Internet taxes
Encyclopedia
From the inception of the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 until the late 1990s, the Internet was free of regulation by government in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 at all levels, and also free of any specially targeted tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 levies, duties, imposts, or license fees. By 1996, however, that began to change, as several U.S. states and municipalities began to see Internet services as a potential source of tax revenue.

The 1998 Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

 halted the expansion of direct taxation of the Internet, grandfathering existing taxes in ten states. In the United States alone, some 30,000 taxing jurisdictions could otherwise have laid claim to tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es on a piece of the Internet. The law, however, did not affect sales taxes applied to online purchases. These continue to be taxed at varying rates depending on the jurisdiction, in the same way that phone and mail orders are taxed.

The enactment of this legislation has coincided with the beginning of a period of spectacular Internet growth. Its proponents argue that the benefits of knowledge, trade, and communications that the Internet is bringing to more people in more ways than ever before are worth the tax revenue losses, if any, and that the economic and productivity growth attributable to the Internet may well have contributed more revenues to various governments than would otherwise have been received. Opponents, on the other hand, have argued that the Internet would continue to prosper even if taxed, and that the current federal ban on Internet-specific levies denies government at all levels a much-needed source of revenue.

It must be emphasized that the absence of direct taxation of the Internet does not mean that all transactions taking place online are free of tax, or even that the Internet is free of all tax. In the United States, nearly all online transactions are subject to one form of tax or the other. The Internet Tax Freedom Act merely precludes states in the United States from imposing their sales tax, or any other kind of gross receipts tax, on certain online services. For example, a state may impose an income or franchise tax on the net income earned by the provider of online services, while the same state may be precluded from imposing its sales tax on the gross receipts of that provider. In addition, as noted above, the Internet Tax Freedom Act does not prevent taxation of the sale of goods through the Internet.

Internet access tax

Internet access taxes normally take the form of taxation on Internet service provider
Internet service provider
An Internet service provider is a company that provides access to the Internet. Access ISPs directly connect customers to the Internet using copper wires, wireless or fiber-optic connections. Hosting ISPs lease server space for smaller businesses and host other people servers...

 (ISP) access charges. ISPs levy these charges on users. Currently, these fees are typically imposed at the state level. There is no national tax on ISP user charges. No uniform description of Internet access taxes is possible; they fall within the category of sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....

es in some states, and telecommunications taxes in others; and they are considered service charges, which are usually exempt from taxation, in still other states. Ten states (which were grandfathered under the Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

 as part of a political compromise) are allowed to provide for some manner of taxation on ISP charges. The ten states are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington & Wisconsin. Under the grandfather clause included in the Internet Tax Freedom Act, Texas is currently collecting a tax on Internet access charges over $25.00 per month. Texas collected tax on internet access prior to the enactment of ITFA under the "Taxables Services" provision of its Tax Code, see older § 151.0101(a). Texas has refined its tax code to define "Internet access service", include it under "Taxable Services" and exempted the first $25.00 on a monthly basis, See current Texas Tax Code § 151.325 & 151.0101(a)

Telecommunications tax

Some states, such as Tennessee
Tennessee
Tennessee is a U.S. state located in the Southeastern United States. It has a population of 6,346,105, making it the nation's 17th-largest state by population, and covers , making it the 36th-largest by total land area...

 and Wisconsin
Wisconsin
Wisconsin is a U.S. state located in the north-central United States and is part of the Midwest. It is bordered by Minnesota to the west, Iowa to the southwest, Illinois to the south, Lake Michigan to the east, Michigan to the northeast, and Lake Superior to the north. Wisconsin's capital is...

, treat Internet access charges as telecommunications services, thus subjecting them to often high telecommunications taxes. Different methods of accessing the Internet (regular phone, ISDN, DSL, cable
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...

, wireless, satellite) are often subject to different levels of taxation, for a similar service. Opponents of these taxes say this distorts the market and creates unfair advantages for certain businesses, and penalizes certain types of users disproportionately.

Franchise tax

Both states and localities have traditionally levied franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...

es on utilities and cable television operators. Prior to the Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

, many municipalities were studying the possibility of extending their franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...

es to either ISPs, their customers, or both. The greatest practical problem associated with the collection of franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...

es is the multiplicity of potential levies on a single retail customer; the ban on multiple taxation in the Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

 is a response, in part, to this issue. A correlative issue is the compliance burden on ISPs who must deal with competing franchise tax
Franchise tax
Franchise tax is a tax charged by some US states to corporations with a nexus with those states. The common feature of a state's franchise tax is that it is not based on income...

es in thousands of local jurisdictions, although the likelihood is such a burden would be passed on to customers.

Bit tax

Several countries have proposed taxing Internet usage by volume. The bit tax would not discriminate between telephony, data, voice, images, or other content; it would apply based on the volume of data transferred. Because this is an Internet-specific tax that has no analog in the offline world, it is specifically banned in the U.S. by the Internet Tax Freedom Act.

Bandwidth tax

The concept behind the bandwidth tax is progressivity; it would apply on a graduated scale according to the speed of one's Internet connection. It is also clearly banned by the Internet Tax Freedom Act.

E-mail tax

The United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

 has in the past considered proposing an e-mail
E-mail
Electronic mail, commonly known as email or e-mail, is a method of exchanging digital messages from an author to one or more recipients. Modern email operates across the Internet or other computer networks. Some early email systems required that the author and the recipient both be online at the...

 tax, in an effort to raise funds to boost Internet technology access to poor countries.
Citing a "knowledge gap" between the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and underdeveloped countries, proponents of e-mail
E-mail
Electronic mail, commonly known as email or e-mail, is a method of exchanging digital messages from an author to one or more recipients. Modern email operates across the Internet or other computer networks. Some early email systems required that the author and the recipient both be online at the...

 tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es believe that its potential redistributive effects make it an ideal tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 for implementation on a global scale. According to a report by the United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

 Development Program entitled "Globalization With a Human Face", Internet users are mostly males located in the United States, a situation UN researchers suggest puts the world's undeveloped countries at risk of being left behind in a race for knowledge. "The literally well connected have an overpowering advantage over the unconnected poor, whose voices and concerns are being left out of the global conversation," the UNDP said in a 1999 press release. To "rectify the imbalance" between Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 users and non-users, the report's authors proposed a "tax of one US cent on every 100 lengthy e-mails
Email
Electronic mail, commonly known as email or e-mail, is a method of exchanging digital messages from an author to one or more recipients. Modern email operates across the Internet or other computer networks. Some early email systems required that the author and the recipient both be online at the...

" which they believed would generate $70 billion a year. Imposition of e-mail
E-mail
Electronic mail, commonly known as email or e-mail, is a method of exchanging digital messages from an author to one or more recipients. Modern email operates across the Internet or other computer networks. Some early email systems required that the author and the recipient both be online at the...

 taxes by the U.S. government or any of its political subdivisions is banned by the Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

.

Conceptual issues

There are many conceptual issues involved in the determination of which of several jurisdictions have the authority to tax the Internet, or transactions on it, in some way. Internet taxation has essentially been banned in the United States since 1998, except for those jurisdictions that were grandfathered under existing federal law. Most of which involves Internet access taxes, franchise taxes, and telecommunications taxes, although a smattering of other taxes currently exist.

Beyond the questions of direct taxation of Internet access through levies such as bit taxes, bandwidth taxes, email taxes, and franchise fees, a related issue concerns the imposition of sales taxes on Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 sales of goods and services. This taxation is not prohibited by federal statute, but rather by a series of U.S. Supreme Court decisions including Quill Corp. v. North Dakota
Quill Corp. v. North Dakota
Quill Corp. v. North Dakota, 504 U.S. 298 is a Supreme Court ruling concerning use tax. Quill Corporation is an office supply retailer...

 (1992). Those cases held that state taxation of in-state sales by vendors with no significant physical presence in the state violates the Commerce Clause
Commerce Clause
The Commerce Clause is an enumerated power listed in the United States Constitution . The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Courts and commentators have tended to...

 of the U.S. Constitution. Because of this constitutional prohibition on collecting sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....

 from so-called "remote" sales on the Internet, the issue of local jurisdictions taxing goods and services purchased from out of state by their residents using the Internet has not yet raised the conceptual questions discussed below. See tax-free shopping
Tax-free shopping
-Introduction:Tax-Free Shopping allows shoppers to reclaim the VAT /GST they have paid on their shopping in foreign countries. Promoting the tax rebate and making it easier for tourists to claim it back, has helped to attract travellers to many countries...

.

Location

The issue of location—of the Internet user, the user's counterparties in a commercial transaction, the headquarters facilities of any involved commercial entities, and even the servers and switches—is important for tax purposes. For example, of the nine U.S. states that currently tax access in some manner, four make reference to location. In each case, both the provision of service and the billing must take place within the state. Connecticut
Connecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...

 places the burden of determining whether this is so upon the Internet service provider
Internet service provider
An Internet service provider is a company that provides access to the Internet. Access ISPs directly connect customers to the Internet using copper wires, wireless or fiber-optic connections. Hosting ISPs lease server space for smaller businesses and host other people servers...

. But in general, there is no simple way to determine location, owing largely to the Internet's lack of boundaries. Users can and routinely do access their accounts from remote locations; providers are almost always located in multiple taxing jurisdictions; and the data traffic itself, via the Internet's packet-switched architecture, is routed through myriad locations. Such issues are important not only for practical reasons of determining the incidence of the tax and its enforcement, but also because the U.S. Constitution requires that a state or taxing sub-jurisdiction have "nexus" with the transaction in order to exert its taxing power, and that determination rests precisely upon such considerations.

Setup v. monthly fee

In the United States, some states and taxing authorities distinguish between the initial setup fee for Internet access and the monthly, hourly, or per-minute billing fee for actual access. Nebraska
Nebraska
Nebraska is a state on the Great Plains of the Midwestern United States. The state's capital is Lincoln and its largest city is Omaha, on the Missouri River....

 taxes the initial setup, but only if software is provided. It does not tax subsequent monthly billing. Tennessee
Tennessee
Tennessee is a U.S. state located in the Southeastern United States. It has a population of 6,346,105, making it the nation's 17th-largest state by population, and covers , making it the 36th-largest by total land area...

, on the other hand, taxes both.

Good vs. service

A basic issue in determining whether Internet access and Internet usage of various kinds is subject to sales tax, use tax
Use tax
A use tax is a type of excise tax levied in the United States. It is assessed upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state , regardless of where the purchase took place...

, telecommunications tax, a combination of these taxes, or no taxes at all, is whether Internet access and usage is determined to be a "good" or a "service." If access to the Internet or usage is deemed a service, in general no sales or use taxation applies, while the rates and variants of telecommunications taxes that apply can be different. However, if access requires downloading of user software, some U.S. states (e.g., Massachusetts) may deem that to be a "taxable sale" of goods for their residents.

Collection

Collection of Internet taxes presents a complex array of issues. These include whether states themselves should collect the tax; whether the burden instead should be placed on the Internet service provider
Internet service provider
An Internet service provider is a company that provides access to the Internet. Access ISPs directly connect customers to the Internet using copper wires, wireless or fiber-optic connections. Hosting ISPs lease server space for smaller businesses and host other people servers...

; the extent to which retailers or value-added intermediaries can be required to perform collection duties; and in all cases, the ways in which this collection can be accurately and meaningfully enforced by the taxing jurisdiction.

Current law and future prospects

The 1998 Internet Tax Freedom Act
Internet Tax Freedom Act
The 1998 Internet Tax Freedom Act was a United States law authored by Representative Christopher Cox and Senator Ron Wyden, and signed into law on October 21, 1998 by President Bill Clinton in an effort to promote and preserve the commercial, educational, and informational potential of the Internet...

 was authored by Representative
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...

 Christopher Cox, R-CA and Senator
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...

 Ron Wyden
Ron Wyden
Ronald Lee "Ron" Wyden is the senior U.S. Senator for Oregon, serving since 1996, and a member of the Democratic Party. He previously served in the United States House of Representatives from 1981 to 1996....

, D-OR and signed into law on October 21, 1998 by President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....

 Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...

 in an effort to promote and preserve the commercial potential of the Internet. This law bars federal, state, and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es, bandwidth taxes, and e-mail taxes. The law also bars multiple taxes on electronic commerce
Electronic commerce
Electronic commerce, commonly known as e-commerce, eCommerce or e-comm, refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online...

.

The bill has been extended three times by the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 since its original enactment and was last renewed on October 30, 2007 for 7 years.http://www.usatoday.com/money/industries/technology/2007-10-30-internet-tax_N.htm

Propositions outside the United States

French President Nicolas Sarkozy
Nicolas Sarkozy
Nicolas Sarkozy is the 23rd and current President of the French Republic and ex officio Co-Prince of Andorra. He assumed the office on 16 May 2007 after defeating the Socialist Party candidate Ségolène Royal 10 days earlier....

 announced on January 8, 2008, that he would propose taxing the Internet as a way to fund the country's state-owned television stations. The proposition came as part of a broader plan for the French audiovisual network; the plan also included provisions such as the "total suppression of advertising on public channels" whose funding would then be aided by "an infinitesimal sales tax on new communication methods, like Internet access and mobile telephony.".

See also

  • Taxation in the United States
    Taxation in the United States
    The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...

  • Internet Tax Nondiscrimination Act
    Internet Tax Nondiscrimination Act
    The Internet Tax Nondiscrimination Act, , is the current U.S. federal law that bans Internet taxes in the United States. Signed into law on December 3, 2004, by George W. Bush, it extended until 2007 the then-current moratorium on new and discriminatory taxes on the Internet...

  • Taxation of Digital Goods
    Taxation of Digital Goods
    Digital goods are software programs, music, videos or other electronic files that users download exclusively from the Internet. Some digital goods are free, others are available for a fee...


External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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