: Internet Tax Freedom Act

On March 13, 1997, Rep. Christopher Cox (R-CA) introduced H.R. 1054 in the House and Sen. Ron Wyden (D-OR) introduced S. 442 in the Senate. These bills, after significant debate and amendment, eventually became the Internet Tax Freedom Act. Both bills supported the proposition that there should be a national moratorium on "any tax or fee directly or indirectly on the Internet or interactive computer services or on the use of the Internet or interactive computer service."

The House approved a new version of H.R. 1054, H.R. 4105, on June 23, 1998, and the Senate approved S. 442 on October 8, 1998. Bill Clinton signed the bill into law on October 21, 1998, granting the three year moratorium effective from October 1, 1998 through October 21, 2001. The Internet Tax Freedom Act reflects three principles:

1. Information should not be taxed;
2. The Internet, as compared to traditional brick-and-mortar businesses, is more susceptible to multiple and discriminatory taxation; and
3. E-commerce and the Internet need time to develop without a discriminatory tax system hindering growth (and more time is needed to study the issue of taxing the Internet).

More information about the legislative history of the Internet Tax Freedom Act with links to the original bills can be found at http://www.house.gov/cox/nettax/Web-history.html. The "Plain English" Summary of the Internet Tax Freedom Act can be found at http://www.house.gov/cox/nettax/lawsums.html.

Summary

The Internet Tax Freedom Act established a three year period in which certain taxes cannot be imposed on the Internet or on certain transactions associated with the Internet. The Act provides for the following:

Three year moratorium on placing any special taxes on the Internet, and a three year moratorium on placing multiple and discriminatory taxes on electronic commerce.

Thus, subject to exceptions and interpretation, ITFA:

• Bars both state and local governments from taxing Internet access during the moratorium.
• Bars state and local governments from imposing taxes on e-commerce that would cause the participants to be subject to taxation in multiple states.
• Bars any new taxes from being applied to those involved in commercial transactions over the Internet.
• Bars taxes from being imposed on the sale of goods and services that are sold exclusively over the Internet with no comparable offline equivalent.

The moratorium contains a grandfather clause that allows ten states (including Texas) that already taxed access to the Internet to continue to do so if they so elected (meaning that the states which enforced and actually collected such taxes may continue to do so).

Established a Commission to study the question of remote sales over the Internet.

• Established the Advisory Commission on Electronic Commerce (ACEC) which was directed to report to Congress in eighteen months on whether e-commerce should be taxed. Secondly, if the Commission decided e-commerce should be taxed, the Commission was charged with recommending how it could be taxed so as not to be subject to special, multiple, or discriminatory taxes.

No Federal taxes should be placed on Internet access or on e-commerce.

• Expresses the sense of Congress that the federal government should not impose taxes on Internet access or electronic commerce.

Declares that the Internet should be a tariff-free zone.

• The Act calls on the Clinton Administration to work through the EU and WTO to keep e-commerce and the Internet free from tariffs and discriminatory taxes.

ITFA does not impose an absolute moratorium on Internet taxes. As evidenced by Texas continuing to tax multiple aspects of Internet commerce (see discussion of Texas law, infra), ITFA does allow states, in some circumstances, to tax not only Internet-related services and transactions, but also Internet access.