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Taxation of Internet Sales and Access: Legal
Issues
Erika K. Lunder
Legislative Attorney
April 10, 2015
Congressional Research Service
7-5700
www.crs.gov
R43800
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Summary
In recent years, there has been significant congressional interest in the states’ ability to impose
sales and use taxes on sales made over the Internet. While these taxes are imposed on the
consumer, states generally prefer that retailers collect and remit them, rather than relying on the
consumer to pay the tax. State laws requiring retailers to collect sales and use taxes are subject to
federal law. First, such laws must comply with the U.S. Constitution, of which two provisions are
particularly relevant—the dormant Commerce Clause and the Fourteenth Amendment’s Due
Process Clause. Second, such laws must comply with the Internet Tax Freedom Act.
Both the dormant Commerce Clause and the Due Process Clause require that a retailer have a
certain connection or “nexus” to the state before the state can require the collection of tax. The
Supreme Court has held that the required nexus under the dormant Commerce Clause is the
seller’s “physical presence” in the state, while due process requires only that the seller have
directed purposeful contact at state residents. Notably, Congress may change the “physical
presence” standard under its power to regulate interstate commerce, so long as it is consistent
with other constitutional provisions including due process. In the 114th Congress, legislation has
been introduced (S. 698, Marketplace Fairness Act) that would allow a state to impose sales and
use tax collection duties on remote sellers, regardless of physical presence, if the state (1) is a
member of the multistate Streamlined Sales and Use Tax Agreement (SSUTA) or (2) sufficiently
simplifies its sales and use tax laws and administration.
In addition to the Constitution, state sales and use tax collection laws must also comply with the
federal Internet Tax Freedom Act (ITFA). It imposes a temporary moratorium on states imposing
discriminatory or multiple taxes on electronic commerce. The moratorium also generally
prohibits state taxes on Internet access. The act is scheduled to expire on October 1, 2015.
Meanwhile, some states have recently enacted laws, often called “Amazon laws” after the
Internet retailer, in an attempt to capture uncollected taxes on Internet sales while still complying
with the “physical presence” standard. States enacting these laws have used two basic
approaches: (1) “click-through” nexus, which imposes the responsibility for collecting taxes on
retailers who compensate state residents for placing links on their websites to the retailer’s
website and (2) requirements that remote sellers provide information about sales to the state and
the customers.
State Amazon tax laws have raised issues under both the U.S. Constitution and the ITFA and have
had a mixed reception in the courts. While the highest court in New York upheld that state’s click-
through nexus law against facial challenges on Commerce Clause and due process grounds, a
federal district judge struck Colorado’s notification law as violating the dormant Commerce
Clause. However, the appeals court subsequently determined that federal courts do not have
jurisdiction to hear the Colorado challenge due to the federal Tax Injunction Act. In March 2015,
the U.S. Supreme Court held in Direct Marketing Association v. Brohl that the act did not apply to
this suit, but left open the possibility that the suit might be barred by the comity doctrine. Notably,
Justice Kennedy wrote a concurrence in which he suggested that Quill should be reconsidered in
light of technological advances and the development of the Internet. With respect to the ITFA, the
Illinois Supreme Court held in 2013 that the state’s click-through nexus law violated the statute’s
moratorium on discriminatory taxes because it treated retailers engaged in online performance-
based marketing differently than those with similar print and broadcast marketing arrangements.
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Contents
Constitution’s Nexus Requirement .................................................................................................. 1
When Is There Sufficient Nexus? .............................................................................................. 3
State “Amazon Laws” and Their Constitutionality ................................................................... 4
Congressional Authority to Act ................................................................................................. 6
Marketplace Fairness Act and Other Legislation ................................................................ 7
Internet Tax Freedom Act ................................................................................................................ 8
Moratorium on Multiple and Discriminatory Taxes on E-Commerce ....................................... 8
Moratorium on Taxes on Internet Access ................................................................................ 10
ITFA and Federal Taxes ........................................................................................................... 11
Internet Tax Freedom Act and State “Amazon Laws” ............................................................. 12
Legislation Related to ITFA and Similar Concepts ................................................................. 12
Contacts
Author Contact Information........................................................................................................... 13
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n recent years, there has been significant congressional interest in the states’ ability to impose
sales and use taxes on sales made over the Internet. A use tax is the companion to a sales
Itax—in general, the sales tax is imposed on the sale of goods and services within the state’s
borders, while the use tax is imposed on purchases made by the state’s residents from out-of-state
(remote) sellers.1 The purpose of the use tax is to dissuade residents from purchasing goods and
services from out-of-state merchants in order to avoid the sales tax.2
Sales and use taxes are imposed on the consumer. However, states generally prefer that retailers
collect and remit them, rather than relying on the consumer to pay the tax since consumer
compliance is low. State laws requiring retailers to collect and remit these taxes are subject to
federal law. First, the laws must comply with the U.S. Constitution, of which two provisions are
particularly relevant—the dormant Commerce Clause and the Fourteenth Amendment’s Due
Process Clause. Second, such laws must comply with the Internet Tax Freedom Act (ITFA),
which prohibits multiple or discriminatory taxes on electronic commerce. ITFA also prohibits
state and local taxes on Internet access.
This report first looks at the Constitution’s requirement of nexus, including an examination of
whether recent state laws comply with the nexus standard and federal legislation that would affect
the standard. It then looks at the scope of the ITFA moratorium on multiple or discriminatory
taxes on electronic commerce and taxes on Internet access.
Constitution’s Nexus Requirement
There is a common misperception that the U.S. Constitution prohibits states from taxing Internet
sales. This is not true. States have the power to tax their residents on online purchases, even when
the seller is located outside the state and has no real connection with it—in this situation, the state
can impose the use tax on the purchaser. The Constitution does, however, limit the state’s power
to require an out-of-state seller to collect use tax from the purchaser on behalf of the state.
Specifically, the Due Process Clause of the Fourteenth Amendment and the Commerce Clause
both require that a sufficient connection or “nexus” exist between a state and an out-of-state
business before the state may impose tax obligations on it.3
Due process requires there be a sufficient nexus between the state and the seller so that (1) the
state has provided some benefit for which it may ask something in return and (2) the seller has
fair warning that its activities may be subject to the state’s jurisdiction.4 The dormant Commerce
Clause requires a nexus in order to ensure that the state’s imposition of the liability does not
1 For information on state sales and use taxes, see CRS Report R41853, State Taxation of Internet Transactions, by
Steven Maguire.
2 See Miller Bros. Co. v. Maryland, 347 U.S 340, 343 (1954) (uses taxes, while not significant revenue raisers, have
two purposes: “One is protection of the state’s revenues by taking away from inhabitants the advantages of resort to
untaxed out-of-state purchases. The other is protection of local merchants against out-of-state competition from those
who may be enabled by lower tax burdens to offer lower prices.”).
3 U.S. CONST. Amend. 14, §1 (“nor shall any State deprive any person of life, liberty, or property, without due process
of law ... ”); Art. 1 §8, cl.3 (“The Congress shall have Power ... To regulate Commerce with foreign Nations, and
among the several States, and with the Indian Tribes”). The Supreme Court has long held that because the Constitution
grants Congress the authority to regulate interstate commerce, the states may not unduly burden such commerce—this
is known as the dormant Commerce Clause. See Okla. Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 180 (1995).
4 See Quill v. North Dakota, 504 U.S. 298, 308 (1992).
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impermissibly burden interstate commerce.5 Importantly, Congress has the authority under its
commerce power to permit state taxation that would otherwise violate the dormant Commerce
Clause, but cannot change the standard required for due process.6
The nexus standard for use tax collection liability is not the same under both clauses. The
Supreme Court has ruled that, absent congressional action, the standard required under the
dormant Commerce Clause is the seller’s physical presence in the state, while due process
requires only that the seller have directed
purposeful contact at the state’s residents.7
Tax-Free Internet Sales?
This was not always the case. The Court first
While states cannot require remote sellers to collect
articulated the physical presence requirement
use taxes unless the seller has a sufficient nexus with the
in the 1967 case National Bellas Hess v. Dept.
state, this does not mean the sale is free from tax. The
of Revenue of Illinois,8 where it grounded the
purchaser still has the duty to pay the tax to the state.
requirement in both clauses. The Court noted
that each required a similar connection between the state and the seller: due process required that
“the state has given anything for which it can ask return,” while state taxes on interstate
commerce were permissible when they represented “a fair share of the cost of the local
government whose protection [the seller] enjoys.”9 The Court concluded that these principles,
along with the fact that the use tax collection obligations would burden interstate commerce due
to the significant number of U.S. taxing jurisdictions and complexity of their requirements, meant
that a state’s authority to impose the obligations was limited to when the seller had a physical
presence in the state.10
By the late 1980s, it seemed possible that physical presence was no longer required for use tax
obligations because the Court had modified its analysis of both the Due Process and the
Commerce Clauses. The Due Process Clause in other contexts was no longer interpreted to
require an individual or entity’s physical presence in a state before that state could exercise
authority over the individual or entity; instead, liability could be imposed when the individual or
entity intentionally made a sufficient level of contact with the state.11 Additionally, moving away
from bright-line prohibitions against certain types of taxation on interstate commerce, the Court
developed a flexible test to determine whether a tax placed an unacceptable burden on interstate
commerce.12 It seemed possible that technological advances might have sufficiently reduced the
5 See Complete Auto Transit, Inc. v Brady, 430 U.S. 274 (1977).
6 See Quill, 504 U.S. at 318.
7 See Quill, 504 U.S. at 308, 317-18.
8 386 U.S. 753 (1967).
9 Id. at 756.
10 Id. at 758-60; see also Miller Bros., 347 U.S. at 347 (finding insufficient nexus, based solely on due process grounds,
when the seller’s activities did not involve the “invasion or exploitation of the consumer market in” the taxing state,
with the Court contrasting “active and aggressive operation within a taxing state” with the seller’s “occasional delivery
of goods sold at an out-of-state store with no solicitation other than the incidental effects of general advertising”).
11 Many of these cases addressed whether an individual or entity could be subject to suit in state court. For example, in
Burger King v. Rudzewicz, 471 U.S. 462 (1985), the Court held that a Michigan franchisee without any contacts with
Florida could be subject to suit in state court after entering into a contract with a Florida corporation. The Court wrote,
“So long as a commercial actor’s efforts are ‘purposefully directed’ towards residents of another State, we have
consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there [citations
omitted].” Id. at 476.
12 See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
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complexity of collecting use taxes so that the burden on interstate commerce would not be
unacceptable under the new test.
However, in the 1992 case Quill v. North Dakota,13 the Supreme Court rejected the idea that
physical presence was no longer required. It held that, absent congressional action, the dormant
Commerce Clause still prevented a state from imposing use tax collection liability on a mail-order
seller with no physical presence in the state. As in Bellas Hess, the Court found that collecting the
tax would be an impermissible burden on interstate commerce, noting again the magnitude of the
potential burden in light of the numerous taxing jurisdictions across the country.14 The Court,
however, altered its reasoning from Bellas Hess by expressly rejecting the idea that due process
also requires physical presence. The Court, noting that the two clauses served different purposes,
found that its due process analysis had evolved so that physical presence was not necessary so
long as the seller had directed sufficient action toward the state’s residents.15 The Court found
such purposeful contact existed in Quill since the seller had “continuous and widespread
solicitation of business” within the state.16
When Is There Sufficient Nexus?
The Supreme Court has not revisited the issue of when a state may impose use tax obligations on
a seller since Quill. Nonetheless, several pre-Quill cases provide guidance on determining when a
state may impose use tax collection obligations on out-of-state retailers. Clearly, a state can
impose such responsibilities on a company with a “brick and mortar” retail store or offices in the
state.17 This can be the case even if the in-state offices and the sales giving rise to the tax liability
are unrelated to one another. For example, the Court held that a state could require a company to
collect use taxes on mail-order sales to in-state customers when the company maintained two
offices in the state that generated significant revenue, even though the offices were used to sell
advertising space in the company’s magazine and had nothing to do with the company’s mail-
order business.18 The Court firmly rejected the argument that there needed to be a nexus not only
between the company and the state, but also between the state and the sales activity. It reasoned
that there was a sufficient connection between the state and company as the two in-state offices
had enjoyed the “advantage of the same municipal services” whether or not they were connected
to the mail-order business.19
Absent some type of physical office or retail space in the state, it also seems that having in-state
salespeople or agents is sufficient contact. In several cases predating Bellas Hess and Quill, the
Court upheld the power of the state to impose use tax collection liabilities on remote sellers when
13 504 U.S. 298 (1992). While Quill is the current standard for nexus, Justice Kennedy wrote a concurrence in a March
2015 decision, Brohl v. Direct Marketing Association, in which he suggested that Quill should be overruled. Brohl is
discussed below in “State “Amazon Laws” and Their Constitutionality.”
14 Id. at 313.
15 See id. at 308.
16 Id.
17 See Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941) (upholding imposition of use tax collection liability on
mail order sales when company had retail stores in the state); Nelson v. Montgomery Ward, 312 U.S. 373 (1941)
(same); see also D.H. Holmes Co., Ltd. v. McNamara, 486 U.S. 24, 32-33 (1988) (upholding imposition of use tax on
company with 13 stores in the state).
18 Nat’l Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551 (1977).
19 Id. at 561.
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the sales were arranged by local agents or salespeople.20 In Scripto, Inc. v. Carson,21 the Court
held that a state could impose use tax collection liability on an out-of-state company that had no
presence in the state other than 10 “independent contractors” who solicited business for the
company. These individuals had limited power and had no authority to make collections or incur
debts on behalf of the company. They merely forwarded the orders they solicited to the
company’s out-of-state headquarters, where the decision to fill the order was made. Finding their
status as independent contractors rather than employees to be constitutionally insignificant,22 the
Court held that there was a constitutionally sufficient nexus between the company and the state
because the individuals had conducted “continuous local solicitation” in the state on behalf of the
company.23 The Court later described the case as “represent[ing] the furthest constitutional reach
to date” of a state’s ability to impose use tax collection duties on a remote seller.24
Discriminatory Taxes
In addition to requiring nexus, the Commerce Clause prohibits state laws that discriminate against interstate
commerce.25 A state law that “regulates even-handedly to effectuate a legitimate local public interest” and has “only
incidental” effect on interstate commerce is constitutional y permissible “unless the burden imposed on such
commerce is clearly excessive in relation to the putative local benefits.”26 On the other hand, a state law that facially
discriminates against out-of-state sellers is “virtually per se invalid.”27 Traditionally, such laws are permissible only if
they meet the high standard of “advanc[ing] a legitimate local purpose that cannot be adequately served by reasonable
nondiscriminatory alternatives.”28 Thus, a state law that subjects remote sel ers to tax-related burdens not imposed
on in-state sel ers would appear to be facial y discriminatory and subject to a strict judicial scrutiny.
State “Amazon Laws” and Their Constitutionality
The most significant legal development in recent years regarding state taxation of Internet sales
has been states enacting laws to try to capture more of the uncollected use taxes. 29 These are
generally called “Amazon laws” in reference to the Internet retailer.
Two primary approaches have developed. One is “click-through nexus.” It refers to the click-
throughs or online referrals that some Internet retailers solicit through programs where an
individual or business (called an associate or affiliate) places a link on its website directing
Internet users to the online retailer’s website. The associate or affiliate receives compensation for
the referral when a consumer clicks through a link and purchases goods and services. State click-
20 See Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960) (discussed infra); Felt & Tarrant Co. v. Gallagher, 306 U.S. 62
(1939) (upholding imposition of use tax collection liability on company with two agents in the state); General Trading
Co. v. Tax Comm’n, 322 U.S. 335 (1944) (upholding imposition of use tax collection liability on company with
salespeople in the state).
21 362 U.S. 207 (1960).
22 Id. at 211.
23 Id.
24 Bellas Hess, 386 U.S. at 757.
25 See Complete Auto Transit, Inc., at 279; Oregon Waste Systems, Inc. v. Dep’t of Environmental Quality, 511 U.S.
93, 98 (1994).
26 Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
27 Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 575 (1997) (internal citations omitted); see
also Hughes v. Oklahoma, 441 U.S. 322, 336 (1979).
28 New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 278 (1988); Hughes, 441 U.S. at 336-37.
29 For a more complete discussion of these laws, see CRS Report R42629, “Amazon Laws” and Taxation of Internet
Sales: Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit.
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through nexus statutes require an online retailer to collect use taxes based on the physical
presence of its associates or affiliates. The second approach requires remote retailers to provide
information on taxable sales to the state and customer, rather than requiring retailers to collect the
use taxes themselves.
Since their enactment, questions have been raised about whether these laws are consistent with
due process and the dormant Commerce Clause. Courts have considered the constitutionality of
two statutes: New York’s click-through nexus law and Colorado’s notification law.
In a 2012 case brought by Overstock and Amazon, New York’s highest court rejected facial
constitutional challenges to the state’s law.30 New York’s law provides a rebuttable presumption
that a retailer must collect use taxes if it enters into an agreement with a New York resident
providing compensation in exchange for referring potential customers to the retailer via a website
link or other means.31 In rejecting the argument that the law was facially unconstitutional under
the Commerce Clause because it applied to sellers without a physical presence in the state, the
court noted it had previously held that the physical presence required by Quill did not have to be
“substantial,” but rather “demonstrably more than a slightest presence’’ and could be met if
economic activities are performed in the state on the seller’s behalf.32 The court found this
standard to be met since the law was based on “[a]ctive, in-state solicitation that produces a
significant amount of revenue.”33 With respect to due process, the court found that “a brigade of
affiliated websites compensated by commission” was clearly sufficient to meet Quill’s standard of
“continuous and widespread solicitation of business within a State.”34 The court also rejected the
argument that the law violated due process because the presumption was unreasonable and
irrebuttable, finding the presumption was (1) reasonable because it presumed that affiliates would
solicit in-state acquaintances in order to increase their compensation and (2) rebuttable, as
evidenced by the state tax agency’s guidance discussing the methods to rebut it.35
The Colorado law met a different result. In 2012, a federal district court struck down the state’s
notification law on Commerce Clause grounds.36 The law requires that retailers who do not
collect Colorado sales tax must (1) inform Colorado customers that tax may be owed on
purchases and it is the customer’s responsibility to file a tax return; (2) send Colorado customers
a year-end notice about any purchases; and (3) provide an annual statement to the Colorado tax
agency showing the amount paid for purchases by in-state customers.37
30 Overstock.com, Inc. v New York State Dept. of Taxation & Fin., 987 N.E.2d 621 (N.Y. 2013), cert. denied, 134 S.
Ct. 682 (2013).
31 N.Y. TAX LAW §1101(b)(8)(vi).
32 Overstock.com, 987 N.E.2d at 625 (internal quotations omitted).
33 Id. at 626. The court also noted that while not dispositive, sellers do not pay these taxes themselves, but rather “are
collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers
themselves, and as to which there is no risk of multiple taxation.” Id.
34 Id. at 627.
35 See id. The court left open the possibility that the presumption might not be reasonable in all circumstances,
specifically as applied to those receiving compensation unrelated to actual sales, since “[i]t is difficult to distinguish
that arrangement from traditional advertising.” Id. However, the court found this was not sufficient to strike the statute
as facially unconstitutional. See id.
36 Direct Mktg. Ass’n v. Huber, Civil Case No. 10-cv-01546-REB-CBS, 2012 U.S. Dist. LEXIS 44468 (D. Colo.
March 30, 2012).
37 COLO. REV. STAT. ANN. §39-21-112(3.5); see also COLO. REV. STAT. ANN. §39-26-102(4) (defining retailer).
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The problem with this law is that it applies only to companies that do not collect Colorado sales
taxes, which would appear to be primarily those retailers without a physical presence in the state.
The federal district court determined this was fatal to the law for two reasons under the dormant
Commerce Clause: there was insufficient nexus, and the law was impermissibly discriminatory.
First, the court found that the notification requirements were “inextricably related in kind and
purpose” to the tax collection responsibilities at issue in Quill and therefore subject to the
physical presence nexus standard, which the law plainly did not meet.38 Second, the court found
the law only applied to, and thus discriminated against, out-of-state vendors and failed to survive
strict scrutiny.39 While there were legitimate governmental interests involved (e.g., improving tax
collection and compliance), the court found the state had not provided evidence to show that these
interests could not be served by reasonable nondiscriminatory alternatives, such as collecting use
taxes on the resident income tax return and improving consumer education.40
However, in August 2013, the Tenth Circuit Court of Appeals dismissed the case after finding that
the federal Tax Injunction Act (TIA) prohibits federal courts from hearing it.41 The act provides
that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection
of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of
such State.”42 In March 2015, the Supreme Court held that the TIA does not apply to this suit,43
but left open the possibility that the suit might be barred by the comity doctrine, under which
federal courts refrain from interfering with state fiscal operations “in all cases where the Federal
rights of the persons could otherwise be preserved unimpaired.”44 The Court instructed the Tenth
Circuit to determine if the doctrine applies here.
The Court’s opinion was unanimous. Notably, Justice Kennedy wrote a concurrence in which he
raised the possibility that Quill was wrongly decided and should be reconsidered in light of
technological advances and the development of the Internet.45 Characterizing the Quill holding as
“tenuous” and “inflicting extreme harm and unfairness on the States,” he stated that “[i]t should
be left in place only if a powerful showing can be made that its rationale is still correct.”46
Congressional Authority to Act
Under its authority to regulate commerce, Congress has the power to authorize state action that
would otherwise be an unconstitutional burden on interstate commerce, so long as it is consistent
38 Id. at *27.
39 See id. at *13-*17.
40 See id. at *18-*20.
41 Direct Mktg. Ass’n v. Brohl, 735 F.3d 904 (10th Cir. 2013), cert. granted, 134 S. Ct. 2901 (2014).
42 28 U.S.C. §1341.
43 Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (2015) (concluding that the notice and reporting requirements were not
an act of “assessment, levy, or collection” within the specific meaning of those terms as used in tax law, and that the
suit could not be said to “restrain” the assessment, levy, or collection of a tax if it “merely inhibits,” rather than stops,
those activities).
44 Id.(quoting Levin v. Commerce Energy, Inc., 560 U. S. 413, 422 (2010)).
45 See id. at 1134-35 (J. Kennedy, concurring).
46 Id. at 1134, 1135 (J. Kennedy, concurring).
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with other provisions in the Constitution.47 As such, Congress may permit state taxation without
physical presence, but cannot change the standard required to satisfy due process.48
Marketplace Fairness Act and Other Legislation
Thus far, Congress has not defined a standard for nexus under the Commerce Clause, although
legislation has been introduced in the 114th Congress (S. 698, Marketplace Fairness Act).49 S. 698
would authorize states to require that remote vendors collect sales or use taxes for sales sourced
to that state, regardless of whether the remote vendors have a physical presence in the state. In
order to do so, the state would either (1) have to be a member of the multistate Streamlined Sales
and Use Tax Agreement (SSUTA)50 or (2) adopt the act’s minimum simplification requirements
for their sales and use tax laws. In either case, states could only impose the collection obligation
on remote sellers with more than $1,000,000 in gross annual receipts in total U.S. remote sales
during the preceding calendar year.
The minimum simplification requirements include such things as providing a single entity within
the state responsible for all state and local sales and use tax administration, return processing, and
audits. Additionally, any changes to SSUTA after the act’s enactment would have to be consistent
with these requirements.
Sales would be sourced to SSUTA member states according to the agreement. For non-SSUTA
states, sales would generally be sourced to the location where the item sold is received by the
purchaser based on the delivery instructions (the act includes other rules for cases in which no
delivery location is specified).
If S. 698 were enacted into law, SSUTA members could require the collection of sales and use
taxes on remote sales beginning 180 days after the state publishes notice of its intent to do so, but
no earlier than the first day of the calendar quarter that is at least 180 days after the act’s
enactment. Non-SSUTA members could require the collection no earlier than the first day of the
calendar quarter that is at least six months after the state complies with the act’s simplification
requirements and other provisions.
Another bill, the Wireless Telecommunications Tax and Fee Collection Fairness Act of 2015
(H.R. 1087), has been introduced that would use Congress’s commerce authority to restrict state
sales and use taxation related to wireless telecommunication services. The legislation would
prohibit states from requiring a person to collect from or remit on behalf of another person any
state or local fee, tax, or surcharge imposed on a purchaser or user for wireless
telecommunication services within the state unless there is a “financial transaction” between the
47 See Northeast Bancorp v. Board of Governors of Fed. Reserve Sys., 472 U.S. 159, 174 (1985) (“[S]tate actions [that
burden interstate commerce] which [Congress] plainly authorizes are invulnerable to constitutional attack under the
Commerce Clause. [citations omitted]”); see also Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 434 (1946)
(describing Congress’s Commerce Clause power as plenary and limited only by other constitutional provisions).
48 See Quill, 504 U.S. at 318.
49 In the 113th Congress, the Senate passed a similar version of the act (Marketplace Fairness Act of 2013, S. 743) by a
vote of 69 to 27. The House took no action on the bill.
50 SSUTA was created by a group of state tax administrators who formed in 2000 in order to simplify and make
uniform the administration of sales and use taxes. See STREAMLINED SALES TAX GOVERNING BOARD INC.,
http://www.streamlinedsalestax.org. Member states adopted the agreement in 2002, and efforts are now aimed at state
compliance. Forty-four states and the District of Columbia participate, and 24 have enacted conforming legislation.
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person and the purchaser or user. A “financial transaction” would be “a transaction involving
cash, credit or any other exchange of monetary value or consideration given by the purchaser or
user upon whom the fee, tax or surcharge is imposed to the person required to collect or remit the
fee, tax or surcharge.”
Internet Tax Freedom Act
The Internet Tax Freedom Act (ITFA), enacted in 1998, imposes a moratorium on (1) state and
local governments imposing multiple or discriminatory taxes on electronic commerce and (2)
taxes on Internet access.51 Originally set to expire in 2001, the moratorium has been extended
several times, with the current continuing resolution extending it until October 1, 2015.52
The moratorium only applies to “taxes” (i.e., charges imposed for the purpose of generating
revenue for governmental purposes) and not to any charge properly characterized as a user fee.53
Importantly, the definition of “taxes” includes not only the tax itself, but the imposition on a seller
of an obligation to collect and remit any sales or use tax imposed on the buyer. Certain
government-imposed charges are excluded from the definition of “tax,” including (1) franchise
and similar fees imposed by state and local franchising authorities under Sections 622 and 653 of
the Communications Act of 1934 and (2) any other fee related to obligations of
telecommunications carriers under the Communications Act of 1934.54
Moratorium on Multiple and Discriminatory Taxes on E-Commerce
For purposes of the moratorium on multiple or discriminatory taxes on electronic commerce, a
“multiple tax” is generally any tax on the same electronic commerce that is subject to tax by
another state without a credit for taxes paid in other jurisdictions.55 It does not include a sales or
use tax on tangible personal property or services imposed by a state and a political subdivision,
with the definition of tangible personal property, and thus the exemption’s scope, determined by
state law.56 There is sparse case law interpreting “multiple,” none of which seems noteworthy.
A “discriminatory tax” includes any tax where electronic commerce is treated differently than
other types of commerce (e.g., mail-order or brick-and-mortar stores) because the tax is only
imposed on e-commerce, is applied at a different rate, or imposes different obligations to collect
51 P.L. 105-277, Div. C, Title XI, §1101(a), found at 47 U.S.C. §151 note. Some taxpayers are not allowed to benefit
from the moratorium: (1) persons or entities who make online communications for commercial purposes that include
materials harmful to minors unless steps have been taken to restrict access by minors, and (2) Internet access providers
that do not provide screening software. ITFA, §1101(d), (e).
52 P.L. 107-75, §2 (extended moratorium through Nov. 1, 2003); P.L. 108-435, §§2, 8 (extended it retroactively from
Nov. 1, 2003, to Nov. 1, 2007); P.L. 110-108, §2 (extended it to Nov. 1, 2014); P.L. 113-164, §126 (extended it to Dec.
11, 2014); P.L. 113-235, §624 (extends it to October 1, 2015).
53 ITFA, §1105(8)(A). See City of Eugene v. Comcast of Or. II, Inc., 333 P.3d 1051, 1066 (Or. Ct. App. 2014) (city
license fee imposed “as compensation for use of right-of-way” is not a tax for ITFA purposes).
54 ITFA, §1105(8)(B).
55 ITFA, §1105(6).
56 See id.; see also City of Chicago v. StubHub!, Inc., 624 F.3d 363 (7th Cir. 2010) (noting that the applicability of the
exemption for a city ticket tax would turn on whether tickets are tangible personal property under state law).
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or pay it.57 It also includes a tax that establishes a classification of Internet access service
providers or online service providers in order to tax them at a higher rate than the one generally
applied to providers of similar information services delivered through other means. Further,
discriminatory taxes include those defined with reference to certain nexus requirements for
remote sellers:
• if the sole ability to access a site on a remote seller’s out-of-state computer server
is a factor in determining the seller’s tax collection obligation, or
• if a provider of Internet access or online services is deemed to be the agent of a
remote seller for determining tax collection obligations solely as a result of the
display of a remote seller’s information or content on the provider’s out-of-state
computer server or the processing of orders through that server.
An example of a tax that was found to be discriminatory is a state retail telecommunication excise
tax that was imposed on the sale of items by telecommunication service providers (e.g., games
sold by a mobile phone company), but did not apply when similar products were sold by someone
other than a telecommunication service provider (e.g., Walmart).58 On the other hand, a court
found that a local privilege tax on any business “where persons utilize electronic machines ... to
conduct games of chance” was not discriminatory.59 Rejecting the argument that the ordinance
was discriminatory because it only taxed Internet-based games of chance, the court reasoned that
the law “never mentions ‘internet-based’ sweepstakes or makes a distinction regarding electronic
commerce; it only imposes the tax for cyber-gambling establishments that use a computer or
gaming terminal in provision of games of chance.”60
Courts have rejected arguments that taxes are discriminatory when they are generally applicable
and any disparate tax treatment is business related. For example, a court held that the ITFA was
not violated when an Internet service provider who did not own lines for transmitting data traffic
had to purchase them and pay tax on the purchase, while cable-based and facilities-based Internet
service providers did not have to pay any tax because they already owned the infrastructure.61 The
court explained that the different treatment was due solely to the company’s business decisions
and that nothing in the tax laws prevented the company from installing its own lines, in which
case it would not owe tax.62 Similarly, several courts rejected the argument that local hotel
occupancy taxes are discriminatory because the tax is effectively higher for purchases made
through online travel companies (OTCs) than traditional travel agents.63 In general, these taxes
are based on the amount the renter pays for the room: when a renter purchases through an OTC,
the company’s fee is included in the price and thus taxed, but when someone purchases through a
traditional travel agent, the hotel charges the customer for the room and separately pays the
agent’s fee, so the agent’s fee is not included in the amount taxed. In finding this treatment was
57 ITFA, §1105(a)(2).
58 Alltel Comms., LLC v. Montana Dep’t of Revenue, 2012 Mont. Dist. LEXIS 28 (Mont. Dist. Ct. Feb. 22, 2012).
59 IMT, Inc. v. City of Lumberton, 724 S.E.2d 588 (N.C. Ct. App. 2012), rev’d on other grounds, 738 S.E.2d 156 (N.C.
2013).
60 Id. at 48.
61 Concentric Network Corp. v. Commonwealth, 897 A.2d 6 (Pa. Commw. Ct. 2006).
62 Id. at 15.
63 Village of Rosemont v. Priceline.Com Inc., 2011 U.S. Dist. LEXIS 119231 (N.D. Ill. Oct. 14, 2011); District of
Columbia v. Expedia, Inc., 2012 D.C. Super. LEXIS 14 (D.C. Super. Ct. Sept. 24, 2012); Travelocity.com, LP v. Wyo.
Dep’t of Revenue, 329 P.3d 131 (Wyo. 2014).
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not discriminatory, courts have noted that the laws are universally applied to the amount the
renter pays and imposed at the same rate, regardless of whether the transaction is online or
through other means.64
Moratorium on Taxes on Internet Access
The moratorium also prohibits states from taxing Internet access, regardless of whether imposed
on a provider or buyer of Internet access and the terminology used to describe the tax.65 This does
not apply to taxes levied upon or measured by net income, income, capital stock, net worth, or
property value, nor to grandfathered taxes (discussed below) and some other exceptions.66 Also,
Internet access can be taxed if the service provider does not separate charges for Internet access
from taxable telecommunications charges and other charges, unless the provider can reasonably
identify the Internet access charges from its books and records.67
For purposes of the moratorium, “Internet access” is any service that enables users to connect to
the Internet to access content, information, or other services offered over the Internet, as well as
the purchase, use, or sale of telecommunications by a service provider if done to provide these
services or to otherwise enable users to access the Internet.68 It also includes services such as
email and instant messaging, regardless of whether these are provided incidentally to the Internet
access or independently. However, “Internet access” does not include voice, audio, and video
programming or other products and services (other than those already mentioned) that utilize
Internet protocol (or any successor protocol) and for which there is a charge.
Importantly, the moratorium does not apply to taxes on Internet access that were “generally
imposed and actually enforced” prior to October 1, 1998.69 Additionally, in order for this
grandfathering provision to apply, two things must have occurred prior to October 1, 1998:
• the tax was authorized by statute, and
• either of the following is true: (1) a provider of Internet access services had a
“reasonable opportunity to know” that the relevant tax authority had interpreted
and applied the tax to Internet access services because the authority had issued a
rule or other public proclamation saying so; or (2) a state or local government
“generally collected” the tax on charges for Internet access.
One court examining the “reasonable opportunity to know” criteria found it was not sufficient for
a city to merely point to the plain language of the ordinance and a regulation that repeated that
64 See, e.g., Village of Rosemont, 2011 U.S. Dist. LEXIS 119231 at *26-*28.
65 ITFA, §§1101(a), 1105(10)(A).
66 ITFA, §1105(10)(B), (C) (additional exception for certain taxes).
67 ITFA, §1106.
68 ITFA, §1105(5). See, e.g., j2 Global Communications, Inc. v. City of Los Angeles, 218 Cal. App. 4th 328 (Cal. App.
2d Dist. 2013) (online faxing services did not qualify as “Internet access” services); IMT, Inc., 724 S.E.2d at 596
(privilege license tax on businesses providing electronic machines for games of chance was not a tax on Internet
access).
69 ITFA, §1104(a). See, e.g., City of Chicago v. AT&T Broadband, Inc., 2003 U.S. Dist. LEXIS 15453 (N.D. Ill. Sept.
4, 2003) (city franchise fee was not “generally imposed” when imposed only on cable operators providing cable
modem services and not on all providers of Internet access services).
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language.70 As the court explained, “It is not enough that the language of its ordinance, or even its
rules, might be broad enough to encompass Internet access services,” but rather the city must
specifically and publicly provide that it interprets the language to apply to Internet access.71
The grandfathering provision does not apply if the state or local government repealed or stopped
applying the tax to Internet access. Thus, while the grandfathering provision originally captured
13 states, it now appears to apply only to Hawaii, New Mexico, North Dakota, Ohio, South
Dakota, Texas, and Wisconsin.72 Like the moratorium, the grandfathering provision is scheduled
to expire on October 1, 2015. For a policy discussion of the grandfathering provision and related
issues, see CRS Report R43772, The Internet Tax Freedom Act: In Brief, by Jeffrey M. Stupak.
ITFA and Federal Taxes
While the ITFA defines “tax” as a tax imposed by “any governmental entity,” the moratorium
only restricts the taxing power of state and local governments, not that of the federal
government.73 However, the law enacting the ITFA also provides the following:
It is the sense of Congress that no new Federal taxes similar to the taxes described in section
1101(a) should be enacted with respect to the Internet and Internet access during the
moratorium provided in such section.74
Questions are sometimes asked about the legal effect of this language. In general, “sense of
Congress” language is appropriate if Congress wishes to make a statement without making
enforceable law.75 Ordinarily, a statement that it is the “sense of Congress” that something
“should” or “should not” be done is “merely precatory,” creating no legal rights.76 However, in
the appropriate context, a “sense of Congress” provision can have the same effect as statements of
congressional purpose, resolving ambiguities in more specific language of operative sections of a
law.77 In other words, “courts rely on the sense of Congress provisions to buttress interpretations
of other mandatory provisions and do not interpret them as creating any rights or duties by
themselves.”78 Here, there is no apparent ambiguity in the act’s moratorium, which supports the
conclusion that the “sense of Congress” provision is simply precatory.79
70 See City of Eugene, 333 P.3d at 1067.
71 Id.
72 CRS Report R43772, The Internet Tax Freedom Act: In Brief, by Jeffrey M. Stupak.
73 ITFA, §1101(a) (“No State or political subdivision thereof may impose any of the following taxes during the period
beginning November 1, 2003 and ending November 1, 2014.... ” (emphasis added)); §1105(7) (defining “state”).
74 P.L. 105-277, Div. C, Title XII, §1201.
75 CRS Report 97-589, Statutory Interpretation: General Principles and Recent Trends, by Larry M. Eig, at 35.
76 Monahan v. Dorchester Counseling Ctr., Inc., 961 F.2d 987, 994-95 (1st Cir. 1992); see also Yang v. California Dep't
of Social Services, 183 F.3d 953, 955, 958-61 (9th Cir. 1999).
77 See Accardi v. Pennsylvania R.R., 383 U.S. 225, 229 (1966); State Highway Comm’n v. Volpe, 479 F.2d 1099, 1116
(8th Cir. 1973).
78 Yang, 183 F.3d at 959.
79 The legislative history of the “sense of Congress” provision is sparse. See, e.g., S.Rept. 105-276 (committee
amendment states simply “it is the sense of the Congress that no new Federal taxes like the State and local government
taxes to which the two-year moratorium applies should be enacted on Internet activity during the moratorium”).
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Internet Tax Freedom Act and State “Amazon Laws”
As discussed above (“State “Amazon Laws” and Their Constitutionality”), some states have
recently enacted “click-through nexus statutes” that require a retailer to collect use taxes if its
associates or affiliates have a physical presence in the state, even if the retailer does not. Since the
ITFA defines “tax” to include not only charges for raising revenue, but also laws that impose an
obligation on a seller to collect and remit sales or use taxes,80 these laws are “taxes” for purposes
of the ITFA and subject to the moratorium on multiple and discriminatory taxes.
In the only case challenging such a law under the ITFA, the Illinois Supreme Court struck down
its state’s click-through nexus law in 2013 as being discriminatory.81 The 2011 Illinois law
applied to any retailer who entered into a contract with a person in the state under which that
person receives a commission based on the retailer’s sales in exchange for referring potential
customers to the retailer “by a link of the person’s Internet website.”82 According to the court, the
problem was that this provision is limited to online performance-based marketing arrangements
even though similar arrangements occurred in print and broadcast media. The state argued these
other arrangements were covered by a separate provision that applied to retailers who are
“pursuant to a contract with a broadcaster or publisher located in this State, soliciting orders for
tangible personal property by means of advertising which is disseminated primarily to consumers
located in this State and only secondarily to bordering jurisdictions.”83 However, this did not
solve the problem in the court’s eyes since this provision only applied to advertising
“disseminated primarily to consumers located in this State” and not that disseminated nationally
or internationally, while online advertising was inherently national and international. Thus, the
court found that the law was preempted by the ITFA moratorium on discriminatory taxes because
it applied to retailers engaged in performance-based marketing over the Internet, but not retailers
engaged in national or international performance-based marketing in print or broadcasting.84
Two points should be made about state Amazon laws and the ITFA. First, this case does not
suggest that click-through nexus laws inherently violate the ITFA. For example, New York’s
statute would appear to not be discriminatory under the court’s reasoning because it applies to
retailers who enter into affiliate agreements where the referral occurs “via a website link or
otherwise” (emphasis added). Second, it is not clear that all Amazon laws are subject to the ITFA.
For example, Colorado’s notification law does not impose an obligation to collect and remit tax
on remote sellers, and thus it might be argued the law could fall outside the ITFA’s scope.
Legislation Related to ITFA and Similar Concepts
As mentioned above, the ITFA moratorium is scheduled to expire on October 1, 2015. Two bills
have been introduced in the 114th Congress to make the moratorium permanent, while allowing
the grandfathering provision for states that tax Internet access to expire—the Internet Tax
Freedom Forever Act (S. 431) and the Permanent Internet Tax Freedom Act (H.R. 235). For a
80 ITFA, §1105(a)(8).
81 Performance Mktg. Ass’n v. Hamer, 998 N.E.2d 54 (Ill. 2013).
82 Id. at 56.
83 Id. at 58.
84 See id. at 59-60 (also rejecting the state’s argument that Internet affiliates engaged in activities beyond advertising,
which would subject them to another statute that did not distinguish between Internet and other types of retailers).
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policy discussion related to the ITFA legislation, see CRS Report R43772, The Internet Tax
Freedom Act: In Brief, by Jeffrey M. Stupak.
Other legislation introduced in the 114th Congress would create a moratorium similar to the ITFA.
The Digital Goods and Services Tax Fairness Act of 2015 (H.R. 1643 and S. 851) would prohibit
state and local governments from imposing “multiple or discriminatory taxes” on the sale or use
of digital goods and services, as well as provide that taxes on the sale of digital goods and
services could only be imposed by the state or local jurisdiction whose territorial limits
encompass the customer’s address.
Author Contact Information
Erika K. Lunder
Legislative Attorney
elunder@crs.loc.gov, 7-4538
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