Order Code RL30667
CRS Report for Congress
Received through the CRS Web
Internet Tax Legislation:
Distinguishing Issues
Updated January 11, 2001
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Internet Tax Legislation: Distinguishing Issues
Summary
The Internet Tax Freedom Act (ITFA), enacted in 1998, placed a three-year
moratorium on the ability of state and local governments to impose new taxes on
Internet access, or to impose any multiple or discriminatory taxes on electronic
commerce. The moratorium is scheduled to expire on October 21, 2001.
On May 10, 2000, the House approved H.R. 3709, the Internet
Nondiscrimination Act of 2000. That bill would have extended the current
moratorium on state and local taxes for five years. It would have removed the
grandfathering protection the ITFA now provides for state and local taxes on Internet
access that were already in place in ten states in 1998. H.R. 3709 also expressed a
sense of Congress listing attributes that a state tax relating to electronic commerce
should contain to avoid being considered multiple or discriminatory and consequently
subject to the moratorium. The Senate did not act on an Internet tax bill before the
106th Congress ended.
In addition to H.R. 3709, 12 other bills to regulate state and local taxation of the
Internet were introduced in the 106th Congress. This report discusses four major
areas of difference among the various bills. The first is whether to extend the current
three-year moratorium and, if so, whether on a temporary or permanent basis. A
second is whether or not to continue the grandfathering protection provided by the
ITFA for state and local taxes on Internet access that were already in place at the time
of enactment. A third is whether or not to broaden the scope of the moratorium to
explicitly protect electronic commerce in digitized goods and services from sales and
use taxation. A fourth is whether or not Congress will take action to facilitate the
collection of state and local sales and use taxes on interstate sales of goods and
services arranged over the Internet.
This report will be updated as new legislative initiatives emerge in the 107th
Congress regarding state and local taxation of the Internet.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Internet Tax Freedom Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sales and Use Taxes and Internet Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Role of Congress under the Commerce Power . . . . . . . . . . . . . . . . . . . . . . 3
Report of the Advisory Commission on Electronic Commerce . . . . . . . . . . 4
H.R. 3709 Passed the House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Legislation in the 106th Congress to Regulate State and Local Internet Taxation
6
Basic Issues Distinguishing the Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Extending the Moratorium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Grandfathering Protection for Internet Access Taxes . . . . . . . . . . . . . . . . . 9
Expanding Scope of Moratorium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Collecting Sales and Use Taxes on Internet Transactions . . . . . . . . . . . . . 10
Simplification of state and local sales and use taxes . . . . . . . . . . . . . 11
Voluntary versus required collection by interstate sellers . . . . . . . . . 14
Codify nexus standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
For Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CRS Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Resources Available on the World Wide Web . . . . . . . . . . . . . . . . . 20
List of Tables
Table 1. Comparison of Internet Tax Bills on Four Distinguishing Issues . . . . 16

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Internet Tax Legislation: Distinguishing Issues
Introduction
The tax moratorium imposed by the Internet Tax Freedom Act is scheduled to
expire on October 21, 2001. Thirteen bills to regulate state and local taxation of the
Internet were introduced in the 106th Congress. H.R. 3709, the Internet
Nondiscrimination Act of 2000, passed the House on May 10, 2000. However, the
Senate did not act on an Internet tax bill before the second session ended. The issues
remain for the 107th Congress to address.
This report begins with a brief background on the Internet Tax Freedom Act of
1998, the controversy over collecting sales and use taxes on Internet sales, the
message to Congress from the Supreme Court’s Quill decision on the taxation of
mail order sales, the report of the Advisory Commission on Electronic Commerce,
and H.R. 3709. The second section lists the bills to regulate state and local taxation
of the Internet that were introduced in the 106th Congress. The third section discusses
four major issues that differentiate the bills. These include the positions the bills take
on extending the moratorium, grandfathering existing Internet access taxes, expanding
the scope of the moratorium to the taxation of digitized goods or possibly all
electronic commerce, and collecting sales and use taxes on Internet transactions. The
comparison of the bills is summarized in Table 1 at the end of the report.
This report will be updated as new legislative initiatives emerge in the 107th
Congress regarding state and local taxation of the Internet.
Background
Internet Tax Freedom Act
The Internet Tax Freedom Act (ITFA) was enacted on October 21, 1998.1 The
Act imposed a three-year moratorium on the ability of state or local governments to
impose new taxes on “Internet access services” or to impose 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 them
to continue. The moratorium is scheduled to expire on October 21, 2001.
1 The 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-
277, 112 Stat. 2681).

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The Act can be viewed as preventive in the sense that most states were not
levying the “multiple or discriminatory” taxes prohibited by the moratorium. In 2000
there were 10 states with taxes of various types on Internet access that are protected
by the grandfathering provision of the ITFA.2
Sales and Use Taxes and Internet Sales
Under the Internet Tax Freedom Act’s definition of discriminatory taxes, sales
transacted through electronic commerce are to be treated the same way as catalog or
mail order sales. Under current law, for within-state sales (where both the buyer and
seller are in the same state), a state can require the seller to collect the sales tax from
the buyer and remit the revenue to the state. For interstate sales, a seller in another
state can only be required to collect the “use tax” (the companion tax to the sales tax,
applicable to interstate sales)3 from the buyer and remit the revenue to the buyer’s
home state government if the seller has a “substantial nexus” in the buyer’s state.4
Substantial nexus is currently defined as physical presence (explained further in the
next section of this report on the “Role of Congress under the Commerce Power”).
If the seller does not collect a sales or use tax on a transaction, the legal
obligation to pay a “use tax” to one’s home state nonetheless remains with the buyer.
In practice, however, few individual consumers voluntarily remit use taxes to their
home state on purchases from out-of-state. Businesses are more likely to pay use
taxes, in part because they are subject to audit by state revenue officials.
As Internet commerce continues to develop, state and local governments
anticipate a growing, substantial loss of revenue from untaxed Internet sales. Sales
taxes are a major source of revenue for states, especially those states without income
taxes, and for some local governments.5 In addition, “Main Street” or “bricks-and-
mortar” retailers are complaining about the unfair competition they face from untaxed
2 Connecticut, Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas,
and Wisconsin levy their regular retail sales tax on Internet access. (The Connecticut tax is
scheduled for repeal effective July 1, 2001.) New Hampshire applies a telecommunications
services tax to two-way communications provided by certain types of entities, including
Internet access provided by cable TV companies. In addition, Washington state has a
business and occupations tax; this is a gross receipts tax levied on all entities doing business
in the state, including firms offering Internet access. The Federation of Tax Administrators
(FTA) estimated that there would be a combined revenue loss of $75 million for these 10
states for the fiscal year beginning July 1, 2000, if the grandfathering protection was removed.
Montana is currently prevented by the moratorium from applying to Internet access charges
its 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, 2000.
3 Every 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. A transaction
taxed under the sales tax is not subject to the use tax.
4 For further explanation of current law, see CRS Report RS20577, State Sales Taxation of
Internet Transactions, by John R. Luckey.
5 See CRS Report RL30431, Internet Transactions and the Sales Tax, by Steve Maguire.

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Internet sales. Loss of income by Main Street sellers could, in turn, place downward
pressure on rents for retail space, the value of retail real estate, and the local property
tax base.
On the other side of the issue is concern for the potential compliance burden
facing sellers engaged in interstate sales if they were required to be familiar with the
unique sales tax laws in each state and local jurisdiction that levies a tax (in order to
know how much tax to collect from each customer, on which items) and if they had
to file and remit taxes to each of those jurisdictions. Forty-five states and the District
of Columbia levy sales and use taxes.6 As of May 2000, approximately 7,500 local
jurisdictions levied a sales tax.7 That represents approximately 25 percent of the
30,000 local jurisdictions (counties and cities) that are authorized under their state
laws to levy a sales or use tax.
Role of Congress under the Commerce Power8
While the issues involved in state taxation of the Internet might not appear to
raise federal questions, Congress’s power under the Commerce Clause9 brings these
issues into the federal arena. As mentioned in the preceding section, a state may tax
a transaction if there is some connection of the transaction to the state. If both the
seller and the buyer are located in the same state, the state has the authority to require
the seller to collect and remit the sales tax. But if the transaction is purely one of
interstate commerce, with the seller not having the requisite nexus to the buyer’s
state, Congress is the only entity that may regulate the activity, or Congress may
authorize the states to do so.
The Supreme Court has held that the Commerce Clause limits a state from
imposing tax liability or collection and remittance responsibilities on a business
concern unless the business has a “substantial nexus” or in-state contact established
with that state. The two major Supreme Court decisions in the sales tax area are
National Bellas Hess, Inc. v. Illinois Department of Revenue10 and Quill Corp. v.
North Dakota.11
In National Bellas Hess the Supreme Court held that the state of Illinois could
not require the out-of-state mail-order sales company to collect a use tax from Illinois
customers. Bellas Hess’s only contact with the state was via the mails or common
carriers. This contact was found to be insufficient to establish nexus under either the
6 Delaware, 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.
7 Estimates by Vertex Inc., Berwyn, Pennsylvania, May 22, 2000.
8 John R. Luckey, Legislative Attorney, CRS American Law Division, contributed to this
section.
9 U.S. Const. art. I § 8, cl.3.
10 386 U.S. 753 (1967).
11 504 U.S. 298 (1992).

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Due Process or Commerce Clause of the U.S. Constitution. The Court utilized a
“physical presence” standard for nexus for both of these clauses.12
In the 25 years between Bellas Hess and Quill the Supreme Court had clarified
the Commerce Clause’s four-part test for substantial nexus in Complete Auto Transit,
Inc. v. Brady.13 For a state tax to be applied to an activity there must be substantial
nexus with the taxing state. The tax must be fairly apportioned. It must not
discriminate against interstate commerce. The tax must be fairly related to the
services provided by the state.14
This clarification became even more significant in the mail-order sales area in the
Quill decision. In Quill the Court, in a case factually similar to Bellas Hess, dropped
the physical presence test for nexus under the Due Process Clause, requiring only that
the seller’s efforts be “purposefully directed toward the residents of the taxing
State.”15 Therefore the Due Process Clause was no longer an impediment to requiring
tax collection by the out-of-state seller. However, the physical presence standard or
substantial nexus of the Commerce Clause was reaffirmed.16 The practical outcome
of the Quill case was therefore the same as Bellas Hess: the state could not force the
seller to collect the use tax absent a substantial nexus.
However, the removal of the Due Process Clause as a road block did open the
door for Congress, under its commerce powers, to legislatively empower the states
to require out-of-state sellers to collect use taxes from the customer and remit the
revenues to the buyer’s home state. In fact, in Quill the Supreme Court specifically
invited Congress to act in this area. To date, Congress has chosen not to enact
legislation granting states the authority to require out-of-state sellers to collect and
remit use taxes.
Report of the Advisory Commission on Electronic Commerce
The Internet Tax Freedom Act also created the Advisory Commission on
Electronic Commerce (ACEC) to study a variety of issues related to the taxation of
electronic commerce and telecommunications. The Commission presented its final
report to Congress on April 12, 2000.17
12 386 U.S. 753 (1967). Generally, the Due Process Clause relates to the fairness of the tax
burden and whether a business has minimum contacts with the taxing jurisdiction. The
Commerce Clause is concerned with the effect of the tax on interstate commerce. Hellerstein,
Walter. Supreme Court Says No State Use Tax Imposed on Mail-order Sellers...for Now. 77
Journal of Taxation 120 (August 1992). p. 120.
13 430 U.S. 274 (1977).
14 Id. at 279.
15 Quill at 312.
16 Id. at 317.
17 The text of the Report to Congress is available on the website of the Advisory Commission
on Electronic Commerce [http://www.ecommercecommission.org].

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Several bills were introduced in Congress in response to the Advisory
Commission’s report. Some bills reflect the so-called “majority proposals” drafted
by the “Business Caucus” of the Commission and included in the Commission’s final
report.18 Other bills reflect the so-called “minority proposals” supported by most (but
not all) of the state and local government representatives on the Commission. These
proposals were not included in the final report of the Advisory Commission, but have
been advanced separately as part of the Streamlined Sales Tax Project, represented
by Utah Governor Mike Leavitt, also a member of the Advisory Commission
(discussed below in the subsection on “Work through NCCUSL or Streamlined Sales
Tax Project”).19
H.R. 3709 Passed the House
On May 10, 2000, the House approved H.R. 3709, the Internet
Nondiscrimination Act of 2000, which would have extended the current moratorium
on state and local taxation of the Internet for five additional years, until October 21,
2006. The legislation would have eliminated the current law’s “grandfather”
provision that permits states to continue to levy taxes on Internet access that were
already in place at the time the Internet Tax Freedom Act was enacted.
H.R. 3709 also expressed the sense of Congress that, to avoid being
characterized as multiple or discriminatory (and consequently subject to the
moratorium) a state tax relating to electronic commerce should include 14 listed
features. These features relate to simplifying state and local sales and use taxes and
standardizing their administration nationwide.20 While this sense of Congress
provision would have had no enforcement authority, it acknowledged the issue of
state and local sales tax simplification.
The Senate did not act on Internet tax legislation in the 106th Congress.
18 Only a few of the proposals before the Commission received the two-thirds vote needed to
qualify as a formal recommendation of the Commission. However, Virginia Governor James
Gilmore, chairman of the Advisory Commission, ruled that any proposal receiving votes from
a simple majority of the 19 Commission members could be included in the final report, but
it would be labeled as a “majority proposal” rather than a “recommendation.”
19 The Streamlined Sales Tax Project is discussed further in the sub-section below on
“Simplification of state and local sales and use taxes.”
20 The 14 criteria included in H.R. 3709 are listed in footnote 24 to the sub-section below on
“Simplification of state and local sales and use taxes.”

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Legislation in the 106th Congress to Regulate State and
Local Internet Taxation
Listed below are the 13 bills to regulate state and local taxation of the Internet
that were introduced in the 106th Congress:21
H.R. 3252 (Kasich and Boehner). The Internet Tax Elimination Act.
Introduced November 8, 1999, and referred to the Committee on the Judiciary and
the Committee on Ways and Means.
H.R. 3709 (Cox). The Internet Nondiscrimination Act of 2000. Introduced
February 29, 2000, and referred to the Committee on the Judiciary, Subcommittee on
Commercial and Administrative Law. An amended version passed the House by a
vote of 352 to 75 on May 10, 2000.
H.R. 4202 (Ehrlich). The Internet Services Promotion Act of 2000. Introduced
April 6, 2000, and referred to the Committee on Commerce, Subcommittee on
Telecommunications, Trade, and Consumer Protection, and to the Committee on the
Judiciary, Subcommittee on Commercial and Administrative Law.
H.R. 4267 (Hyde and Conyers, ACEC majority). The Internet Tax Reform
and Reduction Act of 2000. Introduced April 13, 2000, and referred to the
Committee on the Judiciary. (It puts into legislative language many of the “majority
proposals” included in the final report of the Advisory Commission on Electronic
Commerce.)
H.R. 4460 (Hyde and Conyers, ACEC minority). The Internet Tax
Simplification Act of 2000. Introduced May 16, 2000, and referred to the Committee
on the Judiciary. (It puts into legislative language many of the “minority proposals”
not included in the final report of the Advisory Commission on Electronic
Commerce.)
H.R. 4462 (Bachus). The Fair and Equitable Interstate Tax Compact
Simplification Act of 2000. Introduced May 16, 2000, and referred to the Committee
on the Judiciary and the Committee on Rules.
S. 328 (Smith, B.). Introduced January 28,1999, and referred to the Committee
on Commerce, Science, and Transportation.
S. 1611 (McCain). Introduced September 22, 1999, and referred to the
Committee on Commerce, Science, and Transportation.
21 For a fuller description of each bill, see CRS Report RL30412, Internet Taxation: Bills in
the 106th Congress, by Nonna A. Noto. This report draws upon the state and local tax section
of that report, which also covers bills addressing federal and foreign taxation of the Internet.

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S. 2028 (Wyden). The Internet Non-discrimination Act. Introduced on
February 3, 2000, and referred to the Committee on Commerce, Science, and
Transportation.

S. 2036 (Smith, B.). Introduced February 7, 2000. Read the second time and
placed on the calendar on February 8, 2000. It is identical in language to S. 328.
S. 2255 (McCain). Introduced March 21, 2000, and referred to the Committee
on Commerce, Science, and Transportation.
S. 2401 (Gregg and Kohl). The New Economy Tax Simplification Act
(NETSA). Introduced April 11, 2000, and referred to the Committee on Finance.
S. 2775 (Dorgan). The Internet Tax Moratorium and Equity Act. Introduced
June 22, 2000, and referred to the Committee on Finance.
Basic Issues Distinguishing the Bills
There are four major areas of difference among the bills introduced in the 106th
Congress. These involve the positions the bills take regarding:
! whether the tax moratorium should be extended, and if so, whether
permanently or temporarily, and if temporarily, for how many years;
! whether to continue to grandfather existing Internet access taxes;
! whether to expand the scope of the moratorium to prohibit taxation
of digitized goods and services, or possibly all electronic commerce;
and
! whether, and under what conditions, to authorize the states to collect
sales and use taxes on interstate sales of goods and services arranged
over the Internet.

Under each of the subheadings that follows, there is a brief discussion of the
issue, followed by mention of the specific bills that take a position on that issue.
Some of the bills contain multiple provisions and may therefore be mentioned under
more than one subheading.22 This comparison of the Internet tax bills is summarized
in Table 1 at the end of this report.
Extending the Moratorium
The first issue differentiating the Internet tax bills is the position taken on the
extension of the current three-year moratorium. The moratorium has two
components. One addresses the ability of state or local governments to impose new
taxes on “Internet access services.” The second addresses their ability to impose any
“multiple or discriminatory taxes on electronic commerce.” Most bills do not
22 Some of the bills contain elements in addition to the ones discussed in this report. See CRS
Report RL30412, Internet Taxation: Bills in the 106th Congress, by Nonna A. Noto.

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distinguish between the two components and would apply the same moratorium
extension to both. Some of those bills would extend the moratorium temporarily, by
two to five years. Others would make it permanent. A few bills propose a longer
moratorium extension for taxes on Internet access than for multiple and discriminatory
taxes on electronic commerce.
Opponents of any extension of the moratorium by the 106th Congress argued that
there was no need for Congress to take action in 2000 because the moratorium does
not expire until October 21, 2001. The initial moratorium gave the states impetus to
simplify their sales tax systems. Some were concerned that extending the moratorium
will remove the urgency that the current moratorium is imposing on the Streamlined
Sales Tax Project (discussed below in the subsection on “Work through NCCUSL
or Streamlined Sales Tax Project”) to draft model sales tax legislation in time for
states’ legislative sessions in calendar 2001. Others fundamentally oppose federal
involvement in regulating state and local taxation of the Internet.
Some supporters have agreed to a five-year extension of the moratorium. Others
want to make the moratorium permanent. The latter includes people concerned about
providing businesses with greater tax law certainty and stability within which to plan,
as well as people fundamentally opposed to taxation of the Internet. These supporters
of extending the moratorium are typically not interested in addressing sales taxation
of the Internet.
Still a third group would support an extension of the moratorium, but only if it
is combined with a commitment by Congress to address the issue of sales taxation of
interstate commerce. Many representatives of states’ interests view sales tax
simplification as a precursor to having sellers collect taxes on interstate sales. They
are concerned that any extension of the moratorium be long enough for the states to
accomplish meaningful sales tax simplification, but not so long as to allow the Internet
to grow large enough to stop any attempt to tax it. From this vantage point, a five-
year extension of the moratorium appears too long.
Temporary extension. Like H.R. 3709 which passed the House, H.R. 4202
(Ehrlich), H.R. 4462 (Bachus), and S. 2255 (McCain) would extend the current
moratorium by five years. S. 2775 (Dorgan) would extend the current moratorium
by four years. H.R. 4267 (Hyde and Conyers, ACEC majority) would provide a five-
year extension to the current moratorium on multiple and discriminatory taxes on
electronic commerce, but would make the ban on Internet access taxes permanent.
H.R. 4267 also would impose a new five-year moratorium on taxation of digitized
goods and products and their nondigitized counterparts. H.R. 4460 (Hyde and
Conyers, ACEC minority) would extend the moratorium on taxes on Internet access
by five years, but the moratorium on multiple and discriminatory taxes by two years.
Make the moratorium permanent. Three bills would solely make permanent the
current three-year federal moratorium on state and local taxes on the Internet enacted
in 1998: S. 328 (Smith, B.), S. 2028 (Wyden), and S. 2036 (Smith, B.). Two bills
would both make the moratorium permanent and expand the scope of the moratorium
to ban any sales and use taxes on electronic commerce: S. 1611 (McCain) and H.R.
3252 (Kasich and Boehner). As mentioned, H.R. 4267 (Hyde and Conyers, ACEC
majority) would make the ban on Internet access taxes permanent, but would extend

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the moratorium on multiple or discriminatory taxes for five years; it would also
impose a new five-year moratorium on taxation of digitized goods and products and
their nondigitized counterparts.
Grandfathering Protection for Internet Access Taxes
A second area of difference among the bills is whether or not 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 prior to October 1, 1998, at
the time of the law’s enactment. Removing the grandfathering protection would
effectively ban all state and local taxes on Internet access.
Like H.R. 3709 which passed the House, H.R. 3252 (Kasich and Boehner) and
H.R. 4267 (Hyde) would remove the grandfathering protection. In contrast, both
H.R. 4460 (Hyde and Conyers, ACEC minority) and S. 1611 (McCain) would
explicitly continue to grandfather existing taxes on Internet access. Any bill that
simply extends the current moratorium or makes it permanent would implicitly extend
the grandfathering protection for existing Internet access taxes.
The taxation of Internet access refers to applying state and local taxes (on sales,
telecommunications, or gross receipts) to the monthly charge (of approximately $15
to $22) that subscribers pay for access to the Internet through Internet service
providers (ISPs) such as America Online (AOL) or EarthLink. Supporters of the
moratorium on access taxes and of removing the grandfathering protection view
access taxes as a form of double taxation. They point out that the underlying
“backbone transmission” telecommunications service that the Internet service provider
purchases is already taxed. They also argue that access taxes will raise the price of
Internet access, discourage usage, and thereby widen the “digital divide” between
those with access to the Internet and those without.
Opponents of the moratorium on access taxes, and therefore of removing the
grandfathering protection, believe strongly in each state’s autonomy to set its own tax
policy. They point out that Internet service providers should be able to claim a sale-
for-resale exemption for the taxes they pay on telecommunications services. They
argue that as long as other modes of communication such as telephone (which is also
used to fax) and cable are subject to tax, the Internet should be taxed similarly, so as
not to grant the Internet a competitive pricing advantage. Furthermore, they are
concerned that when communications services are bundled and sold as a package,
there is a problem of how to distinguish the taxed portion from the untaxed Internet
access portion of the communications services package.23
23 For arguments on both sides of this and other Internet tax issues, see Advisory Commission
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, p. 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].

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Expanding Scope of Moratorium
A third area of difference among the bills is whether the scope of the moratorium
on multiple and discriminatory taxes on electronic commerce would be broadened to
explicitly protect electronic commerce from sales and use taxation. A distinction is
sometimes made between the tax treatment of digitized goods that are both sold and
delivered over the Internet, and more traditional goods and services whose sales are
arranged over the Internet but which are delivered by other means, in tangible physical
form.
H.R. 4267 (Hyde and Conyers, ACEC majority) would expand the scope of the
moratorium to include taxes on sales of digitized goods and products – and their non-
digitized counterparts. This would approach the goal of a “level playing field,” or
nondiscriminatory tax treatment between electronic and tangible goods and services,
not by extending the sales tax to digitized products, but instead by removing from the
sales tax base non-digitized counterparts that currently are subject to tax, such as
books, videos, and music CDs.
S. 1611 (McCain) and H.R. 3252 (Kasich and Boehner) would expand the
moratorium to ban any sales and use taxes “...for domestic or foreign goods or
services acquired through electronic commerce.” This would apply to any products
or services purchased over the Internet, whether they are delivered over the Internet
in digital form, or delivered otherwise in tangible physical form.
The bans in all three of these bills would, to a lesser or greater extent, pre-empt
existing state authority to tax tangible goods. The bans on taxation would apply to
within-state as well as interstate sales. They would pre-empt existing state authority:
! to have sales taxes collected by e-commerce vendors on within-state
sales to individuals and businesses;
! to have businesses pay use taxes on their e-commerce purchases from
out-of-state; and
! for states to make efforts to collect use taxes from resident
individuals on their out-of-state purchases over the Internet.
Collecting Sales and Use Taxes on Internet Transactions
A fourth area of difference among the bills is whether Congress would use its
power under the Commerce Clause to help states collect use taxes on interstate sales
of goods and services arranged over the Internet. This is probably the most complex
and controversial of the Internet tax issues discussed in this report.

Several bills propose guidelines for simplifying state and local sales taxes.
However, some pursue tax simplification as a means to encourage a system of
voluntary compliance by remote sellers. Other bills provide a formal mechanism in
the form of an interstate compact under which Congress would grant states the
authority to require out-of-state sellers to collect and remit use taxes if the states
complied with certain criteria for sales tax simplification.

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Simplification of state and local sales and use taxes. There appears to be
widespread agreement that states need to simplify and standardize their systems of
state and local sales and use taxes if they hope to improve collection of use taxes on
interstate sales made to their residents. In addition to Internet sales, this concern
applies to interstate sales arranged by mail order, telephone, face-to-face, or other
means. The perceived need for administrative simplification applies regardless of
whether collection is to occur on a voluntary basis by remote sellers or through
Congress authorizing the states to require sellers to collect.
Reflecting the general consensus on the need for simplification, four other bills
include, with some small variations, the same list of 14 criteria for simplification and
uniformity included in H.R. 3709 which passed the House.24 These are H.R. 4267
(Hyde and Conyers, ACEC majority), H.R. 4460 (Hyde and Conyers, ACEC
minority), H.R. 4462 (Bachus), and S. 2775 (Dorgan).
Uniform state-wide rate or local-option rate. One of the commonly mentioned
goals for a simplified sales tax system is that each state have a single, uniform,
statewide use tax rate applicable to all remote sales (purchases made from out-of-
state).25 An average local sales tax rate could be added to the state rate. But out-of-
state sellers could only be expected to apply one combined tax rate to a purchase by
a customer from any locality in a given state. That is, remote sellers would not be
24 The 14 sales and use tax simplification criteria listed in H.R. 3709 are:
(1) a centralized, one-stop, multi-state registration system for sellers;
(2) uniform definitions for goods or services that might be included in the tax base;
(3) uniform and simple rules for attributing transactions to particular taxing jurisdictions;
(4) uniform rules for the designation and identification of purchasers exempt from the non-
multiple and non-discriminatory tax system, including a database of all exempt entities and
a rule ensuring that reliance on such database shall immunize sellers from liability;
(5) uniform procedures for the certification of software that sellers rely on to determine non-
multiple and non-discriminatory taxes and taxability;
(6) uniform bad debt rules;
(7) uniform tax returns and remittance forms;
(8) consistent electronic filing and remittance methods;
(9) state administration of all non-multiple and non-discriminatory taxes;
(10) uniform audit procedures;
(11) reasonable compensation for tax collection that reflects the complexity of an individual
state’s tax structure, including the structure of its local taxes;
(12) exemption from use tax collection requirements for remote sellers falling below a
specified de minimis threshold;
(13) appropriate protections for consumer privacy; and
(14) such other features that the member states deem warranted to remote [sic, instead of
promote] simplicity, uniformity, neutrality, efficiency, and fairness.
These features reflect considerations raised in the Advisory Commission on Electronic
Commerce’s Report to Congress as well as efforts currently underway under the Streamlined
Sales Tax Project sponsored by the National Governors’ Association and other state and local
umbrella groups.
25 One rate per state is not, however, one of the 14 simplification criteria listed in the
preceding footnote.

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CRS-12
expected to administer the varying local-option taxes particular to different cities or
counties in a state.
The findings section of H.R. 4460 (Hyde and Conyers, ACEC minority) would
have the state administer all taxes and distribute revenues to subdivisions of the state
“according to precedent and applicable State law.” None of the other bills addresses
how states would distribute the local portion of the use tax collections among their
local governments.
Some local government representatives want to leave open the possibility of
having remote sellers collect the actual local tax levy. They argue that computer
software is, or will soon be, available to make that feasible at a reasonable
administrative cost. S. 2775 (Dorgan) provides that a remote seller has the annual
option of collecting the actual applicable state and local use tax rate, as an alternative
to collecting a single, uniform, statewide rate.
Work through NCCUSL or Streamlined Sales Tax Project. The bills
supporting sales tax simplification may differ in terms of which of two organizations
they endorse to oversee the simplification effort – the National Conference of
Commissioners on Uniform State Laws (NCCUSL) or the Streamlined Sales Tax
Project (SSTP).
NCCUSL is a long-standing non-profit association, founded in 1892. Through
NCCUSL, the commissioners of uniform state laws from each state join together to
promote uniformity in laws among the states. They study existing laws and then draft
and propose specific model statutes or uniform legal codes in areas of the law where
uniformity seems desirable. NCCUSL is perhaps best known for developing the
Uniform Commercial Code (UCC). For a uniform code proposed by NCCUSL to
take effect, it must be approved by individual state legislatures. It may be adopted
either exactly as written or adapted to the particular preferences of a state. Drafting
and enacting a uniform act is typically a lengthy process. For example, it took 10
years for the NCCUSL to draft the Uniform Commercial Code and another 14 years
before it was enacted by states across the country.26 H.R. 4267 (Hyde and Conyers,
ACEC majority), H.R. 4460 (Hyde and Conyers, ACEC minority), and S. 2775
(Dorgan) call upon the involvement of NCCUSL in the simplification of the sales tax
system.
The Streamlined Sales Tax Project (SSTP) is an ad hoc effort that started in
September 1999 as an outgrowth of the proposals of the “minority” on the Advisory
Commission on Electronic Commerce, which included most of the commission
members representing state and local governments. The SSTP is a voluntary,
cooperative effort among state governments. The SSTP formally began its work in
March 2000. The project has two main components. One is to simplify state and
local sales and use taxes and standardize their administration among the states. The
other is to identify both the computer software and a financial transmission system
26 More information about The National Conference of Commissioners on Uniform State
Laws is available on their Web site [http://www.nccusl.org].

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CRS-13
that could be used to implement the collection of use taxes on out-of-state sales at a
reasonable cost, for which vendors could be compensated by the states.
The original motivating purpose of the Streamlined Sales Tax Project was to get
the states to reduce the complexity of their sales tax systems sufficiently that remote
sellers would be willing to voluntarily collect and remit use taxes on out-of-state sales.
Perhaps longer term, then, Congress might be willing to authorize states to require
use tax collection by remote sellers, once it was convinced that administrative
compliance costs for sellers had been reduced to a reasonable level.
As of December 2000, 29 states were formally participating in the SSTP, with
nine other states participating as observers.27 The SSTP met its goal of formulating
model legislation by December 2000, in time to present to state legislatures for
enactment during 2001. In a December 22, 2000 teleconference, 27 member states
of the SSTP approved a motion to forward both model simplified sales tax legislation
and an accompanying compact to the states for consideration during their 2001
legislative sessions. The model legislation is formally known as the Uniform Sales and
Use Tax Administration Act. The compact is known as the Streamlined Sales and
Use Tax Agreement. 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 Agreement must contain. The Agreement sets forth the
specific elements of the new sales and use tax system. A state must enact all of the
Agreement in order to be in compliance and become a participant in the new system.
The National Conference of State Legislatures and the National Governors’
Association remain actively involved in this year’s effort to have individual states
draft, pass, and enact the legislation needed for each to participate in the multistate
agreement. In addition, during 2001, the SSTP will continue to work to resolve
specific definitions (such as those involving software, digital goods, and tangible
personal property) and procedures (such as vendor compensation for collection) in
the Agreement.

In September 2000, the SSTP began a pilot project to test tax collection
software under current sales tax law. It contracted with four providers – in Kansas,
Michigan, North Carolina, and Wisconsin. These four states and Wyoming are
already actively considering the model legislation. The Agreement cannot take effect
until five states have signed and filed a certificate of compliance.28
27 The 29 states formally participating in the Streamlined Sales Tax Project are Alabama,
Arkansas, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan,
Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, North Carolina, North
Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas,
Utah, West Virginia, Wisconsin, and Wyoming. Forty-five states and the District of
Columbia levy sales and use taxes.
28 More information about the Streamlined Sales Tax Project, including the text of the uniform
a c t a n d u n i f o r m a g r e e m e n t , i s a v a i l a b l e o n t h e i r W e b s i t e
[http://www.streamlinedsalestax.org] or [http://www.geocities.com/streamlined2000/].

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CRS-14
H.R. 4462 (Bachus) encourages the states to work voluntarily through the
Streamlined Sales Tax Project.
Voluntary versus required collection by interstate sellers. Some of the
Internet tax bills would simply endorse sales tax simplification as a means of
encouraging voluntary cooperation by sellers. Other bills would have Congress grant
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 meets certain criteria for simplifying its sales and use
tax system. H.R. 3709 which passed and H.R. 4267 (Hyde and Conyers, ACEC
majority) endorse simplification of state and local sales and use taxes, but do not offer
the states authority to require collection.
In contrast, H.R. 4460 (Hyde and Conyers, ACEC minority), H.R. 4462
(Bachus), and S. 2775 (Dorgan) provide 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.
Under H.R. 4460 (Hyde and Conyers, ACEC minority) collection authority would be
conferred on any state adopting the simplification requirements. Alternatively, under
S. 2775 (Dorgan) and H.R. 4462 (Bachus), 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.29 However, some Members believe 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.
Codify nexus standards. Some business representatives would like Congress
to clarify and codify situations in which use of the Internet (as a means of
communication and sales solicitation) would not be considered physical presence and
therefore would not establish a business’s substantial nexus in a state for tax
purposes.30 While most discussion of Internet taxation has focused on sales taxation,
many businesses engaged in interstate commerce are perhaps more concerned about
compliance with business activity taxes (e.g., income, gross receipts, and franchise
taxes) in more than one state.31 In addition to tax liability and reporting requirements,
having substantial nexus in a state exposes businesses to the possibility of audits,
litigation, and appeals by that state.
29 Under H.R. 4460 (Hyde and Conyers, ACEC minority) the Secretary of the Treasury would
need to certify the simplified system; any state that adopted it could require collection by
remote sellers. Under S. 2775 (Dorgan) the compact could take effect automatically once
signed by 20 states and sent to Congress, if the Congress did not take action within 120 days
to disapprove it. Under H.R. 4462 (Bachus) the compact could take effect automatically once
it was signed by 20 states and submitted to the President, its streamlined system was approved
by a report from the President to the Congress, and if the Congress did not within 90 days
pass a joint resolution (whose language is detailed in the bill) disapproving the system.
30 This is commonly referred to as establishing “bright-line” nexus standards.
31 H.R. 2401 defines business activity taxes to include a tax imposed on or measured by net
income, a business license tax, a business and occupation tax, a franchise tax, a single
business tax, a capital stock tax, or any similar tax or fee imposed by a state. Business
activity taxes also include taxes on apportioned corporate net income.

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CRS-15
Two of the Internet tax bills offer new nexus guidelines for physical presence
that would apply to state and local business activity taxes as well as sales and use
taxes. They provide taxation “safe harbors” for certain Internet activity, as well as
protection for certain traditional, non-Internet sales solicitation arrangements. The
two bills list somewhat different business activities that would not constitute physical
presence. Codifying new nexus guidelines is one component of H.R. 4267 (Hyde and
Conyers, ACEC majority), but it is the sole purpose of S. 2401 (Gregg and Kohl).
H.R. 4267 would amend the Internet Tax Freedom Act. It would codify nine
factors that would not establish sufficient nexus for states to collect a sales or income
tax from remote (out-of-state) vendors. Critics consider two of these requests
particularly aggressive. One is that customers could receive repair or warranty
services in their home state, by or on behalf of an out-of-state seller, on property
purchased from that out-of-state seller. The other is that customers could return
goods or products purchased over the Internet or through a mail order catalogue to
an affiliated party’s physical location within their home state.
Critics are also concerned that exempting the affiliation of an out-of-state seller
with a person that is physically present and paying taxes in the state would condone
the practice of having tax-free Internet kiosks operated by “dot-com subsidiaries”
located within traditional retail stores. Critics also point out that exempting the
presence of intangible property in a state could protect out-of-state financial
institutions from being taxed on their various operations in a state.
S. 2401 would amend a federal statute, 15 U.S.C. 381 et seq., enacted by P.L.
86-272 in 1959. This law prohibits state and local taxes on net income from interstate
commerce if the business’s only activity in the state was the solicitation of orders, and
if those orders were sent outside the state for approval or rejection and filled by
shipment from a point outside the state. S. 2401 provides that a state or local
government may not impose a business activity tax, or the duty to collect and remit
sales or use taxes, on income earned from interstate commerce, unless that person has
a “substantial physical presence” (defining a new term) in the taxing state.
S. 2401 lists eight business activities which are not sufficient to establish
substantial physical presence.32 These differ somewhat from the factors listed in
32 The business activities listed in S. 2401 that would not constitute substantial physical
presence include:
(1) the solicitation of orders or contracts which are approved or rejected outside the state and
filled by shipment from outside the state; this includes orders by a person or in the name of
a prospective customer of the person, or by an independent contractor working on behalf of
such person;
(2) the presence or use of intangible personal property in a state, including patents, copyrights,
trademarks, logos, securities, contracts, money, deposits, loans, electronic or digital signals,
and web pages;
(3) the use of the Internet to create or maintain a World Wide Web site accessible by persons
in the state;
(4) the use of the Internet to take and process orders via a web page or site on a computer
physically located in the state;
(continued...)

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CRS-16
H.R. 4267. For example, the exempted list includes the ability to receive warranty
services but not the ability to return products. It includes the presence of intangible
property, but goes further to list numerous specific examples. It specifies the use of
the Internet to maintain a World Wide Web site accessible in the state and the use of
the Internet to take and process orders via a web page on a computer physically
located in the state. Building upon P.L. 86-272, S. 2401 emphasizes the solicitation
of orders. It distinguishes between an out-of-state seller having a formal “agency
relationship” with an in-state sales solicitor, which would qualify as physical presence,
and an independent contractor relationship, which would not.
Supporters say that S. 2401 would merely codify the standard set forth by the
U.S. Supreme Court in Quill v. North Dakota. But state and local governments
generally oppose federal efforts to codify nexus standards, which they view as unduly
restricting states’ ability to levy business activity (income) taxes as well as sales and
use taxes.33 One critic describes S. 2401 as depriving states of jurisdiction to tax just
about any interstate activity, whether the Internet is involved or not.34, 35
32 (...continued)
(5) the use of any service provider for the transmission of communications (whether by cable,
satellite, radio, telecommunications, or other similar system);
(6) the affiliation with a person located in the state unless that is the person’s agent and the
activity of the agent constitutes substantial physical presence; and
(7) the use of an unaffiliated representative or independent contractor in the state to perform
warranty or repair services on property sold by a person located outside the state.
(The above list includes 7 rather than 8 entries because item 1 here incorporates the first
two items in S. 2401.)
33 Kessler, Martha. FTA Opposes Nexus Change Bill, Favors Expansion of Sales Tax
Collection Duty. Bureau of National Affairs, Daily Tax Report, no. 113, June 12, 2000. p.
G-5. This refers to S. 2401.
34 Sheppard, Lee A. Business Taxpayers Resist State Tax Nexus in Courts and Congress,
Tax Notes, vol. 87, no. 6, May 8, 2000. p. 740-47.
35 For a heated debate on the jurisdictional standards proposal, see Sheppard, Doug, Dean
Andal, and Michael Maserov. California’s Andal, CBPP’s Maserov Go Head-To-Head on
E-Commerce. State Tax Notes. Tax Analysts Doc. 1999-38291, November 30, 1999. Dean
Andal is chairman of the California State Board of Equalization. Andal was a member of the
Advisory Commission on Electronic Commerce and the prime supporter of the proposal to
codify jurisdictional standards, embodied in S. 2401. Michael Mazerov, a senior policy
analyst for the Center on Budget and Policy Priorities, is critical of the proposal.

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CRS-17
Table 1. Comparison of Internet Tax Bills on Four Distinguishing Issues
Bill number
Extension of
Grandfather
Expand
Taxation of
(sponsor)
moratorium
Internet
scope of
interstate sales
access taxes
moratorium
H.R. 3252
Permanent
Eliminate
Ban any sales
--
(Kasich)
and use taxes
on e-
commerce
H.R. 3709
5 years,
Eliminate
--
Endorses simplification of
(Cox)
until 10/21/06
state sales taxes, but does
passed
not offer states authority to
House
require collection. Lists
5/10/00
simplification criteria.
H.R. 4202
5 years,
--
--
--
(Ehrlich)
until 10/21/06
H.R. 4267
Extend
Eliminate.
Impose new
Codify e-commerce nexus
(Hyde and
moratorium on
Permanent
moratorium
guidelines on physical
Conyers,
multiple or
ban on
on taxation
presence. Applicable to
ACEC
discriminatory
Internet
of digitized
business activity or income
majority)
taxes for 5
access
goods and
taxes as well as sales taxes.
years,
taxes.
products and
Endorses simplification of
until 10/21/06
their non-
state sales taxes, but does
digitized
not offer states authority to
counterparts,
require collection. Lists
until
simplification criteria.
10/21/06
Works with NCCUSL.
H.R. 4460
Extend
Explicitly
--
Congress would grant states
(Hyde and
moratorium on
continues
participating in a multistate
Conyers,
Internet access
compact the authority to
ACEC
taxes 5 years,
require collection if the state
minority)
until 12/31/06,
conformed with certain
and on multiple
simplification requirements.
and
Lists simplification criteria.
discriminatory
Works with NCCUSL.
taxes 2 years,
until 12/31/03

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CRS-18
Table 1. Comparison of Internet Tax Bills on Four Distinguishing Issues
Bill number
Extension of
Grandfather
Expand
Taxation of
(sponsor)
moratorium
Internet
scope of
interstate sales
access taxes
moratorium
H.R. 4462
5 years, until
--
--
Congress would grant states
(Bachus)
10/21/06
joining a multistate compact
the authority to require tax
collection if the state
conformed with certain
simplification requirements.
Lists simplification criteria.
Works through the
Streamlined Sales Tax
Project.
S. 328
Permanent
--
--
--
(Smith, B.)
S. 1611
Permanent
Explicitly
Ban any sales
--
(McCain)
continues
and use taxes
on e-
commerce
S. 2028
Permanent
--
--
--
(Wyden)
S. 2036
Permanent
--
--
--
(Smith, B.)
S. 2255
5 years,
--
--
--
(McCain)
until 12/31/06
S. 2401
--
--
--
Codify e-commerce nexus
(Gregg and
guidelines defining
Kohl)
“substantial physical
presence.” Applicable to
business activity taxes as well
as sales taxes.

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CRS-19
Table 1. Comparison of Internet Tax Bills on Four Distinguishing Issues
Bill number
Extension of
Grandfather
Expand
Taxation of
(sponsor)
moratorium
Internet
scope of
interstate sales
access taxes
moratorium
S. 2775
4 years,
--
--
Congress would grant states
(Dorgan)
until 12/31/05
joining a multistate compact
the authority to require
collection if the state
conformed with certain
simplification requirements.
Lists simplification criteria.
Works with NCCUSL.

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CRS-20
For Additional Information
CRS Reports
CRS Report RS20426. Electronic Commerce: An Introduction, by Glenn J.
McLoughlin.
CRS Report RL30435. Internet and E-Commerce Statistics: What They Mean and
Where to Find Them on the Web, by Rita Tehan.
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 Resources Available on the World Wide Web
Advisory Commission on Electronic Commerce. Internet Home Page.
[http://www.ecommercecommission.org]
For coverage of arguments generally against applying current sales and use taxes
to sales made over the Internet, see:
e-Freedom Coalition. Internet Home Page.
[http://www.e-freedom.org]
Representative Christopher Cox’s Office. Internet Tax Freedom Act Home Page.
[http://www.house.gov/cox/nettax]
For coverage of arguments generally in support of applying current sales and use
taxes to sales made over the Internet, see:
National Conference of State Legislatures (NCSL). Internet address.
[http://www.ncsl.org/programs/fiscal/tctelcom.htm].

National Governors’ Association (NGA). Internet address.
[http://www.nga.org/Internet/equality.asp].
Streamlined Sales Tax Project (SSTP). Internet Home Page.
[http://www.streamlinedsalestax.org] or
[http://www.geocities.com/streamlined2000/]

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