State and Local Sales and Use Taxes and Internet Commerce Page: 5 of 16
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CRS-2
23 other states followed suit and implemented a general sales tax.5 At the time, the
sales tax was relatively easy to administer and could raise a significant amount of
revenue with a relatively low rate.6 Given the relative success of the sales tax in
raising revenue, 45 states and the District of Columbia added the sales tax to their tax
infrastructure by the late 1960s. The last of the 45 states to enact a general sales and
use tax was Vermont in 1969.7
What Are "Internet Taxes"? Over the last several years, a number of bills
have been introduced in Congress that address "Internet taxes."' For this report, and
in the majority of the legislation introduced, "Internet taxes" refer to two sub-federal
taxes: (1) state sales taxes on Internet access services (sometimes referred to as
Internet access taxes) and (2) state sales and use taxes on products and services
purchased over the Internet. Internet access taxes, in states where they exist, are
typically a sales tax (or gross receipts tax, GRT) on Internet access services.9 The
Internet Tax Freedom Act (ITFA) defines Internet access service as a service "...that
enables users to access content, information, electronic mail, or other services offered
over the Internet...."0 The economic burden of an Internet access tax is shared by
access providers (such as America Online and Earthlink) and consumers of Internet
services.
The most recent extension of the Internet tax moratorium (P.L. 108-435)
prohibited Internet access taxes unless they existed before the original passage of the
ITFA in October 1998. The extension of the moratorium expires November 1, 2007.
A permanent prohibition of Internet access taxes would prevent state and local
governments from ever assessing a sales tax (or GRT) on the provision of these
services. Some observers have argued that the definition of Internet access should
be broadened to ensure that all means of connecting to the Internet such as
through digital subscriber lines (DSL) are treated equally.
The most recent moratorium extension modified the moratorium to include new
taxes on DSL (those not existing before November 1, 2003). Under the original
5 Fox, William F., ed., Sales Taxation: Critical Issues in Policy and Administration, Sales
Tax Trends and Issues, by Ebel, Robert and Christopher Zimmerman (Westport, CT:
Praeger, 1992), pp. 3-26.6 The highest rate in 1934 was 3%, which was considered quite high at the time. Today, in
some Oklahoma jurisdictions, the rate can be as high as 9.75%.
7 The five states without a state sales and use tax are: Alaska, Delaware, Montana, New
Hampshire, and Oregon. Alaska allows local jurisdictions to impose a local sales tax.
8 For a review of Internet related legislation introduced in the 108th Congress, see CRS
Report RL33261, Internet Taxation: Issues and Legislation in the 109th Congress, Steven
Maguire, Nonna A. Noto.
9 A gross receipts tax, such as New Mexico's, is a business tax that is levied on all of the
revenues generated by a business operating in the state. The grand-fathering provision in
the Internet Tax Freedom Act, allowed states with Internet access taxes in place to keep
them. The current list of states with Internet access taxes: New Mexico, North Dakota,
Ohio, South Dakota, Tennessee, Texas (with a $25 exemption), and Wisconsin.10 P.L. 105-277, Title XI.
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Maguire, Steven. State and Local Sales and Use Taxes and Internet Commerce, report, March 9, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs9320/m1/5/?rotate=90: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.