Internet Tax Freedom Act Not Re-Enacted Before Congress Adjourned in 2003
 
December 24, 2003
 
Raymond P. "Ray" Carpenter- Atlanta

In 1998, Congress passed the Internet Tax Freedom Act (Act) to prohibit the federal government and the states from enacting laws that would tax transactions conducted over the Internet. The Act was intended to have a temporary life while Congress studied the ban and the need for permanent legislation. In 2001, the Act was reinstated for a two-year period. For various reasons, Congress was unable to agree on an expanded version of a new ban, and the Act expired on November 1, 2003.

In the past, the Internet Tax Freedom Act placed a temporary ban on state and local taxes on (1) the Internet or interactive computer services; or (2) the use of the Internet or interactive computer services. In addition, the Act prohibited the FCC from “regulating the prices or charges paid by subscribers for interactive computer services, or information services transmitted through the Internet.” Use of the term “Internet” here does not include communications or telecommunications services.

State governments have protested loudly that the ban creates a hardship for the states because it allows otherwise taxable transactions to escape taxation simply because they occur over the Internet. State governments have estimated that the ban is costing $1.8 billion in sales and use taxes, and this figure could become even larger as the volume of transactions over the Internet continues to grow.

Due to Congressional deadlock over reinstatement of the ban, at least some state legislatures that will convene during early 2004 have indicated that they will move to expand their sales taxes to cover Internet access charges and other services that are taxable under state sales tax statutes. Internet service providers, who previously had no sales tax compliance obligations, may now be faced with compliance issues in the most aggressive states.

Holland & Knight state tax lawyers will be pleased to assist you with interpreting any new statutory obligations and filing requirements in those states or local jurisdictions taxing Internet-based transactions.

For more information, e-mail Ray Carpenter at rcarpenter@hklaw.com or call toll free, 1-888-688-8500.