Order Code RL33261
Internet Taxation: Issues and Legislation
Updated February 12, 2007
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Nonna A. Noto
Specialist in Public Finance
Government and Finance Division

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Internet Taxation: Issues and Legislation
Summary
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 P.L. 107-75. The moratorium was
extended for an additional four years, through November 1, 2007, by P.L. 108-435.
Taxes on Internet access that were in place before October 1, 1998, were protected
by a grandfather clause.
In the 110th Congress, two companion bills have been introduced. Both H.R.
743 (38 cosponsors) and S. 156 (9 cosponsors), which are identical, would make the
moratorium permanent.
In the 109th Congress, H.R. 1684, H.R. 1685, H.R. 4862, and H.R. 5422, would
have made the moratorium permanent by repealing the moratorium’s sunset date.
H.R. 1685 and H.R. 4862 would have also struck the grandfather provision for digital
subscriber line (DSL) taxes. The grandfather provision was added in the most recent
extension of the ITFA (P.L. 108-435). In the Senate, S. 849 would have also
repealed the moratorium’s sunset; it is similar, though not identical, to H.R. 1684.
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 109th Congress, S. 2152 and S. 2153 would have granted states that
comply with the Streamlined Sales and Use Tax Agreement (a multistate compact)
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 109th Congress, H.R. 1956 and its Senate companion, S. 2721, would
have established a physical presence standard for business activity taxes. For more
on state corporate income taxes, see CRS Report RL32297, State Corporate Income
Taxes: A Description and Analysis, by Steven Maguire.
This report will be updated as legislative events warrant.

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Contents
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Moratorium: Permanent vs. Temporary Extension? . . . . . . . . . . . . . . . . 3
Grandfathering of Existing Access Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Taxation of Internet Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Multiple Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Discriminatory Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Streamlined Sales Taxes and Remote Collection Authority . . . . . . . . . . . . . 9
Remote Collection Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Streamlined Sales and Use Tax Agreement (SSUTA) . . . . . . . . . 10
Business Activity Tax (BAT) Nexus Standards . . . . . . . . . . . . . . . . . . . . . 11
Action in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Action in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Internet Tax Moratorium Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Internet-Commerce-Related Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SSUTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
BAT Nexus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
For Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Hearings in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Hearings in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Internet Taxation: Issues and Legislation
History
The Internet Tax Freedom Act (ITFA) was enacted on October 21, 1998, as
Title XI of Division C of P.L. 105-277, the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999.1 The ITFA placed a three-year moratorium
on the ability of state and local governments to (1) impose new taxes on Internet
access or (2) impose any multiple or discriminatory taxes on electronic commerce.
The act grandfathered the state and local access taxes that were “... generally imposed
and actually enforced prior to October 1, 1998....”
This initial Internet tax moratorium expired on October 21, 2001. The Internet
Tax Nondiscrimination Act, P.L. 107-75, was enacted on November 28, 2001. It
provided for a two-year extension of the prior moratorium, through November 1,
2003. The moratorium was extended for an additional four years, through November
1, 2007, by P.L. 108-435, enacted on December 3, 2004. Taxes on Internet access
that were in place before October 1, 1998, were protected by a grandfather clause.
The latest extension also grandfathered pre-November 1, 2003, taxes (mostly on
digital subscriber line or DSL services) through November 1, 2005, and excluded
from the moratorium taxes on voice or similar service utilizing voice over Internet
protocol (VoIP). These services were not as prevalent at the time the original
moratorium was enacted. As part of compromise negotiations in the 108th Congress,
the grandfathering protection for Internet access taxes in Wisconsin was limited to
three years (through November 1, 2006) instead of four, and the ability of Texas
municipalities to collect franchise fees from telecommunications providers that use
public lands was protected. The 2004 act included several modifications and
refinements to the original ITFA. Specifically, the 2004 act:
! Extended the Internet tax moratorium for four years, retroactively
one year to November 1, 2003, and forward three years until
November 1, 2007. The moratorium bars state and local
governments from imposing any new taxes on Internet access or
imposing any multiple or discriminatory taxes on electronic
commerce.
! Clarified that the term “tax on Internet access” applies regardless of
whether the tax is imposed on a provider or buyer of Internet access.
1 Title XII was also part of S. 442, 105th Congress, the underlying ITFA legislation. Titles
XI and XII, 112 Stat. 2681-719 through 728 (1998). Title XI is codified as the ITFA in 47
U.S.C. 151 note. Title XII is codified as 19 U.S.C. 2241 note.

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! Made explicit that a “tax on Internet access” does not include a tax
levied on net income, capital stock, net worth, or property value.
! Provided that the terms “Internet access” and “Internet access
service” do “not include telecommunications services, except to the
extent such services are purchased, used, or sold by a provider of
Internet access to provide Internet access.” (This permits some
portion of telecommunications services to be included under the tax
moratorium.)
! Extended the grandfather protection from November 1, 2003, until
November 1, 2007, for state and local governments which taxed
Internet access prior to October 1, 1998. An exception was made for
a state telecommunications service tax in Wisconsin, for which
protection was extended only until November 1, 2006. Protection
was extended only until November 1, 2005, for taxes on Internet
access that were generally imposed and actually enforced as of
November 1, 2003. This provision applies mainly to taxes on digital
subscriber line (DSL) services.
! Explicitly protected the Texas municipal access line fee. This
provision is intended to protect the ability of Texas municipalities to
collect franchise fees from telecommunications providers that use
public lands.
! Included a new accounting rule that charges for Internet access may
be subject to taxation in cases where they are aggregated with
charges for telecommunications services or other charges that are
subject to taxation — unless the Internet access provider can
reasonably identify the charges for Internet access.
! Stated that nothing in the act prevents the collection of any charges
for federal or state universal service programs (for telephone
service), or for state or local 911 and E-911 (emergency call)
services, nor does it affect any federal or state regulatory non-tax
proceeding (such as FCC regulatory proceedings).
! Clarified that the moratorium does not apply to taxes on Voice over
Internet Protocol (VoIP) services. This section does not apply to
services that are incidental to Internet access, such as voice-capable
e-mail or instant messaging.
! And Provided for the GAO (Government Accountability Office) to
study the effects of the Internet tax moratorium on the revenues of
state and local governments and on the deployment and adoption of
broadband technologies for Internet access throughout the United
States, including under-served rural areas. The study was to
compare deployment in states that tax broadband Internet access
service with states that do not. The Comptroller General is to report
the findings, conclusions, and any recommendations from the study

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to the Senate Committee on Commerce, Science, and Transportation
and the House Committee on Energy and Commerce by November
1, 2005. The report was published in January 2006.2
Issues
The five main issues surrounding Internet taxation and e-commerce that the
110th Congress may address are as follows:
! whether or not to extend the moratorium on Internet access taxes and
if so, temporarily or permanently;
! whether, if the moratorium was to be extended, to grant grandfather
protection for states that imposed taxes on Internet access before the
original moratorium was enacted;
! how to better define Internet access and discriminatory taxes to the
satisfaction of all stakeholders;
! whether to grant states the authority to require remote sellers to
collect use taxes if the states adopted a streamlined sales tax system;
and
! if congressional codification of guidelines is needed for establishing
whether or not a business engaged in interstate commerce has nexus
in a jurisdiction for purposes of business activity tax (BAT, e.g.,
corporate income tax, franchise tax, business license tax) liability.
Theses issues remain similar to those considered in 2001 and 2004, the two
previous times the Internet tax moratorium was temporarily extended.3
The Moratorium: Permanent vs. Temporary Extension?
The intent of the Internet Tax Freedom Act (enacted in 1998) was to prevent
state taxes on Internet access, to ensure that multiple jurisdictions could not tax the
same electronic commerce transaction, and to ensure that commerce over the Internet
would not be singled out for discriminatory tax treatment. Supporters of extending
the moratorium contend that the Internet should continue to be protected from the
administrative and financial burdens of taxation in order to further advance of
2 U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue
Impacts Will Vary by State, GAO-06-273, Jan. 2006.
3 For a longer discussion of the extension of the moratorium, grandfathering of existing
access taxes, and collecting sales and use taxes on interstate sales — in relation to bills
introduced in the first session of the 107th Congress — see CRS Report RL31177, Extending
the Internet Tax Moratorium and Related Issues, by Nonna A. Noto.

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Internet technology and associated economic activity.4 Opponents of extending the
moratorium contend that a federal moratorium infringes on the states’ independent
authority to levy taxes and, further, that Internet transactions and services should not
be afforded preferential tax treatment.
Supporters of permanent extension of the moratorium maintain it would
eliminate the need for Congress to revisit the issues surrounding Internet taxation
when a temporary moratorium expires. Permanent extension presumably could also
provide both the producers and consumers of Internet services greater certainty about
state and local taxation of the Internet. Opponents, on the other hand, say a
permanent extension would not address the underlying issue of federal restrictions
on state taxation, nor would it clarify the definition of Internet access.
Opponents of a permanent extension of the moratorium point out that a
temporary one would allow Congress to periodically review the conditions of the
moratorium and the effect of the moratorium on the states. Reassessment could then
be made in the context of developments in computer technology and business
organization, as well as state and local government tax administration. A temporary
extension could also provide more time for the states to further simplify their sales
and use taxes. (See the discussion below on Streamlined Sales Taxes and Remote
Collection Authority.)
Allowing the moratorium to sunset would permit states to tax Internet access,
although, in practice, the trend has been for states to repeal their Internet access taxes.
As Internet technology continues to change the telecommunications industry,
however, state and local governments will likely modify how the industry is taxed.
A sunset of the moratorium could induce states to address the taxation of
telecommunications more broadly.
Grandfathering of Existing Access Taxes
The Internet Tax Freedom Act exempted from the moratorium taxes on Internet
access that were “... generally imposed and actually enforced prior to October 1,
1998....” When ITFA legislation was being considered in the spring of 1998, 10
states and the District of Columbia were already applying their sales tax to Internet
access services.5 Subsequently, Connecticut, Iowa, Tennessee, and the District of
Columbia eliminated their tax on Internet access, and South Carolina has not
enforced the collection of its tax during the federal moratorium. These developments
left six states imposing a sales tax (or equivalent tax) on Internet access as of January
2006: New Mexico, North Dakota, Ohio (on commercial use only), South Dakota,
4 U.S. Congress, Committee on Commerce, Science, and Transportation, Internet Tax Non-
Discrimination Act of 2003, report to accompany S. 150, 108th Cong., 1st sess., S.Rept. 108-
155, (Washington: GPO, 2003), p. 1.
5 National Conference of State Legislatures, “Which States Tax Internet Access?” March
25, 1998. Available at [http://www.ncsl.org/programs/fiscal/intertax.htm].

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Texas (on monthly charges over $25), and Wisconsin.6 In addition, Hawaii levies its
general excise tax, New Hampshire its communications services tax (imposed on all
two-way communications equipment), and Washington State its business and
occupation tax (a gross receipts tax levied on business) on Internet access. The
Congressional Budget Office believes that several local jurisdictions in Colorado,
Ohio, South Dakota, Texas, Washington, and Wisconsin also are collecting taxes on
Internet access.7
The grandfathering protection was continued when the ITFA moratorium was
extended for two years in 2001 (through November 1, 2003). P.L. 108-435 further
extended the grandfathering protection for pre-October 1998 taxes through
November 1, 2007. A second grandfathering issue arose in 2004 as states began to
tax Internet access provided through digital subscriber lines (DSL), a high-speed
telephone service. DSL is considered a telecommunication service and was exempt
from the original moratorium and thus taxable. P.L 108-435 grandfathered pre-
November 2003 taxes (mostly taxes on DSL service) through November 1, 2005.
In its cost estimates for H.R. 49 and S. 150 in the 108th Congress, the
Congressional Budget Office (CBO) determined that eliminating the grandfathering
protection for Internet access taxes would impose an intergovernmental mandate as
defined in the Unfunded Mandates Reform Act (UMRA, 2 U.S.C. 1501-1571).8
According to CBO, the prohibition of taxes on Internet access that were then
collected in up to 10 states (in 2003, at the time of the CBO study, more states had
Internet access taxes) and a few local jurisdictions in six states, would cost these
jurisdictions approximately $80 million to $120 million per year. This estimate alone
exceeded the UMRA threshold of $59 million in 2003, in the case of H.R. 49, and
$64 million in 2007 (adjusted annually for inflation), in the case of S. 150. CBO
noted that additional state and local revenues could be lost if more
telecommunications services and information content were redefined as Internet
access.
In addition, in a report released in October 2003, the Center on Budget and
Policy Priorities estimated that as many as 27 states could lose approximately $70
million per year if they were not allowed to tax DSL Internet access services.9 CBO
6 Vertex, Inc., Tax Cybrary. Available at [http://www.vertexinc.com], visited Jan. 27, 2006.
7 Congressional Budget Office, “Cost Estimate for S. 150, the Internet Tax
Nondiscrimination Act,” Sept. 9, 2003. Contained in U.S. Congress, Senate, Committee on
Commerce, Science, and Transportation, Internet Tax Non-discrimination Act of 2003,
Report on S. 150, 108th Cong., 1st sess., Report 108-155, Sept. 29, 2003 (Washington: GPO,
2003), p. 7. Cost estimate also available at [http://www.cbo.gov].
8 Congressional Budget Office, “Cost Estimate for H.R. 49, Internet Tax Nondiscrimination
Act,” as ordered reported by the House Committee on the Judiciary on July 16, 2003,
Washington, July 21, 2003; and “Cost Estimate for S. 150, the Internet Tax
Nondiscrimination Act.” Both available at [http://www.cbo.gov].
9 Michael Mazerov, “Making the Internet Tax Freedom Act Permanent in the Form
Currently Proposed Would Lead to a Substantial Loss for States and Localities,” Center on
Budget and Policy Priorities, Oct. 20, 2003. Available at [http://www.cbpp.org].

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estimated the revenues that would be lost from prohibiting taxes on DSL at $40
million in 2003 and projected an $80 million loss per year by 2008.10
Definitions
As noted earlier, the ITFA tax moratorium prohibits new taxes on Internet
access and multiple or discriminatory taxes on electronic commerce. The act’s
definitions of Internet access and of discriminatory tax, in particular, have been the
source of some concern and legal uncertainty for state and local governments,
providers of new-technology Internet access service, telecommunications companies
offering bundled communications and information services, supporters of federal and
state universal service programs, and companies with “dot.com” subsidiaries.
Taxation of Internet Access. The taxation of Internet access most
commonly refers to the application of state and local sales and use taxes to the
monthly charges that retail subscribers pay for access to the Internet. These payments
may go to traditional dial-up Internet service providers (ISPs) such as America
Online (AOL) and EarthLink, or to the local telephone or cable TV company.
According to the Federation of Tax Administrators, the tax may also take the form
of a sales and use tax or excise tax levied specifically on telecommunications,
information services, or data processing services, the definition of which
encompasses “charges for Internet access.” P.L. 108-435 clarified that a “tax on
Internet access” applies regardless of whether the tax is imposed on a provider or
buyer of Internet access.11
Telecommunications Industry Concerns. Telecommunications carriers
were concerned that Internet access offered through primarily telecommunications
technologies, such as DSL or wireless services, might not be treated as exempt from
tax, while access offered over other technologies, such as cable modem, would be
exempt. In an attempt to address these concerns, P.L. 108-435 provided that all
forms of telecommunications services used to provide Internet access would be
exempt from state and local taxes under the moratorium.12 P.L. 108-435 added the
phrase shown below in italics to the definition of Internet access and Internet access
service. According to Section 1105(5) of the revised Internet Tax Freedom Act,
The term “Internet access” means a service that enables users to access content,
information, electronic mail, or other services offered over the Internet and may
also include access to proprietary content, information, and other services as part
of a package of services offered to users. Such term does not include
telecommunications services except to the extent such services are purchased,
10 For an overview of revenue loss estimates, see U.S. Government Accountability Office,
Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, GAO-06-273, Jan.
2006.
11 A recent GAO (op. cit. Jan. 2006, p. 23) report concluded that ISP acquired services are
not protected by the moratorium.
12 For more information, see U.S. Congress, Senate Committee on Commerce, Science, and
Transportation, Internet Tax Non-discrimination Act of 2003, Report on S. 150,108th Cong.,
1st sess., S.Rept. 108-155, Sept. 29, 2003 (Washington: GPO, 2003).

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used, or sold by a provider of Internet access to provide Internet access.
[Emphasis added.]
As a result, some portion of telecommunications services may be included under the
tax moratorium.
State and Local Government Concerns. State and local governments are
concerned that the revised language would broaden the current tax exemption far
beyond retail Internet access. The expanded definition could also exempt not only
the services that connect the consumer to the Internet, but also all of the
telecommunications services that compose the Internet backbone.13 While not
quantifying the likely cost, CBO indicated that this interpretation of S. 150 (P.L. 108-
435) could reduce state and local revenues from taxes on telecommunications.14
P.L. 108-435 made explicit that the term “tax on Internet access” does not
include a tax levied on net income, capital stock, net worth, or property value. It
extended the grandfather protection for existing Internet access taxes until November
1, 2007, with the exception of Wisconsin, where protection ended on November 1,
2006. It explicitly protected the Texas municipal access line fee; this protects the
ability of Texas municipalities to collect franchise fees from telecommunications
providers that use public lands.
In addition, state and local governments were concerned that with the growth
of Internet telephony (Voice over Internet Protocol, VoIP), there would be less
traditional telephone service or plain old telephone service (POTS) remaining in the
tax base. Currently, state and local taxes on voice telephone services produce $12
billion in annual revenues.15 P.L. 108-435 clarified that the tax moratorium does not
apply to VoIP services, which may be taxed.16
Bundling of Services. The breadth of coverage in the first sentence of the
definition of Internet access shown above gives rise to concern on the part of state
and local revenue departments that the tax-protection of Internet access may extend
to “bundled” products and services that might otherwise be taxable if purchased on
their own. These could include data and information services, cable television,
books, magazines, games, music, and video on demand, for example. These types
13 Harley Duncan and Mattt Tomalis, “On the ITFA: Telecom’s Trojan Horse,” State Tax
Notes, Jan.12, 2004, pp. 129-132.
14 Congressional Budget Office, “Cost Estimate for S. 150, Internet Tax Nondiscrimination
Act,” Sept. 9, 2003. Available at [http://www.cbo.gov] and included in Senate Commerce
Committee, Report on S. 150, S.Rept. 108-155, pp. 8.
15 Michael Mazerov, “A Permanent Ban on Internet Access Taxation Risks Serious Erosion
of State and Local Telephone Tax Revenue as Phone Calls Migrate to the Internet,” Center
on Budget and Policy Priorities, Washington, DC, Feb. 11, 2004, p. 1. Available at
[http://www.cbpp.org].
16 For objections to a tax prohibition on VoIP, see Michael Mazerov, “Proposed ‘Voice over
Internet Protocol Regulatory Freedom Act’ Threatens to Strip States and Localities of
Billions of Dollars in Annual Tax Revenues,” Center on Budget and Policy Priorities,
Washington, DC, July 20, 2004. Available at [http://www.cbpp.org].

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of products and services can be offered online and sold as part of an Internet access
service.17
P.L. 108-435 included a new accounting rule which addressed the bundling
issue. Under this rule, Internet access service may be taxable if access fees are
aggregated with fees for otherwise-taxable telecommunications services. If the
Internet access provider can reasonably identify the charges for Internet access, then
the Internet access, however, is not taxable.
Funding Universal Service. Some Members of Congress were concerned
about protecting the financing source for the Universal Service Fund (USF).18 The
USF is administered by the Universal Service Administrative Company, an
independent not-for-profit organization operating under the auspices of the Federal
Communications Commission (FCC). The USF is financed by mandatory
contributions from interstate telecommunications carriers.19 A company’s USF
contribution is a percentage of its interstate and international end-user revenues.20
Some states also levy charges on the intrastate retail revenues of telecommunications
carriers for their state’s universal service fund.21
Supporters of the universal service programs were concerned that efforts to
protect Internet access and associated telecommunications services should not reduce
the funding base for universal service. P.L. 108-435 does not prevent the federal
government or the states from imposing or collecting the fees or charges on
telecommunications that are used to finance the universal service program. Nor does
it prevent states or local governments from collecting fees or charges to support 911
or E-911 (emergency) services. Nor does it affect any federal or state regulatory
proceeding that is not related to taxation.
17 Harley Duncan and Matt Tomalis, “On the Internet Tax Freedom Act: The Forgotten First
Sentence,” State Tax Notes, March 29, 2004, pp. 1105-1108.
18 The USF subsidizes telephone service to low-income consumers and to high-cost rural and
insular areas. Through the E-rate or education-rate program instituted by the
Telecommunications Act of 1996, the USF also subsidizes telecommunications discounts
for schools and libraries. Also as a result of the 1996 act, the USF subsidizes
communications links between rural health care providers and urban medical centers. For
further information on the E-rate program, see CRS Report RL32018, The E-Rate Program:
Universal Service Fund Telecommunications Discounts for Schools, by Angele A. Gilroy.
19 All telecommunications providers that furnish service between states must contribute to
the USF. This includes long distance companies, local telephone companies, wireless
telephone companies, paging companies, and payphone providers.
20 The percentage, known as the contribution factor, is set quarterly, and varies depending
on the financing needs of the universal service programs. The federal universal service
contribution factor for the fourth quarter of 2005 was 0.102 or 10.2%. The proposed
contribution factor for the first quarter of 2006 is also 0.102 or 10.2%. Federal
Communications Commission, Contribution Factors and Quarterly Filings, available at
[http://www.fcc.gov/wcb/universal_service/quarter.html].
21 State charges are typically levied on the intrastate retail revenues of wireline carriers and,
in some states, wireless carriers as well.

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Multiple Taxes. The ban on multiple taxes prohibits more than one state, or
more than one local jurisdiction at the same level of government (i.e., more than one
county or one city), from imposing a tax on the same transaction, unless a credit is
offered for taxes paid to another jurisdiction. However, the state, county, and city in
which an electronic commerce transaction takes place could all levy their sales taxes
on the transaction.
Discriminatory Taxes. In practice, the ban on discriminatory taxes on
electronic commerce means that transactions arranged over the Internet are to be
taxed in the same manner as mail-order or telephone sales. Under the current judicial
interpretation of nexus as applied to mail-order sales, a state cannot require an out-of-
state seller to collect a use tax from the customer unless the seller has a physical
presence in the taxing state.22 (A use tax is the companion tax to the sales tax,
applicable to interstate sales.) Congress or the Supreme Court would need to act to
grant or approve the states’ ability to require out-of-state tax collection, whether the
transaction was arranged over the Internet or by mail order, telephone, or other
means.
The second part of the ITFA’s definition of discriminatory tax lists conditions
under which a remote seller’s use of a computer server, an Internet access service, or
online services does not establish nexus. These circumstances include the sole ability
to access a site on a remote seller’s out-of-state computer server; the display of a
remote seller’s information or content on the out-of-state computer server of a
provider of Internet access service or online services; and processing of orders
through the out-of-state computer server of a provider of Internet access service or
online services. Some businesses have taken advantage of these nexus limits in the
ITFA’s definition of discriminatory tax to establish what are referred to as Internet
kiosks or dot-com subsidiaries. The businesses claim that these Internet-based
operations are free from sales and use tax collection requirements. Critics object that
these methods of business organization are an abuse of the definition of
discriminatory tax.
Streamlined Sales Taxes and Remote Collection Authority
In earlier Congresses, the debate surrounding legislation to extend the Internet
tax moratorium was linked to the states’ quest for sales and use tax collection
authority. The issue continues to be whether Congress is willing to grant states the
authority to require remote (out-of-state) sellers to collect use taxes on interstate sales
conditioned on a simplification of state and local sales and use tax systems. Bills
were introduced in conjunction with an extension of the moratorium that enumerated
criteria for a simplified sales and use tax system, and procedures for Congress to
grant tax collection authority. In contrast, in the 108th Congress and continuing into
the 109th and 110th Congresses, the sales tax issue has been pursued separately from
the moratorium.
22 For additional discussion, see CRS Report RS21537, State Sales Taxation of Internet
Transactions, by John R. Luckey.

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Remote Collection Issue. Under current law, a vendor with substantial
nexus (usually defined as physical presence) in its customer’s state collects the state
(and local) sales tax on sales arranged over the Internet (or by telephone, mail order,
or other means). In contrast, an out-of-state vendor without substantial nexus in the
customer’s state is not required to collect the sales tax.23 Technically, the customer
is required to remit a “use” tax to his or her state of residence.24 In practice, however,
use tax compliance by non-business purchasers is low. Because of this low
compliance, many states have long wanted to require out-of-state vendors without
physical presence in the respective states (referred to as remote sellers) to collect the
use tax from the customer. This would apply to all interstate sales, whether arranged
over the Internet or by mail-order catalog, telephone, or other means.
The Streamlined Sales and Use Tax Agreement (SSUTA).
Acknowledging administrative complexity as a major obstacle to remote collection
authority, the states began a concerted effort to simplify state and local sales and use
tax through the Streamlined Sales Tax Project (SSTP).25 The project commenced in
March 2000, midway through the initial ITFA moratorium (October 1998 - October
2001). As of February 6, 2007, 15 states were designated as “full” members for
having approved a model interstate agreement to simplify their sales tax systems,
known as the Streamlined Sales and Use Tax Agreement (SSUTA).26 The agreement
establishes uniform definitions for taxable goods and services and requires that a
participating state and local government have only one statewide tax rate for each
type of product. Another six states are “associate” members for partially complying
with the SSUTA. Each state would retain the power to define which products are
taxable and establish its tax rate.
In the 109th Congress, S. 2152 (Enzi) and S. 2153 (Dorgan) would have granted
states that comply with the SSUTA the authority to require remote sellers to collect
state and local use taxes on interstate sales. S. 2153 included a detailed procedure
for the determination of those small businesses that would be exempt from
complying with the SSUTA. In contrast, S. 2152 used a minimum annual remote
sales of $5 million as the threshold for the tax collection requirement. The U.S.
Conference of Mayors opposes both bills because, in exchange for remote collection
23 In 1967 and again in 1992, the Supreme Court invited the Congress to take action on this
issue. See the following decisions: National Bellas Hess, Inc. v. Illinois Department of
Revenue, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
24 The use tax is the companion tax to the sales tax, created to ensure that cross-border
transactions are not favored in the state tax code.
25 For more on the Streamlined Sales and Use Tax Agreement, see CRS Report RS22387,
The Streamlined Sales and Use Tax Agreement: A Brief Description, by Steven Maguire.
2 6 According to the National Conference of State Legislatures,
[http://www.ncsl.org/programs/fiscal/Member_ssutachart1.htm], the states are Indiana,
Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina,
North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, and West Virginia. For
more on the membership requirements, see Jeffery A. Friedman and Charles Kearns,
“Federal Streamlined Sales Tax Legislation Introduced in the Senate,” State Tax Notes, Jan.
16, 2006, p. 131.

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authority, other telecommunications taxes would be simplified, potentially leading
to reduced revenue from those taxes.
Business Activity Tax (BAT) Nexus Standards
The possibility that states could be authorized to require remote vendors to
collect sales and use taxes on interstate sales raised concerns that states would then
attempt to impose income and other business taxes on those vendors. In response,
some multistate businesses asked Congress to clarify nexus standards for state and
local business activity taxes (BATs).27 Past court decisions and the landmark P.L.
86-272, enacted in 1959 (15 U.S.C. 381 et seq.), established physical presence as the
standard for sufficient nexus, but only for the sale of tangible goods, and only for
taxes on net income.
Congress clarified nexus in P.L. 86-272 by identifying those activities which
would not establish nexus. Generally, soliciting the sale of tangible goods in a state
for shipment by common carrier from locations outside the state would not be
sufficient to trigger nexus. Thus, for products shipped across state lines, state
corporate income taxes are levied at the source, not the destination, of the product.
Proponents of federally defined nexus standards contend that current federal law
does not sufficiently define substantial nexus. The issue before Congress is whether
to codify nexus rules for intangible property and services, not just tangible goods as
provided for in P.L. 86-272. Currently, each state independently implements rules
that establish nexus for economic activities that are not covered by P.L. 86-272.
Although state rules are very similar for many services and activities, there is still
significant variation among states on the threshold for establishing nexus. In theory,
Congress could establish uniform federal standards for imposing state business
activity taxes on out-of-state businesses.
Some representatives of state and local governments, however, are concerned
that enacting federal nexus guidelines could restrict their ability to levy corporate
income taxes or other BATs on business activities conducted in their state. For
example, if Congress implemented thresholds at the midpoint level of all existing
state nexus rules, by definition, many states would lose taxpayers that did not meet
the new standard for substantial nexus. The states with the lowest nexus thresholds
would fare the worst under such a scenario. Perhaps more importantly,”bright line”
legislation would expand the definition of economic activity beyond tangible goods
to include intangible goods and services.
The remote collection authority bills offered in earlier Congresses typically
provided that out-of-state vendors that collected sales and use taxes would not then
27 Business activity taxes are commonly thought of as corporate income taxes, but may also
include franchise taxes, business license taxes, business and occupation taxes, a tax on gross
receipts, gross income or gross profits, value-added taxes, single business taxes, and capital
stock taxes. They do not include taxes on transactions, like sales and use taxes or excise
taxes. For more on state corporate income taxes, see CRS Report RL32297, State Corporate
Income Taxes: A Description and Analysis, by Steven Maguire.

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be subject to business activity taxes by virtue of their tax collection for the state.28
In the 109th Congress, as in the 108th Congress, the BAT nexus issue had been kept
separate from both the extension of the Internet tax moratorium and the sales tax
simplification issue.
Action in the 110th Congress
Internet Tax Moratorium Legislation
In the 110th Congress, two companion bills have been introduced. Both H.R.
743 (38 cosponsors as of February 9, 2007) and S. 156 (9 cosponsors as of February
9, 2007), which are identical, would make the moratorium permanent. Legislation
affecting the other issues has yet to be introduced in the 110th Congress.
Action in the 109th Congress
Internet Tax Moratorium Legislation
Three bills to modify the Internet tax moratorium have been introduced in the
109th Congress. Then-Representative Cox introduced H.R. 1684 and H.R. 1685, both
of which would repeal the moratorium sunset. Representative Campbell introduced
H.R. 4862 on March 2, 2006, which is identical to H.R. 1685. In contrast to H.R.
1684, H.R. 1685 and H.R. 4862 also strike the grandfather provisions included in the
most recent extension of the ITFA. In the Senate, S. 849 (Senator Allen) would
repeal the moratorium sunset and is similar, though not identical, to H.R. 1684. H.R.
5422 would eliminate the sunset on the moratorium but does not eliminate the
grandfather provision.
On June 28, 2006, the Senate Commerce, Science, and Transportation
Committee approved an amendment to a communications bill, S. 2686, that would
make the moratorium on Internet access taxes permanent. Another amendment to the
same legislation would impose a three-year moratorium on new taxes on wireless
services.
Internet-Commerce-Related Legislation
SSUTA. In the Senate, S. 2152 (Senator Enzi) and S. 2153 (Senator Dorgan)
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. Both bills were referred to the Senate Committee on Finance when introduced
on December 20, 2005.
BAT Nexus. A proposal to address state business activity taxation has also
been introduced in the 109th Congress. H.R. 1956 (Representative Goodlatte) would
establish a physical presence standard for business activity taxes and expand the test
28 For more on state BATs, see CRS Report RL32297, State Corporate Income Taxes: A
Description and Analysis, by Steven Maguire.

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to include intangible goods and services. More specifically, H.R. 1956 would (1)
amend P.L. 86-272 to extend to all sales (not just tangible personal property) and
to other state and local business activity taxes (not just net income taxes) the
protection from taxation on interstate commerce if the only activity within a state was
soliciting orders for sales; (2) establish physical presence as the nexus standard for
levying state and local business activity taxes on interstate commerce; (3) generally
require use of employees or property in a state for more than a combined 21 days per
calendar year to establish nexus; (4) enumerate exempt business activities; and (5)
set the minimum time limit at one day, instead of more than 21 days, for a live
performance or live sporting event before more than 100 spectators.29
H.R. 1956 was introduced on April 28, 2005, and was referred to Committee
on the Judiciary. The Subcommittee on Commercial and Administrative Law
approved the legislation by voice vote on December 13, 2005, and forwarded the
legislation to the full committee. On June 28, 2006, the House Judiciary Committee
approved H.R. 1956. The Senate counterpart to H.R. 1956, S. 2721, was introduced
on May 4, 2006, by Senator Schumer.
For Additional Information
Hearings in the 109th Congress
U.S. Congress. House. Committee on the Judiciary. Subcommittee on Commercial
and Administrative Law. Business Activity Tax Simplification Act of 2005.
Hearing on H.R. 1956. 109th Cong., 1st sess., serial No. 109-62, September 27,
2005 (Washington: GPO, 2005).
Hearings in the 108th Congress
U.S. Congress. House. Committee on the Judiciary. Subcommittee on Commercial
and Administrative Law. Business Activity Tax Simplification Act of 2003.
Hearing on H.R. 3220. 108th Cong., 2nd sess., serial No. 84, May 13, 2004
(Washington: GPO, 2004).
____. Internet Tax Nondiscrimination Act. Hearing on H.R. 49. 108th Cong., 1st
sess., serial No. 13, April 1, 2003 (Washington: GPO, 2003).
____. Streamlined Sales and Use Tax Agreement: States’ Efforts to Facilitate Sales
Tax Collection from Remote Vendors. Hearing. 108th Cong., 1st sess., serial
No. 57, October 1, 2003 (Washington: GPO, 2003).
U.S. Congress. Senate. Committee on Commerce, Science, and Transportation.
Internet Tax Moratorium. Hearing. 108th Cong., 1st sess., July 16, 2003
(Washington: GPO, 2003).

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29 For a detailed critique of H.R. 1956, see Michael Mazerov, “Assessing the Claim That
Federal BAT Nexus Bill Would Have A Negligible Impact on State Revenue,” State Tax
Notes, Jan. 23, 2006, pp. 201-213.

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