Extending the Internet Tax Moratorium and Related Issues
CRS Report for Congress
Extending the Internet Tax Moratorium and
Related Issues
Updated January 17, 2002
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Extending the Internet Tax Moratorium
And Related Issues
Summary
The Internet Tax Freedom Act, enacted in 1998, placed a 3-year moratorium on
the ability of state and local governments 1) to impose new taxes on Internet access
or 2) to impose multiple or discriminatory taxes on electronic commerce. It
grandfathered existing taxes on Internet access. The original moratorium expired on
October 21, 2001. Numerous bills to extend the moratorium were introduced in the
first session of the 107th Congress. The Congress approved H.R. 1552 (P.L. 107-75,
enacted November 28, 2001) which extended the prior moratorium by 2 years, until
November 1, 2003.
The bills under active consideration during 2001 addressed two major sets of
issues. The first centered on how long to extend the moratorium and whether to
continue to grandfather existing taxes on Internet access. The second addressed the
simplification of state and local sales and use tax systems and whether Congress was
willing to signal support for the states’ effort to have out-of-state sellers collect taxes
on interstate sales. (Tax simplification is treated as a prerequisite to Congress
granting states the authority to require tax collection by remote sellers.)
The two issues were linked. Some supporters of granting the states sales and use
tax collection authority wanted no extension of the moratorium. Others wanted the
extension to be long enough for the states to accomplish meaningful sales tax
simplification, but not so long that public perception of the Internet as a tax-free
shopping zone could become entrenched. They preferred a shorter extension of the
moratorium – of 2 years or less. They might have agreed to a longer extension if sales
tax collection provisions were included in the extension bill. Those skeptical of the
ability of state and local governments to quickly agree upon and implement
meaningful sales tax simplification favored a longer extension – of 4 or 5 years.
Those who opposed addressing the issue of tax collection by remote sellers typically
favored a longer, if not permanent, extension of the moratorium.
The moratorium extension bill that was enacted, H.R. 1552 (P.L. 107-75), did
not address the sales and use tax simplification and collection issue. However, before
voting to approve H.R. 1552 as received from the House, the Senate debated the
Enzi-Dorgan amendment (S.Amdt. 2155), which did address the issue in considerable
detail. The amendment was tabled by a vote of 57 to 43. Still, both during the debate
and after the votes in the Senate, several Senators expressed their intention to pursue
an agreement on the sales and use tax simplification and collection issues raised in the
amendment during the added 2 years of the moratorium.
Two other issues related to definitions in the Internet Tax Freedom Act were of
particular concern to state and local revenue officials. One was including otherwise
taxable products and services in the definition of tax-protected Internet access.
Another was businesses using Internet kiosks and dot-com subsidiaries to avoid sales
tax collection and other tax obligations, based on the definition of discriminatory tax.
This report will not be updated.
Contents
Introduction ................................................... 1
Moratorium Issues...............................................2
How Long to Extend the Moratorium............................2
No Extension...........................................3
Temporary Extension.....................................3
Permanent Extension.....................................3
New Internet Access Taxes....................................4
Definition of Internet Access...............................4
Arguments For Extending Moratorium on Access Taxes..........4
Arguments Against Extending Moratorium on Access Taxes.......5
Grandfathering for Existing Internet Access Taxes...................7
States with Grandfathered Taxes............................7
Removing Grandfathering An Unfunded Mandate...............8
Multiple and Discriminatory Taxes on Electronic Commerce..........10
Electronic Commerce....................................10
Multiple Taxes.........................................10
Discriminatory Taxes....................................11
Related Issues.................................................13
Collecting Sales and Use Taxes on Interstate Sales..................13
Underlying Debate over the Taxation of Internet Sales...........13
Role of Congress.......................................14
Connection to Extending the Moratorium.....................15
Streamlined Sales Tax Project (SSTP) and SSTIS..............16
Bill Provisions on Granting States Tax Collection Authority.......18
For Additional Information.......................................22
CRS Reports..............................................22
Other Congressional Reports..................................22
Hearings in the 107th Congress.................................22
Resources Available on the World Wide Web.....................23
Extending the Internet Tax Moratorium and
Related Issues
Introduction
The moratorium imposed by the Internet Tax Freedom Act1 (ITFA) in 1998
prohibited state and local governments from levying 1) new taxes on “Internet access”
and 2) any “multiple or discriminatory taxes on electronic commerce.” The Act
grandfathered taxes on Internet access that were in place prior to October 1, 1998,
thereby permitting existing access taxes to continue. The initial moratorium expiredth
on October 21, 2001. The 107 Congress approved H.R. 1552 (P.L. 107-75, enacted
November 28, 2001), extending the prior moratorium by 2 years, until November 1,
Numerous bills were introduced in the first session of the 107th Congress to
extend the moratorium. Several bills addressed other issues related to state and local
taxation of the Internet and interstate commerce.2
The main questions with regard to extending the moratorium were:
!how long to extend the moratorium – several months, 2 years, 4 or 5 years, or
permanently;
!whether to extend the moratorium on Internet access taxes permanently, but
extend the moratorium on multiple and discriminatory taxes temporarily; and
!whether to continue to grandfather existing taxes on Internet access.
A major issue raised in conjunction with extending the moratorium was:
!whether Congress would consider granting states the authority to require
remote sellers to collect sales and use taxes on interstate sales and, if so, under
what conditions.
Before voting on H.R. 1552, the Senate debated the Enzi-Dorgan amendment
to H.R. 1552 (S.Amdt. 2155), which addressed the sales and use tax collection issue
in considerable detail. The amendment was tabled by a vote of 57 to 43. However,
both during the debate and after the votes in the Senate, several Senators expressed
1The Internet Tax Freedom Act comprises Titles XI and XII of Division C of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999 (H.R. 4328, P.L. 105-
2For a side-by-side comparison and brief description of the individual bills introduced and a
summary of congressional action, see CRS Report RL31158, Internet Tax Bills in the 107th
Congress: A Brief Comparison, by Nonna A. Noto.
their intention to continue to pursue an agreement on the sales tax simplification and
collection issues raised in the Enzi-Dorgan amendment.3
Under each subheading that follows is a short description and pro-con analysis
of the issue. References are made to specific bills introduced during 2001 that took
a position on the particular issue.4 Many of the same issues remain to be addressed
when the expiration of the Internet tax moratorium approaches again, in 2003. The
discussion is organized in two parts. The first focuses on the moratorium, including
definitions in the Internet Tax Freedom Act. The second addresses issues related to
collecting sales and use taxes on interstate sales.
Moratorium Issues
The main issues with regard to extending the moratorium were how long to
extend it and whether to continue to grandfather existing taxes on Internet access.
However, state and local revenue officials were also concerned about other issues
related to definitions in the Internet Tax Freedom Act. The definition of Internet
access may be interpreted as being broad enough to exempt products and services
sold together with Internet access that might otherwise be taxable, if treated
independently. With respect to discriminatory taxes, one issue is states having to
treat Internet sales like mail-order sales for sales and use tax collection purposes.
Another issue is businesses using Internet kiosks and dot-com subsidiaries to avoid
sales tax collection and other tax obligations.
How Long to Extend the Moratorium
The first issue differentiating the Internet tax bills introduced in 2001, during the
first session of the 107th Congress, was how long to extend the prior 3-year
moratorium, which expired on October 21, 2001. The moratorium has two
components. The first prohibits state or local governments from imposing new taxes
on “Internet access.” The second prohibits them from imposing any “multiple or
discriminatory taxes on electronic commerce.”
Among the bills introduced, some would have extended both parts of the
moratorium temporarily – ranging from 8 months (S. 1504) up to 2 years (H.R.
1552/P.L. 107-75 and S. 1481), 4 years (H.R. 1410/S. 512), or 5 years (S. 246 and
S. 1525). Four bills would have made the moratorium on Internet access taxes
permanent, but extended the moratorium on multiple and discriminatory taxes
temporarily, by 4 (S. 1542, S. 1567, and S.Amdt. 2155) or 5 years (S. 288). Four
other bills would have made both parts of the moratorium permanent (H.R. 1675/S.
3Congressional Record, Daily Edition, vol. 147, Nov. 15, 2001; floor debate, S11902-15; text
of S.Amdt. 2155, S11963-64.
4For a similar analysis of bills introduced in the 106th Congress, see CRS Report RL30667,
Internet Tax Legislation: Distinguishing Issues, by Nonna A. Noto.
extended both parts of the moratorium by 2 years and a few days, until November 1,
No Extension. Some opposed any extension of the Internet tax moratorium.
This group included those who fundamentally object to federal restrictions on state
and local taxing authority. It also included those who felt that the original
moratorium was largely anticipatory in the sense that not many states were levying or
intending to levy the prohibited taxes, and that there was not likely to be a rush to
impose such taxes if the moratorium ended.
Opponents also included those who did not want the moratorium extended
unless Congress addressed the issue of sales and use taxation of interstate commerce
at the same time. They were concerned that unless Congress strongly signaled its
support for taxing Internet commerce like “bricks and mortar” commerce in the near
future, businesses would aggressively pursue methods of business organization and
Internet technology designed to avoid state and local tax liability, exacerbating an
existing problem (see the discussion of “Internet Kiosks” below).
Temporary Extension. Many of those concerned with eventually addressing
the sales and use tax collection issue were willing to simply extend the prior
moratorium temporarily, but not for too many years. They wanted any extension of
the moratorium to be long enough for the states to accomplish meaningful sales tax
simplification, but not so long that the Internet access and electronic commerce
industries could grow large and powerful enough to stop any attempt to tax them, or
that public perception of the Internet as a tax-free shopping zone could become
entrenched. From this vantage point, a 4- or 5-year extension of the moratorium
seemed too long. A shorter extension of 2 years or less was preferable.5
Permanent Extension. Supporters of permanently extending the moratorium
included those specifically opposed to taxing any activity that occurs over the Internet
(both Internet access and electronic commerce), as well as those generally opposed
to any tax. Supporters of a permanent extension of the moratorium on multiple and
discriminatory taxes were typically not interested in addressing the taxation of
interstate sales.
Some of the bills would have permanently extended the moratorium on Internet
access taxes, but temporarily extended the moratorium on multiple and discriminatory
taxes on electronic commerce for 4 or 5 years. This dichotomy reflected substantial
differences in the views of these two parts of the moratorium, discussed in more detail
in the sections that follow.
5The link between the length of the moratorium extension and the sales tax collection issue is
discussed further in the subsection below on “Connection to Extending the Moratorium” in
the section on “Collecting Use Taxes on Interstate Internet Sales.”
New Internet Access Taxes
The Internet Tax Freedom Act placed a moratorium on state and local
governments’ ability to impose new taxes on Internet access, but grandfathered
existing taxes on Internet access that were in place prior to October 1, 1998.
Definition of Internet Access. The taxation of Internet access refers to
applying state and local taxes to the monthly charge that subscribers pay for access
to the Internet through Internet service providers (ISPs). When applied, the tax on
Internet access is most commonly a retail general sales tax, but may also take the form
of other transactional taxes such as telecommunications, gross receipts, or business
and occupation taxes (see the discussion below of “States with Grandfathered
Taxes”). Among those states that do levy a sales tax on Internet access, the state
sales tax rate ranges from 4% to 6.25%.
According to Section 1104(5) of the Internet Tax Freedom Act, “The term
‘Internet access’ means a service that enables users to access content, information,
electronic mail, or other services offered over the Internet and may also include access
to proprietary content, information, and other services as part of a package of services
offered to users. Such term does not include telecommunications services.” The
breadth of this definition gives rise to the issue of including, in the definition of
Internet access, products and services that might otherwise be taxable (discussed
further in the subsection below on “Bundling of services”).
In addition to basic access to the Internet, an ISP subscription typically includes
basic services offered over the Internet, such as access to electronic mail (e-mail) and
a standard browser (Internet Explorer or Netscape Navigator). The subscription may
also include access to some proprietary information services. Internet access
subscriptions can differ substantially in the services they offer, the limit on the number
of access hours covered under the standard fee, and their price. As of fall 2001,
monthly subscription charges ranged from free, $5, or $10 for limited basic services;
to $18 to $24 for unlimited enhanced services such as those offered by America
Online (AOL), Microsoft Network (MSN), or EarthLink; and up to $30 to $50 for6
high-speed Internet access, also known as broadband.
Arguments For Extending Moratorium on Access Taxes. Supporters
of extending the moratorium on new Internet access taxes, and of removing the
grandfathering protection for existing taxes, argued that taxing Internet access would
raise the price of the service, thereby discouraging the spread of the new technology
and the growth of electronic commerce. They also argued that access taxes would
widen the digital divide between those who can afford access to the new technology
and those who cannot.7 Some also argued that access taxes are, in part, double
6High-speed Internet access or broadband service is provided by Cable-TV services, by
telephone companies through digital subscriber lines (DSL), and by satellite companies.
Explanation and price survey from “You’ve got...choices” [for Internet access], Consumer
Reports, September 2001, 12-15.
7For arguments on both sides of this and other Internet tax issues, see Advisory Commission
(continued...)
taxation if ISPs are also paying taxes on the underlying “backbone transmission”
telecommunications service used to provide Internet access.
The effort to ban Internet access taxes also can be viewed as part of the
movement to simplify or eliminate state and local telecommunications taxes and to
repeal the federal telephone excise tax. The “majority” on the Advisory Commission
on Electronic Commerce had proposed, among other items, a permanent moratorium
on Internet access taxes, simplifying state and local telecommunications taxes (in
addition to simplifying sales taxes), and repealing the 3% federal telephone excise
tax.8 These proposals were included in various bills introduced in the 106th Congress.9
Arguments Against Extending Moratorium on Access Taxes. Others
opposed extending the moratorium on new Internet access taxes and removing the
grandfathering protection for existing access taxes. They especially opposed a
permanent extension of the ban. They also opposed an extension of the ban with
Internet access defined as it currently is in the Internet Tax Freedom Act (reported
above under “Definition of Internet Access”), because of the “bundling of services”
issue (discussed in the next subsection).
States generally oppose federal efforts to restrict their taxing authority. States
also want to retain the flexibility to adapt their tax structure to the rapidly changing
telecommunications landscape. There is concern, even within the communications
industry, that the tax burden on different modes of communication be comparable.
This objective suggests that as long as other modes such as telephone (which is also
used to fax) and cable are subject to state and local taxes, the Internet should also be
taxed, so as not to grant the Internet a competitive pricing advantage. Opponents of
the moratorium refuted the double-taxation argument (explained in the previous
subsection on “Arguments for Extending Moratorium on Access Taxes”) by pointing
out that Internet service providers could be able to claim a sale-for-resale exemption
for the taxes they pay on the underlying telecommunications services.10
7 (...continued)
on Electronic Commerce, Issues and Policy Options Paper, Final draft submitted to the
Advisory Commission from the Report Drafting Subcommittee, Arlington, Virginia,
December 3, 1999, Section II, Tax Treatment of Internet Access, 6-7. The text of the Issues
and Policy Options Paper is available on the website of the Advisory Commission on
Electronic Commerce [http://www.ecommercecommission.org].
8The text of the Advisory Commission on Electronic Commerce’s Report to Congress is
available on their website [http://www.ecommercecommission.org]. The report was presented
to Congress on April 12, 2000.
9See CRS Report RL30412, Internet Taxation: Bills in the 106th Congress, by Nonna A.
Noto, and CRS Report RS20119, The Telephone Excise Tax: Revenues, Effects, and Repeal
Proposals, by Louis Alan Talley.
10In H.R. 4105 (the version of the Internet Tax Freedom Act passed by the House in the 105th
Congress, on June 23, 1998) the prohibition of multiple taxation included applying a
telecommunications tax to Internet access if a tax was also imposed on the underlying
telecommunications services used to provide Internet access without allowing a credit for other
taxes paid, a sale for resale exemption, or other mechanism for eliminating duplicate taxation.
(continued...)
Bundling of services. Typically, when taxable products or services are sold
“bundled” together with non-taxable products or services for a single price, the entire
package is taxable, unless the price of the nontaxable portion is stated separately. If
Internet access were defined more narrowly than it currently is, the issue would be
how to state the price of the basic Internet access services in the tax-protected portion
of the service package, separately from the price of the enhanced services in the11
taxable portion.
Instead, the issue here is the breadth of the definition of Internet access. States
were concerned that the existing definition in the Internet Tax Freedom Act might be
interpreted as being broad enough to exempt from tax not only basic Internet services,
such as the ability to connect to and surf the Internet and use e-mail but also a range
of other services and products sold together with Internet access that might be taxable
if purchased on their own. Some examples would be information services, cable
television, books, magazines, games, music, and movies offered online.
Increasingly, basic connection to the Internet is being sold together with a variety
of other products and services, by the same vendor, for a single fee. Many of the
additional products and services could arguably fit under the ITFA’s definition of
Internet access. If they did, then state and local governments stand to lose substantial
tax revenue on the sale of products and services that might otherwise be subject to
state and local telecommunications, sales, or franchise taxes, if they were treated
independently.
Consequently, if the ban on Internet access taxes was to continue, some state and
local governments were concerned that the definition of Internet access be narrowed.
S. 1542, S. 1567, and S.Amdt. 2155 would have added to the ITFA a definition of
Internet access services that excluded the receipt of content or ancillary services.12
(S. 1542 and S. 1567, but not S.Amdt. 2155, also would have amended the definition
of Internet access to include wireless web access services, while continuing to exclude
telecommunications services generally.)
The bill enacted, H.R. 1552 (P.L. 107-75), simply extended the prior moratorium
on new Internet access taxes for 2 years, until November 1, 2003. It did not make
any changes to the definitions contained in the original Internet Tax Freedom Act.
10 (...continued)
That provision was not included in the version of the ITFA enacted in October 1998.
11H.R. 4105 (the version of the Internet Tax Freedom Act passed by the House in the 105th
Congress, on June 23, 1998) would have protected bundled Internet access services from
taxation only if the service provider separately stated the portion of the billing that applied to
the Internet access services. That provision was not included in the version of the ITFA
enacted in October 1998.
12An alternative to trying to define tax-protected Internet access more narrowly would be
exempting from tax a dollar amount sufficient to cover the cost of basic Internet access
service. (For example, Texas exempts up to $25 of a monthly Internet access bill.) Charges
in excess of such a threshold could be subject to applicable taxes, if the states chose to tax
enhanced services.
Grandfathering for Existing Internet Access Taxes
A second area of difference among the bills to extend the Internet tax
moratorium was whether to continue the grandfathering protection provided by the
Internet Tax Freedom Act, for state and local taxes on Internet access that were
already in place at the time of the law’s enactment in October 1998. Removing the
grandfathering protection would, in effect, ban all state and local taxes on Internet
access.
Half of the bills that proposed to permanently ban Internet access taxes would
have explicitly removed the grandfathering protection for existing taxes through
specific language (H.R. 1675/S. 777, H.R. 2526, and S. 288). The other half would
have preserved the grandfathering. S. 589 would have implicitly extended the
grandfathering by simply extending the prior moratorium permanently. S. 1542, S.
1567, and S.Amdt. 2155 would have explicitly continued the grandfathering. In
contrast, the bills to temporarily extend the prior moratorium on Internet access taxes
all would have implicitly extended the grandfathering provision for existing Internet
access taxes (H.R. 1410/S. 512, H.R. 1552/P.L. 107-75, S. 246, S. 1481, S. 1504,
and S. 1525).
The bill enacted, H.R. 1552 (P.L. 107-75), implicitly extended the grandfathering
of existing Internet access taxes by simply extending the prior moratorium for 2 years,
until November 1, 2003.
States with Grandfathered Taxes. As of October 2001, 10 states had
taxes on Internet access. Eight states levy their regular retail sales tax (or other
transactional tax) on Internet access: Hawaii, New Mexico, North Dakota, Ohio,
South Dakota, Tennessee, Texas, and Wisconsin. Washington levies a business and
occupation tax in the form of a gross receipts tax. New Hampshire applies a
telecommunications services tax to two-way communications provided by certain
types of entities; this includes Internet access provided by certain cable TV
companies.
Some states that once levied a tax on Internet access have voluntarily chosen to
reduce or eliminate their tax.13
13For example, the Connecticut retail sales tax on Internet access was repealed, effective July
Department of Revenue Services, Taxation of Internet Access Provided by Community
Antenna Television Companies, Policy Statement PS 2001(8), July 2, 2001. Available online
from Tax Analysts [http://www.taxbase.tax.org], Document No. Doc 2001-20167, Electronic
Citation 2001 STT 147-3.
“Iowa eliminated the sales tax on Internet access in 1999, after the Department of
Revenue and Finance began to make serious efforts to collect the tax.” Jack Hunt, Iowa
Unlikely to Restore Tax on Internet Access, State Tax Notes, October 31, 2001, available
online from Tax Analysts, Doc. No. Doc 2001-27462, Electronic Citation 2001 STT 212-8.
South Carolina decided not to enforce collection of sales and use taxes with respect to
(continued...)
Removing Grandfathering An Unfunded Mandate. In the 106th
Congress, H.R. 3709, the Internet Nondiscrimination Act of 2000, which was
approved by the House on May 10, 2000, proposed a 5-year extension of the initial
moratorium and elimination of the grandfathering protection for existing taxes on
Internet access. In its cost analysis of H.R. 3709, the Congressional Budget Office
(CBO) determined that eliminating the grandfathering provision for existing Internet
access taxes would in itself be sufficient to subject the bill to the statutory procedural
restrictions on unfunded intergovernmental mandates.
CBO estimated that the revenue loss to state and local governments from
eliminating existing Internet access taxes alone would exceed the statutory threshold
established by the Unfunded Mandates Reform Act of 1995 (UMRA)14 at some time
during the 5-year extension of the moratorium proposed in H.R. 3709. (The
threshold for a restricted intergovernmental mandate was a revenue loss of $55
million per year in 2000 and $56 million in 2001. The threshold is adjusted annually
for inflation.) The rest of the moratorium – on new Internet access taxes and on any
multiple and discriminatory taxes on electronic commerce – could add to the cost of
the mandate. But, because these prohibited taxes do not yet exist, CBO could not
make a meaningful revenue loss estimate for them.15
In May 2000, the Federation of Tax Administrators estimated a combined
revenue loss of $75 million (from 11 states) for the fiscal year beginning July 1, 2000,
if the grandfathering clause were removed.16 An estimate compiled in March 2001 by
Tax Analysts from information provided by revenue officials (from nine states) was
that repeal of the grandfather clause would cost state governments approximately
13 (...continued)
Internet access during the period of the federal moratorium. South Carolina, Department of
Revenue, Internet Access/Electronic Commerce Moratorium, Administrative Announcement,
SC Information Letter #99-9, May 6, 1999. Available online from Tax Analysts
[http://www.taxbase.tax.org], Document No. Doc 1999-19259, Electronic Citation 1999 STT
This does not purport to be a comprehensive listing. Other states may have adopted policies
to retract their taxes on Internet access, either temporarily or permanently.
14UMRA, P.L. 104-4, 2 U.S.C. 1501-1571.
15U.S. Congressional Budget Office. H.R. 3709; Internet Nondiscrimination Act of 2000.
Mandates Statement, as ordered reported by the House Committee on the Judiciary on Maythnd
4, 2000. 106 Cong., 2 Sess., Washington, May 8, 2000. Available through the CBO
Home Page at [http://www.cbo.gov] under Cost Estimates.
16In addition to the 10 “states with grandfathered taxes” listed in the text, the estimate by the
Federation of Tax Administrators (FTA) for May 2000 included Connecticut, whose tax was
since repealed. FTA pointed out that Montana was prevented by the moratorium from
applying to Internet access charges the state’s retail telecommunications excise tax which is
levied on two-way voice, video, and data communications, regardless of the medium.
Information obtained from the Federation of Tax Administrators, Washington, DC, May 10,
$90 million in revenue loss in the first year alone.17 Both of these estimates exceed
the threshold amount subjecting an unfunded intergovernmental mandate to
procedural restrictions ($56 million in 2001).
None of the proposals to eliminate the grandfathering protection for existing
Internet access taxes, or to permanently ban new access taxes, offered federal
compensation to state and local governments for the revenue they would lose.18
The presence of an unfunded intergovernmental mandate in excess of the
threshold amount means that a point of order may be raised when a bill is considered
on the House or Senate floor.19 In the case of H.R. 3709, on May 10, 2000, a point
of order was raised, but the House voted to consider the measure despite the presence
of the unfunded mandate.20
In October 2001, the Congressional Budget Office prepared a cost estimate for
H.R. 1552, the Internet Tax Nondiscrimination Act, the bill subsequently enacted as
P.L. 107-75. The bill provided for a 2-year extension of the original moratorium,
until November 1, 2003. It continued the grandfathering protection for existing taxes
on Internet access that was provided under the original moratorium. CBO determined
that although the bill would impose an intergovernmental mandate, the revenue losses
to state and local governments would not exceed the threshold amount ($56 million
in 2001), because the grandfathering provision was extended.21
17The revenue losses for the first year of a complete ban on Internet access taxes, as estimated
by state revenue officials (listed in descending order of revenue loss for individual states),
were: Texas $45 million, Connecticut $15 million, Ohio $12 million, Wisconsin $7.5 million,
Tennessee $4 million, North Dakota $2.5 million, South Dakota $1.7 million, and New
Mexico $1 million. The revenue losses from these eight states total $88.7 million. If
Washington’s business and occupation tax is included, that is another $3.9 million, for a total
estimated revenue loss of $92.6 million. These estimates do not include revenues in those
states from taxes on Internet access that is bundled together with telephone service. Doug
Sheppard, “State Officials: Internet Access Tax Repeal Would Cost $90 Million,” Tax Notes
(published by Tax Analysts), vol. 90, no. 10, Mar. 5, 2001, 1308-09. The compilation by
Tax Analysts did not include Hawaii or New Hampshire.
18In contrast, several bills introduced in the 107th Congress in the fall of 2001 proposing a
state sales tax holiday did provide for the federal government to reimburse the states for lost
revenue: H.R. 3172 (Graham), identical bills H.R. 3301(Graham)/S. 1643 (Murray and
Snowe), and H.R. 3398 (Israel).
19For an explanation of congressional procedures required under UMRA, see CRS Report
RS20058, Unfunded Mandates Reform Act Summarized, by Keith Bea and Richard S. Beth,
Washington, February 9, 1999, 4-5.
20For an account of H.R. 3709, see CRS Report RL30412, Internet Taxation: Bills in the
21In its cost estimate, CBO determined that, by extending the prohibition on collecting certain
types of state and local taxes, H.R. 1552 would impose an intergovernmental mandate as
defined in the Unfunded Mandates Reform Act (UMRA). However, because H.R. 1552
would allow states that are currently collecting a sales tax on Internet access to continue doing
so, it would not affect state and local revenues currently being collected and, consequently,
(continued...)
Multiple and Discriminatory Taxes on Electronic Commerce
In addition to the moratorium on new taxes on Internet access, the Internet Tax
Freedom Act (ITFA) imposed a moratorium on any “multiple or discriminatory taxes
on electronic commerce.” This section of the report provides a definition of the terms
electronic commerce, multiple tax, and discriminatory tax. It also explains some of
the implications of the definition of discriminatory tax. This includes the reason why
a state cannot require an Internet seller to collect use taxes unless the seller has a
physical presence (nexus) in the taxing state. It also includes a basis for some
companies claiming that they can sell through Internet kiosks (and comparable
computer and corporate organizational arrangements) and not be subject to sales and
use tax collection requirements.
Electronic Commerce. According to the Internet Tax Freedom Act, “The
term ‘electronic commerce’ means any transaction conducted over the Internet or
through Internet access, comprising the sale, lease, license, offer, or delivery of
property, goods, services, or information, whether or not for consideration, and22
includes the provision of Internet access.”
Multiple Taxes. The ban on multiple taxes prohibits double taxation, or
overlapping taxes, by two or more jurisdictions at the same level of government.
More precisely, the ban on multiple taxes prohibits more than one state, or more than
one local jurisdiction at the same level of government (i.e., more than one county or
21 (...continued)
the cost of complying with the mandate would not exceed the threshold established in UMRA
($56 million in 2001).
U.S. Congressional Budget Office, H.R. 1552: Internet Tax Nondiscrimination Act, as
ordered reported by the House Committee on the Judiciary on October 10, 2001. Cost
Estimate, October 12, 2001. Available through the CBO Home Page at http://www.cbo.gov.
Also included in U.S. Congress, House, Internet Tax Nondiscrimination Act, Report to
Accompany H.R. 1552, Including Cost Estimate of the Congressional Budget Office, H.Rpt.
22The Department of Commerce defines e-commerce sales as “...sales of goods and services
where an order is placed by the buyer or price and terms of sale are negotiated over an
Internet, extranet, Electronic Data Interchange (EDI) network, electronic mail, or other online
system. Payment may or may not be made online.” The emphasis is on the means used to
arrange the sales transaction. No reference is made to the means of delivery. E-commerce
sales are just one part of electronic commerce as defined in the Internet Tax Freedom Act.
U.S. Department of Commerce, Economics and Statistics Administration, U.S. Census
Bureau, “Retail E-Commerce Sales in Second Quarter 2001 Were $7.5 Billion, Up 24.7
Percent from Second Quarter 2000, Census Bureau Reports,” United States Department of
Commerce News, CB01-141, August 30, 2001, p. 2, footnote 2 to Table 1. E-commerce
retail sales data is available on the U.S. Census Bureau’s website at
[http://www.census.gov/mrts/www/mrts.html].
one city) from imposing a tax on the same transaction – unless a credit is offered for
taxes paid to another jurisdiction, to eliminate double taxation.23
However, the ITFA does permit multiple sales and use taxes that are
geographically vertical. The definition of multiple tax makes an exception to permit
both a state and one or more of its subdivisions to impose their sales or use tax on the
same electronic commerce transaction. For example, the state, county, and city within
that county could all levy their sales tax on the same electronic commerce transaction.
Another exception included in the ITFA’s definition of multiple tax permits a tax
to be levied on persons engaged in electronic commerce (e.g., a personal income tax,
corporate income tax, or business activity tax) even if a sales or use tax is levied on
the transaction.
To date, multiple taxation has not been cited as an active problem. Multiple
taxation could become an issue in a situation where the location of a sale is
ambiguous. For example, consider the case of a purchase from a seller in one state,
by a person who lives in a second state, over an Internet server in a third state,
charged to a credit card account in a fourth state, and delivered as a gift to a person
in a fifth state. Multiple taxation could occur if more than one of these states claimed
the right to levy a sales or use tax on the sale, without the taxpayer being able to claim
a credit for tax paid to another state.
Discriminatory Taxes. The Internet Tax Freedom Act also prohibits
“discriminatory taxes on electronic commerce.” The Act defines several types of
discriminatory taxes.
A discriminatory tax includes any state or local tax on electronic commerce that
is not levied in the same way, at the same rate, or on the same person or entity as on
“...transactions involving similar property, goods, services, or information
accomplished through other means....” In practice, this means that transactions
arranged over the Internet are to be taxed like mail order or telephone sales. Thus,
the same nexus standards that apply to sales arranged by mail-order or telephone also
apply to Internet transactions.
Under the current judicial interpretation of nexus as applied to mail-order sales,
a state cannot require an out-of-state seller to collect a use tax from the customer
unless the seller has a physical presence in the taxing state.24 (The use tax is the
companion tax to the sales tax, applicable to interstate sales.)25 If the seller does not
23The tax credit could take the form of a resale exemption certificate.
24For additional discussion, see CRS Report RS20577, State Sales Taxation of Internet
Transactions, by John R. Luckey, and CRS Report RL30667, Internet Tax Legislation:
Distinguishing Issues, by Nonna A. Noto, section on “Role of Congress under the Commerce
Power,” 3-4.
25Every state with a sales tax has a corresponding use tax, typically defined as a tax upon the
storage, use, or consumption of tangible personal property in the state.
collect the use tax on an interstate sale, it is the buyer’s obligation to pay the tax to
his home state. But voluntary use-tax compliance by non-business customers is low.26
The definition of discriminatory tax also includes a tax that would classify
Internet access service providers or online service providers for purposes of taxing
them at a higher tax rate than generally applies to similar information services
delivered through other means.
The second part of the ITFA’s definition of discriminatory tax addresses nexus
issues. It lists conditions under which the use of a computer server, an Internet access
service, or online services, by a remote seller, does not establish nexus.
Circumstances that do not establish nexus include the sole ability to access a site on
a remote seller’s out-of-state computer server; the display of a remote seller’s
information or content on the out-of-state computer server of a provider of Internet
access service or online services; and the processing of orders through the out-of-state
computer server of a provider of Internet access service or online services. (In these
examples, “out-of-state” refers to a state other than the state wishing to tax the sales
transaction.)
Internet Kiosks. Some businesses have taken advantage of these nexus limits
in the ITFA’s definition of discriminatory tax to establish what are referred to as
“Internet kiosks.” The businesses claim that orders placed through these computer
kiosks are not subject to sales tax collection requirements. Briefly, a company already
operating a bricks-and-mortar retail business sets up a separate business or corporate
entity, sometimes referred to as a dot-com subsidiary. The subsidiary is designed to
receive sales orders over the Internet and ship the product to the customer, often
across state lines. The subsidiary’s computer terminals are placed in the parent
company’s bricks-and-mortar stores, in what is called an Internet kiosk. Because of
the abovementioned language in the ITFA, some sellers claim that a tax on an order
placed through an Internet kiosk in one state to a seller located in, and shipping from,
another state is considered a discriminatory tax, prohibited by the moratorium.
Critics of the current definition of discriminatory tax disagree with the claim that
a dot-com subsidiary does not have nexus (currently defined as physical presence) in
the state where the kiosk is located. The criticism of nexus-free status becomes even
stronger in cases where customers are permitted to return to the bricks-and-mortar
store products they ordered over the Internet and received by mail or other delivery
service. State and local governments and Main Street retailers are concerned that if
Congress does not signal its support for taxing Internet commerce like “bricks and
mortar” commerce, many types of businesses will aggressively pursue Internet
technology and business structures specifically designed to avoid state and local tax
liability.
26For further discussion, see the introduction to the section below on “Collecting Sales and
Use Taxes on Interstate Sales.”
Related Issues
Collecting Sales and Use Taxes on Interstate Sales
Under current law, sellers with nexus (defined as physical presence) in a state are
already required to collect state tax on their sales arranged over the Internet, or by
other means, to customers in that state. In-state sellers are required to collect sales
taxes. Out-of-state sellers with physical presence in the state (such as a warehouse
or retail store) are required to collect use taxes.27
If the out-of-state seller does not collect the use tax, it is the buyer’s obligation
to pay the use tax to the buyer's home state. In practice, however, voluntary
compliance by non-business purchasers is low. Consequently, states have long
wanted to be able to require out-of-state sellers without physical presence in the state
(referred to as remote sellers) to collect the use tax from the customer and remit it to
the customer’s home state. This would apply to all interstate sales, whether arranged
over the Internet, or by telephone, mail order, in person, or other means. With or
without the Internet tax moratorium, separate congressional action would be needed
in order for states to obtain the authority to require out-of-state sellers without nexus
in the state to collect use taxes from customers at the time of the sale.
A major controversy surrounding the bills to extend the Internet tax moratorium
was whether Congress was willing to include any language that signaled its support
for the states’ effort to have remote sellers collect use taxes on interstate sales. Some
of the bills introduced in the 107th Congress to extend the Internet tax moratorium did
include language addressing the use tax collection issue. The moratorium extension
bill that was enacted, H.R. 1552 (P.L. 107-75), did not. However, before voting to
approve H.R. 1552 as received from the House, the Senate debated the Enzi-Dorgan
amendment (S.Amdt. 2155 to H.R. 1552), which addressed the sales and use tax
collection issue in considerable detail. The amendment was tabled by a vote of 57 to
43. Still, both during the debate and after the votes in the Senate, several Senators
expressed their intention to pursue an agreement on the sales tax simplification and
collection issues raised in the Enzi-Dorgan amendment during the added 2 years of
the moratorium.28
Underlying Debate over the Taxation of Internet Sales. Briefly, the
conflict underlying the debate over whether Congress should support state and local
taxation of interstate sales conducted over the Internet, or by other means, is as
follows. Many state and local governments are concerned about substantial further
erosion of their sales tax base if a growing fraction of the economy can operate tax-
free over the Internet.29, 30 These can be thought of as the “consumer states.” Sales
27Similar nexus rules (physical presence in the local jurisdiction) apply to requiring sellers to
collect local sales and use taxes.
28Congressional Record, Daily Edition, vol. 147, Nov. 15, 2001; floor debate, S11902-15;
text of S.Amdt. 2155, S11963-64.
29The sales tax base has already been eroded by not taxing most services, by exempting some
(continued...)
taxes on purchases made by their residents are a major source of revenue supporting
state and local government services. This is more so for states with a sales tax but no
income tax.31 There is also a “digital divide” concern that the sales tax will become
even more regressive if higher income people have access to tax-free Internet
shopping, while lower income people do not. Joining in support of taxation are
“bricks-and-mortar” retailers who are required to collect sales tax from customers and
feel it is unfair for them to face competition from Internet merchants who are not
required to collect the parallel use tax. These “Main Street” retailers seek a level
playing field with respect to sales and use taxes.32
On the opposite side of the issue, businesses engaged in interstate commerce
point out the administrative compliance burden they could face if they were subject
to the disparate sales and use tax laws, filing requirements, and tax rates of 7,500
(now and potentially 30,000 authorized) state and local taxing jurisdictions. Joining
them in opposition to taxation are those states and localities that expect to benefit
more from the growth of Internet businesses than they would from being able to
collect use taxes on interstate Internet sales. These can be thought of as the
“technology producer states.” In addition, states with no sales tax have little reason
to pursue taxation of Internet sales.33
(The reference section at the end of this report lists the names and World Wide
Web sites of organizations that provide arguments against, followed by organizations
that provide arguments for, requiring remote sellers to collect sales and use taxes on
interstate sales. )
Role of Congress. In its 1967 National Bellas Hess34 decision, and again in
its 1992 Quill decision,35 the U.S. Supreme Court denied states the ability to require
a seller to collect use taxes on interstate mail-order sales unless the seller had a
physical presence in the taxing state. The Court concluded that the complexity of
state and local sales tax systems imposed an undue burden on interstate commerce.
However, in its 1992 Quill decision, the Court indicated that Congress has the power,
under the Commerce Clause of the U.S. Constitution, to address the issue of granting
29 (...continued)
major categories of tangible goods (such as some food, medicine, and clothing), and by the
operation of tax-free interstate mail order and telephone sales.
30This viewpoint is represented by the National Governors’ Association (NGA)
[http://www.nga.org].
31Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas,
Washington, and Wyoming. Two states have limited income taxes, on interest and dividend
income: New Hampshire and Tennessee. Of these states, Alaska has no state sales tax but
permits local sales taxes. New Hampshire has no state or local sales taxes.
32This viewpoint is represented by the e-Fairness Coalition [http://www.e-fairness.org].
33Delaware, Montana, New Hampshire, and Oregon do not levy state or local sales taxes. The
state of Alaska does not levy a sales tax, but its local jurisdictions are permitted to do so.
34National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967).
35Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
states the authority to require out-of-state sellers to collect use taxes on interstate
purchases by their residents. The Court invited the Congress to act. To date,
Congress has not addressed this issue.36
Connection to Extending the Moratorium. The bills to extend the
Internet tax moratorium took one of three basic approaches to the sales and use tax
collection issue.
!Most extension bills did not address the tax collection issue at all.
!Some bills laid out conditions under which Congress would, or might, grant
the states authority to require collection.
!Offering a middle ground, some bills included a sense of Congress provision
encouraging continued state-business efforts at sales tax simplification.
Simplifying the administration of state and local sales and use taxes is considered
a prerequisite to asking Congress to grant states the authority to require out-of-state
sellers to collect use taxes from customers on interstate sales. This applies whether
the sales are arranged in person, over the Internet, by mail order, telephone, or other
means. The practical question linked to extending the moratorium is: can the states
develop and implement a sales and use tax system that would not be an undue burden
on interstate commerce; and, if so, how long would that take to accomplish?
Often, the position taken on granting the states use-tax collection authority
affected the position taken on how long to extend the Internet tax moratorium. This
link could be present even if the moratorium extension bill did not make explicit
reference to the sales and use tax issue.
Some supporters of tax collection on remote sales wanted the extension of the
moratorium to be long enough for the states to accomplish meaningful sales tax
simplification, but not so long that the perception of the Internet as a tax-free
shopping zone became taken for granted, or that many sellers would develop dot-com
subsidiaries to avoid collecting the sales tax. They wanted to keep time pressure on
the states to accomplish simplification and on Congress to consider the collection
issue. They generally preferred a shorter extension of the moratorium. If the bill
made no mention of the tax collection issue, that generally meant supporting an
extension of 2 years (as in the bill enacted, H.R. 1552/ P.L. 107-75) or less. Those
skeptical of the ability of state and local governments to quickly agree upon and
implement meaningful sales tax simplification were willing to support a longer
extension, of 4 or 5 years, if language addressing tax collection was included in the
bill.
Opponents of taxing remote commerce favored a longer (4- or 5-year), if not
permanent, extension of the moratorium, with no mention of the sales tax
simplification and collection issue. This group included opponents of granting states
36For additional discussion, see CRS Report RS20577, State Sales Taxation of Internet
Transactions, by John R. Luckey, and CRS Report RL30667, Internet Tax Legislation:
Distinguishing Issues, by Nonna A. Noto, section on “Role of Congress under the Commerce
Power.”
interstate sales and use tax collection authority. It also included those seeking
protection from state business activity tax (BAT) liability for businesses operating in
multiple states unless they had “substantial physical presence” in a state; this is known
as the BAT nexus issue.
Streamlined Sales Tax Project (SSTP) and SSTIS. The detailed work
on simplifying the administration of state and local sales and use taxes is being
conducted by the Streamlined Sales Tax Project (SSTP). The SSTP is expected to
serve as a technical advisory group to the Streamlined Sales Tax Implementing States
(SSTIS), which began to meet at the end of November 2001.
The SSTP is a voluntary, cooperative effort among state governments, with
input from local governments and the private sector. As of December 2001, 33 states
were formal voting participants in the SSTP, with six other states participating as
observers. 37
The SSTP formally began its work in March 2000. The project has two main
components. One is to simplify and modernize the administration of state and local
sales and use taxes. The other is to identify the computer software and a financial
transmission system that could be used to collect use taxes on out-of-state sales at a
reasonable cost.38
The initial purpose of the Streamlined Sales Tax Project was to get the states to
simplify their sales tax systems enough that remote (out-of-state) sellers would be
willing to collect use taxes on a voluntary basis. Simplification of sales tax
administration would benefit in-state retailers as well. The longer-run hope was that
once compliance costs for sellers had been reduced to a reasonable level (imposing
no undue burden on interstate commerce), Congress might be willing to authorize
states to require use tax collection by remote sellers without nexus, or the Supreme
Court might revise the Quill decision’s requirement of physical presence for nexus in
a future tax-collection case.
The SSTP approved its version of a model act and agreement on January 24,
37The 33 states that were formal voting participants in the Streamlined Sales Tax Project,
under a statute or executive order, were: Alabama, Arkansas, Florida, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri,
Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma. Rhode
Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West
Virginia, Wisconsin, and Wyoming. The six observer states were: California, Colorado,
Connecticut, Georgia, Idaho, and Pennsylvania. Altogether, 45 states and the District of
Columbia levy sales and use taxes.
38More information about the Streamlined Sales Tax Project is available on their Web site
[http://www.streamlinedsalestax.org] or [http://www.geocities.com/streamlined2000/].
39The SSTP’s model legislation is formally known as the Uniform Sales and Use Tax
Administration Act. The Act provides the authority for a state to enter into agreement with
other states to implement the new system and lists the general requirements for what the
(continued...)
National Conference of State Legislatures (NCSL) approved its own version of the
act and agreement on January 27, 2001, dropping some of the SSTP criteria for
simplification. 40
During 2001, 20 states enacted legislation authorizing participation with other
states in developing a multi-state sales tax agreement.41 Some states approved the
version of the model act drafted by the SSTP; other states approved the version
drafted by the NCSL. Some states made their own modifications to one of these
model laws. The states that enacted legislation authorizing participation became the
members of the Streamlined Sales Tax Implementing States (SSTIS).
The purpose of the SSTIS is to finalize an interstate agreement to simplify and
modernize sales and use tax administration and then to recommend the agreement to
the states for implementation. Any state that enacts legislation to authorize
participation in an interstate agreement (either the SSTP or the NCSL version) may42
still become a voting member of the SSTIS.
Delegates from the SSTIS met for the first time on November 28 and 29, 2001,
in Salt Lake City to elect officials and adopt operating rules. The SSTIS is trying to
complete a uniform interstate sales tax agreement by the summer of 2002. This would
leave time for the SSTIS to transmit the model agreement to state legislatures for
their consideration during the 2003 legislative session, before the moratorium
extension ends on November 1, 2003.
During 2000 and 2001, the SSTP made progress in reaching agreement on many
detailed components involved in designing a simplified sales and use tax system.
Nevertheless, considerable work still remains to be done by the SSTP in specifying
details of the multistate simplified sales tax agreement. Once an agreement is drawn
up by the SSTIS, individual states then need to adapt their tax laws to the agreement.
39 (...continued)
Agreement must contain. The SSTP’s compact is known as the Streamlined Sales and Use
Tax Agreement. The Agreement sets forth the specific elements of the new sales and use tax
system. A state must enact the simplifications and other aspects of the Agreement to be in
compliance and become a participant in the new system. A draft of the Act was initially
approved by the SSTP’s voting states on December 22, 2000.
40The NCSL’s model act is known as the Simplified Sales and Use Tax Administration Act.
The NCSL’s compact, containing its simplification provisions, is known as the Streamlined
Sales and Use Tax Agreement, the same name as the SSTP’s agreement.
41As of December 2001, the 20 states that belonged to the Streamlined Sales Tax
Implementing States (SSTIS) were Arkansas, Florida, Illinois, Indiana, Kentucky, Louisiana,
Maryland, Michigan, Minnesota, Nebraska, Nevada, North Carolina, North Dakota,
Oklahoma, Rhode Island, Tennessee, Texas, Utah, Wisconsin, and Wyoming. The District
of Columbia also approved authorizing legislation and had a delegate to the SSTIS. Ten other
states had pending legislation to authorize participation in developing a multistate agreement:
Alabama, Iowa, Kansas, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, South
Dakota, and Vermont.
42Streamlined Sales Tax Implementing States, Rules of Procedure, released November 28,
Finally, the simplified system needs to be put into practice by tax administrators and
vendors in participating states.
The states currently have no indication whether, after all of their efforts to
simplify their sales and use tax systems, Congress will grant them authority to require
remote sellers to collect use taxes. Some would like Congress to specify in law the
criteria that the states need to meet in order for Congress to grant them collection
authority.
On the other side, Congress currently has no assurance about the final outcome
of the states’ sales tax simplification effort. Consequently, even those sympathetic to
the states’ request for collection authority may be reluctant to grant that authority in
advance of seeing the actual streamlined sales tax system that emerges from the SSTP
and SSTIS efforts by the states.
Bill Provisions on Granting States Tax Collection Authority. Most
of the bills to extend the Internet tax moratorium did not address the sales and use tax
collection issue at all. No provisions addressing sales tax collection issues were
included in H.R. 1552, the bill passed by both the House and Senate and enacted as
P.L. 107-75. The new law simply extended the prior moratorium by 2 years, until
November 1, 2003.
The full House did not address the sales tax collection issue.43 The issue
received more attention on the Senate side. In February and March of 2001, Senator
Wyden and Senator Dorgan, respectively, each introduced moratorium extension bills
that also addressed the issue of granting a state the authority to require out-of-state
sellers to collect and remit use taxes to the buyer’s home state, if that state met certain
criteria for simplifying its sales and use tax. S. 288 (Wyden) would have permanently
extended the moratorium on Internet access taxes, removed the grandfathering
protection for existing access taxes, and extended the moratorium on multiple and
discriminatory taxes by 5 years. S. 512 (Dorgan) would have extended both parts of
the moratorium, and the grandfathering protection, for 4 years. S. 288 and S. 512 set
somewhat different simplification criteria and substantially different procedures for
Congress to grant states sales tax collection authority.
In early October 2001, Senators Wyden and Dorgan each introduced a bill for
a shorter time extension that included only a “sense of Congress” provision
encouraging state governments and interested business organizations to expedite
efforts pursuing a simplified tax system that would not impose an undue burden on
interstate commerce. S. 1481 (Wyden) referred to developing “...a streamlined
simplified plan for protecting State revenues affected by Internet use....” It would
43H.R. 1410 (Istook), a bill identical to S. 512 (Dorgan), was introduced in the House. A
hearing on H.R. 1410 was held by the Subcommittee on Commercial and Administrative Law
of the Committee on the Judiciary, but the subcommittee did not report the bill. U.S.
Congress. House. Committee on the Judiciary. Subcommittee on Commercial and
Administrative Law. Internet Tax Moratorium and Equity Act; Hearing on H.R. 1410.thst
Serial No. 31, 107 Cong., 1 Sess., July 18, 2001 (Washington: U.S. Govt. Print. Off.,
have extended the moratorium by 2 years, until October 21, 2003. S. 1504 (Dorgan)
referred more specifically to developing “...a streamlined sales and use tax system
that, once approved by Congress, would allow sellers to collect and remit sales and
use taxes....” It would have extended the moratorium by eight months, until June 30,
Substantial efforts were made, first in the Senate Commerce Committee and later
by Senator Mike Enzi, to reach a compromise between S. 288 and S. 512, the first
bills introduced by Senators Wyden and Dorgan. In mid-October 2001, Senator Enzi
introduced S. 1542 and then S. 1567. He finally introduced S.Amdt. 2155, known
as the Enzi-Dorgan amendment, on the Senate floor on November 15, 2001, as an
amendment in the nature of a substitute to H.R. 1552. The amendment was tabled by
a vote of 57 to 43 before the Senate passed H.R. 1552 as received from the House.
The Enzi-Dorgan amendment drew upon elements from both S. 288 (Wyden)
and S. 512 (Dorgan). Like S. 288, S.Amdt. 2155 would have made the ban on
Internet access taxes permanent. But, like S. 512, it would have extended the
grandfathering protection for existing Internet access taxes and extended the ban on
multiple and discriminatory taxes by 4 years and some months, until December 31,
2005 (not 5 years, as under S. 288). S.Amdt. 2155 included a procedure for
congressional approval based on S. 288, but tax simplification criteria from S. 512.
S. 512 (Dorgan) proposed a mechanism in the form of a multi-state compact
through which Congress would grant a participating state the authority to require
collection if the state conformed with certain simplification requirements. This
opportunity for congressional authorization and consent would expire if the compact
was not formed before the end of the extended moratorium. The compact would take
effect automatically once signed by 20 states and sent to Congress, if Congress did
not take action to disapprove the compact within 120 days (known as a “negative
trigger”).
In contrast, S. 288 (Wyden) proposed an expedited (“fast-track”) procedure for
congressional consideration of a joint resolution to give states the authority to require
collection of use taxes once states had simplified their tax system. This approach
reflects the view that Congress must retain the authority to review and actively
approve any simplification compact before authorizing the states to require remote
sellers to collect taxes (a “positive trigger”).
The compromise amendment, S.Amdt. 2155 (Enzi-Dorgan), included more
detailed provisions than S. 288 (Wyden) providing expedited procedure for Congress
to consider a joint resolution to give states the authority to require collection of use
taxes if the states adequately simplified their sales and use tax systems and adopted
an interstate compact (again, a “positive trigger”). Like S. 512, S.Amdt. 2155 gave
the states until the end of the extended moratorium to form the compact and required
that 20 states sign the compact before it was transmitted to Congress for approval.
S.Amdt. 2155 built upon the criteria for a streamlined sales and use tax system
enumerated in S. 512 (Dorgan).44 Notably, while the criteria call for uniform
definitions for goods or services, they do not call for a uniform tax base across the
states. Individual states could still choose which particular goods and services would
be included in, or exempt from, their sales and use tax base.45
S.Amdt. 2155 also included S. 512's sense of Congress provision that state and
local governments and business should jointly commission a study of the cost to all
sellers (presumably, both local and remote) of collecting and remitting state and local
sales and use taxes, under current tax law and under the streamlined system outlined
in the bill. The purpose of the study is to help determine reasonable government
compensation to sellers for collecting taxes.
A difference between S. 288 and S. 512 that is of particular importance to local
governments regards the local-option sales tax rate. S. 288 would have required one
44S.Amdt. 2155 (Enzi-Dorgan) added criteria (13) and (14) to the 12 sales and use tax
simplification criteria listed in S. 512 (Dorgan), S. 1542 (Enzi), and S. 1567 (Enzi), in a sense
of Congress provision:
(1) a centralized, one-stop, multi-state reporting, submission, and payment system for sellers;
(2) uniform definitions for goods or services, the sale of which may, by state action, be
included in the tax base;
(3) uniform rules for attributing transactions to particular taxing jurisdictions;
(4) uniform procedures for the treatment of purchasers exempt from sales and use taxes
system, and relief from liability for sellers that rely on such state procedures;
(5) uniform procedures for the certification of software that sellers rely on to determine sales
and use tax rates and taxability;
(6) uniform format for tax returns and remittance forms;
(7) consistent electronic filing and remittance methods;
(8) state administration of all state and local sales and use taxes;
(9) uniform audit procedures, including a provision giving a seller the option to be subject to
no more than a single audit per year using those procedures; except that if the seller does not
comply with the procedures to elect a single audit, any state can conduct an audit using those
procedures;
(10) reasonable compensation for tax collection by sellers;
(11) exemption from use tax collection requirements for remote sellers falling below a de
minimis threshold of $5,000,000 in gross annual sales;
(12) appropriate protections for consumer privacy;
(13) uniform enforcement criteria and a process for ensuring compliance by those states that
adopt the streamlined sales and use tax system;
(14) a process for resolving conflicts of law among states in the interpretation or application
of statutory or regulatory provisions implementing the system; and
(15) such other features that the states deem warranted to promote simplicity, uniformity,
neutrality, efficiency, and fairness.
With a few exceptions, the first 12 are similar to the criteria included in H.R. 3709, passedth
by the House on May 10, 2000, in the 106 Congress. This list does not include uniform bad
debt rules. It elaborates on the simpler “uniform audit procedures.” It specifies a dollar value
of $5 million for the de minimis threshold.
45See criterion (2) in the previous footnote.
sales and use tax rate per state, applied to in-state as well as interstate sales. (An
average local sales tax rate could be added to the state rate, but there could be no
variation in the rate charged across local jurisdictions within a state.)
In contrast to S. 288, S.Amdt. 2155, like S. 512, provided that a remote seller
could have the annual option of collecting the actual applicable state and local use tax
rate (as a local seller would), as an alternative to collecting a single, uniform,
statewide use tax rate. Furthermore, a state that adopted the dramatically simplified
tax system described in the interstate compact could require the remote seller to
collect the actual state and local tax due if the state provided the seller relief from
liability for relying on (tax rate) information provided by the state. (Supporters argue
that computer software is, or will soon be, available to make that feasible at a
reasonable administrative cost.)
Both S.Amdt. 2155 and S. 512 provided that the uniform tax rate on remote
sales in a calendar year could be no greater than the weighted average of the sales tax
rates actually imposed by the state and its local jurisdictions during the prior fiscal
year (specifically, during the 12-month period ending on June 30 prior to the calendar
year). The test criterion was that the uniform average rate would not have yielded a
greater total assessment of taxes than the total taxes actually assessed during the base
period, if the uniform rate had actually been applied during the prior fiscal year on all
sales subject to state and local sales and use taxes by that state and its local
jurisdictions.
S.Amdt. 2155 added some new provisions of its own. To address the concern
about the bundling of taxable services with tax-protected Internet access, it defined
Internet access services to exclude the receipt of content or services (other than
Internet access services). To address the concerns about business activity tax nexus,
it contained a sense of Congress provision that legislation be enacted by the end of the
The Senate debated S.Amdt. 2155, the Enzi-Dorgan amendment to H.R. 1552,
for over one hour, before voting, 57 to 43, to table the amendment. The Senate then
passed H.R. 1552 as approved by the House. Both during the debate and after the
votes in the Senate on November 15, 2001, several Senators expressed their intention
to pursue an agreement on the sales tax simplification and collection issues during the
added 2 years of the moratorium.46
46For a recounting of developments during 2001, see Doug Sheppard, “No Kinder, Gentler
Internet Tax Battle in 2001,” State Tax Notes, Dec. 28, 2001, p. 1068-75. Available online
from Tax Analysts [http://www.taxbase.tax.org]. Document No. Doc 2002-90, Electronic
Citation 2001 STT 251-19.
For Additional Information
CRS Reports
CRS Report RL31158. Internet Tax Bills in the 107th Congress: A Brief
Comparison, by Nonna A. Noto.
CRS Report 98-509. Internet Tax Bills in the 105th Congress, by Nonna A. Noto.
CRS Report RL30667. Internet Tax Legislation: Distinguishing Issues, by Nonnath
A. Noto. (Analyzes the bills in the 106 Congress.)
CRS Report RL30412. Internet Taxation: Bills in the 106th Congress, by Nonna A.
Noto.
CRS Report RL30431. Internet Transactions and the Sales Tax, by Steve Maguire.
CRS Report RS20577. State Sales Taxation of Internet Transactions, by John R.
Luckey.
Other Congressional Reports
U.S. Congress. House. Internet Tax Nondiscrimination Act. Report to Accompany
H.R. 1552, Including Cost Estimate of the Congressional Budget Office. H.Rpt.
U.S. Congress. Joint Committee on Taxation. Overview of Issues Related to the
Internet Tax Freedom Act and of Proposals to Extend or Modify the Act.
Scheduled for a Hearing Before the Senate Committee on Finance on August 1,thst
U.S. Congressional Budget Office. Economic Analysis of Taxing Internet and Other
Remote Sales. Statement of G. Thomas Woodward, Assistant Director for Tax
Analysis. CBO Testimony before the U.S. Senate, Committee on Finance.
August 1, 2001.
U.S. General Accounting Office. Sales Taxes: Electronic Commerce Growth
Presents Challenges; Revenue Losses Are Uncertain. GAO report GGD/OCE-
Hearings in the 107th Congress
U.S. Congress. House. Committee on the Judiciary. Subcommittee on Commercial
and Administrative Law. Internet Tax Nondiscrimination Act. Hearing on H.R.thst
Washington: U.S. Govt. Print. Off., 2001.
–––Internet Tax Moratorium and Equity Act. Hearing on H.R. 1410. Serial No.
–––Internet Tax Fairness Act of 2001. Hearing on H.R. 2526. Serial No. 41, 107th
Cong., 1st Sess., September 11, 2001. Washington: U.S. Govt. Print. Off., 2001.
U.S. Congress. Senate. Committee on Commerce, Science, and Transportation.
Hearing on Extension of the Internet Tax Moratorium. 107th Cong., 1st Sess.,
March 14, 2001.
–––Committee on Finance. Cybershopping and Sales Tax: Finding the Right Mix.
Hearing. 107th Cong., 1st. Sess., August 1, 2001.
Resources Available on the World Wide Web
Advisory Commission on Electronic Commerce. Internet Home Page.
[http://www.ecommercecommission.org]
For coverage of arguments against requiring remote sellers to collect sales and
use tax on interstate sales, see:
Direct Marketing Association.
DMA Web site for the Internet use tax issue. [http://www.simplifytax.org]
DMA Web site. [http://www.the-dma.org]
e-Freedom Coalition. Internet Home Page.
[http://www.e-freedom.org]
Information Technology Association of America (ITAA). Internet Home Page.
[http://www.itaa.org]
Internet Tax Fairness Coalition. Internet Home Page.
[http://www.salestaxsimplification.org]
Representative Christopher Cox’s Office. Internet Tax Freedom Act Home Page.
[http://www.house.gov/cox/nettax]
For coverage of arguments in support of requiring remote sellers to collect sales
and use tax on interstate sales, see:
e-Fairness Coalition. (Represents over 1.5 million retailers, retail and real estate
associations, shopping centers, and the Newspaper Association of America.)
Internet Home Page. [http://www.e-fairness.org].
National Conference of State Legislatures (NCSL). Internet Home Page.
[http://www.ncsl.org].
National Governors’ Association (NGA). Internet Home Page.
[http://www.nga.org].
National Retail Federation. Sales tax fairness Web site.
[http://www.salestaxfairness.com]
Streamlined Sales Tax Project (SSTP). Internet Home Page.
[http://www.streamlinedsalestax.org] or
[http://www.geocities.com/streamlined2000/]