Internet Taxation: Issues and Legislation

Congress is involved in issues of state and local taxation of Internet transactions because commerce conducted by parties in different states over the Internet falls under the Commerce Clause of the Constitution.Currently, the "Internet Tax Moratorium" prohibits (1) new taxes on Internet access services and (2) multiple or discriminatory taxes on Internet commerce.The moratorium was created by the Internet Tax Freedom Act (ITFA) of 1998 (112 Stat.2681) and has been extended twice.The original moratorium expired on October 21, 2001.Congress extended the moratorium through November 1, 2003, with the Internet Tax Nondiscrimination Act, P.L. 107-75.The moratorium was extended for an additional four years, through November 1, 2007, by the Internet Tax Nondiscrimination Act, P.L. 108-435.On October 31, 2007, P.L. 110-108, the Internet Tax Freedom Act Amendments Act of 2007 was passed extending the moratorium through November 1, 2014.Generally, taxes on Internet access that have continued in place since before October 1, 1998, are protected by a grandfather clause.An issue previously raised in connection with the Internet tax moratorium concerned states streamlining their sales taxes in order to gain remote tax collection authority.In the 110 th Congress, S. 34 and H.R. 3396 would grant states that comply with the Streamlined Sales and Use Tax Agreement the authority to require remote sellers to collect state and local taxes on interstate sales.Another related issue is whether and how to have Congress set the nexus standards under which a state is entitled to impose a business activity tax (BAT, e.g., corporate net income tax, franchise tax, business and occupation tax, gross receipts tax) on a company located outside the state, but with some business activities in the state.In the 110 th Congress, S. 1726 and its twin H.R. 5267 would establish more-uniform standards -generally higher standards -for the level of business activity that would create nexus and thus state corporate income taxability.For more on state corporate income taxes, see CRS Report RL32297, State Corporate Income Taxes: A Description and Analysis, by