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New Internet Tax Moratorium Allows Some Internet Taxation, New York

04 December 2001

Writing in ecommercetax news, Professor David Hardesty comments on the newly-extended Internet Tax Freedom Act. The latest 2-year extension, says Professor Hardesty, is a no-frills extension, which keeps Internet access free of sales tax in most states, and puts off for two years any further action by Congress on Internet taxation. The extension was passed over the heads of some in Congress, who wanted a commitment to give states the power to enforce collection of sales tax, if the states simplify sales tax compliance. But what is the Internet Tax Freedom Act, asks the article, and what does it mean for online sellers?

The article represents HR 1552, which extends the Internet Tax Freedom Act (ITFA) until November 1, 2003, as a compromise between those who wanted to make the ITFA permanent, and those who wanted to allow states to tax Internet sales as soon as enough of them sign up to a braod simplification of sales taxes, such as is embodied in the Simplified Sales Tax Project (SSTP).

'The ITFA exempts Internet access services from state and local taxes, such as sales tax,' says Professor Hardesty. 'In addition to Internet access, this ban extends to many Internet-based services. However, the ban on taxation of Internet access is not complete. The eight or so states that currently tax Internet access can continue to do so. The ITFA also prohibits multiple and discriminatory taxation of electronic commerce. However, the ITFA does not directly affect sales of tangible products over the Internet.'

ITFA allows taxation of some types of activity on the Internet, for instance the provision of access to materials that are harmful to minors, unless access to those materials is restricted - but not if the tax would be discriminatory. Thus, the taxable activity must also be taxed off-line, and at the same rate.

The article discusses the question of nexus under the new ITFA. The Act includes provisions relating to the ability of a state to require a remote seller to collect sales and use tax. One provision relates to the effect of access to a website on a vendor’s liability to collect sales tax. According to the ITFA, states may not require a vendor to collect a tax if "the sole ability to access a site on a remote seller’s out-of-state computer server is considered a factor in determining a remote seller’s tax collection obligation…" Professor Hardesty points out that the provision specifically relates to a remote seller’s "out-of-state computer server." This language, he says, leaves open the door to a nexus claim where a server is located in a state. The ITFA prohibits a finding of nexus only where an out-of-state computer server is used.

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