October 18, 2021
The Internet Tax Freedom Act and Federal Preemption
Congress enacted the Internet Tax Freedom Act to establish
A multiple tax exists when one state, or a political
a moratorium on the imposition of state and local taxes that
subdivision thereof, imposes a tax “on the same or
would interfere with the free flow of interstate commerce
essentially the same” electronic commerce as another state,
over the internet. The permanent Internet Tax Freedom Act
or political subdivision thereof, without a credit for the tax
(ITFA), 47 U.S.C. §151 note, preempts state and local
paid in the other jurisdiction. A multiple tax is present even
governments from levying (1) taxes on internet access and
where the state or political subdivision’s tax uses a different
(2) multiple and discriminatory taxes on electronic
tax rate or basis than the other state or political
commerce. State court lawsuits challenging state and local
subdivision’s tax. A state’s sales and use tax on electronic
taxes under the ITFA indicate that courts have narrowly
commerce is not a multiple tax when a political subdivision
interpreted the ITFA’s preemption provisions.
within that state also imposes a sales and use tax on the
same electronic commerce. Additionally, a tax imposed on
This In Focus summarizes the ITFA’s legislative history
persons engaged in electronic commerce that is also subject
and major preemption provisions and discusses ITFA
to a sales or use tax is not a multiple tax.
jurisprudence.
In general, the ban on discriminatory taxes means that the
Legislative History
same tax obligations and tax rates must apply to electronic
As first enacted on October 21, 1998, the ITFA imposed a
commerce transactions and nonelectronic commerce
three-year moratorium on the ability of state and local
transactions (e.g., mail-order and brick-and-mortar store
governments to impose taxes on internet access and certain
sales) involving the same, or similar, property, goods,
internet transactions to the extent permitted by the
services, or information. Under the ITFA, a tax
Constitution and any other federal law in effect on that date.
discriminates against electronic commerce when (1) there is
According to Senate Report 105-184, Congress exercised
no analogous tax levied on nonelectronic commerce
its legislative authority under the Constitution’s Commerce
transactions involving similar property, goods, services, or
Clause to establish a moratorium on transactions that were
information; (2) an analogous tax levied on nonelectronic
“inherently interstate in nature” to “facilitate the
commerce transactions involving similar property, goods,
development of a fair and uniform taxing scheme.”
services, or information is imposed at a different rate
Congress sought to prevent a patchwork of “unpredictable
(subject to a limited exception for phaseouts); (3) an
and overly burdensome” state and local internet-specific
analogous tax levied on nonelectronic commerce
taxes that would hamper the growth of the internet and
transactions involving similar property, goods, services, or
electronic commerce. Following the initial moratorium, a
information imposes a tax collection or payment obligation
number of laws amended and extended the moratorium
on a different person or entity; and (4) the tax establishes a
until it became permanent on February 24, 2016, as part of
classification of internet or online service providers to
the Trade Facilitation and Trade Enforcement Act of 2015.
subject them to a higher tax rate than the rate that generally
applies to “providers offering similar information services
Taxes on Internet Access
delivered through other means.”
The initial three-year moratorium included a grandfather
clause permitting states that imposed and enforced taxes on
Taxes on Digital Goods and Services
internet access prior to October 1, 1998, to continue taxing
As more state and local governments pass laws to tax
internet access. The Trade Facilitation and Trade
digital goods and services, courts have had to address novel
Enforcement Act of 2015 set a June 30, 2020, expiration
issues concerning ITFA preemption. Often, these cases turn
date for the grandfather clause. The ITFA now prohibits all
on whether an analogous tax involving a comparable
state and local taxes on internet access. The ITFA defines
nondigital good or service exists, and if so, whether the
the term “internet access” as a “service that enables users to
good or service is taxed in the same manner. If a court finds
connect to the [i]nternet to access content, information, or
an analogous tax exists, then it typically holds that the
other services offered over the [i]nternet.” The term
ITFA does not preempt the state or local government’s tax
excludes “voice, audio or video programming, or other
on electronic commerce.
products and services . . . that utilize [i]nternet protocol or
In 2013, in Performance Marketing Association, Inc. v.
any successor protocol and for which there is a charge.”
Hamer, the Illinois Supreme Court considered whether the
Multiple and Discriminatory Taxes
ITFA preempted an Illinois use tax collection obligation on
internet “performance marketing” contracts. In general, a
The ITFA also prohibits multiple and discriminatory taxes
performance marketing contract is one under which a
on electronic commerce. The term electronic commerce is
person or organization publishes or displays an
broader than internet access. It embraces “any transaction
advertisement and is paid when a specific action, such as a
conducted over the [i]nternet or through [i]nternet access.”
sale, occurs. Illinois enacted a “click-through” nexus law
https://crsreports.congress.gov
The Internet Tax Freedom Act and Federal Preemption
that required out-of-state (remote) internet retailers and
rate and a retail sales tax collection obligation. A business
servicemen to collect a use tax if they had a performance
selling “professional services” that involved “human effort”
marketing contract with a person or organization, an
originating after a customer request was subject to the
“affiliate,” in Illinois that advertised or displayed a link on a
higher service B&O rate, but was generally not required to
website connecting an internet user to that remote retailer or
collect the retail sales tax. In Gartner, the taxpayer sold
servicemen’s website.
“licenses” or “subscriptions” to client-customized subsites
that permitted clients to view research content in the
A trade group challenged Illinois’s law on the grounds that
taxpayer’s research library via software. Citing
it was a discriminatory tax on electronic commerce in
Performance Marketing, the taxpayer argued that the higher
violation of the ITFA, as it applied to internet performance
combined rate on digital automated services was
marketing contracts, but not to print and broadcast media
discriminatory and its services were subject to the higher
performance marketing contracts. The state acknowledged
rate only because they were “electronically transferred.”
that the law did not apply to offline performance marketing
The taxpayer contended that selling access to information in
contracts. However, the state argued that the law was not a
discriminatory tax under the ITFA because a “click
its research library was the same as providing research
-
through” link was similar to active solicitation, which was
reports to clients via email or CD, which remained subject
to the service B&O tax. The court held Washington’s tax
subject to a use tax collection obligation.
regime did not violate the ITFA, explaining that
The court disagreed with the state’s reasoning. It concluded
simply sending its clients Research Content by e-
that a click-through link was not similar to active
mail is not the equivalent of Gartner selling access
solicitation because there was no interaction between an
to its Research Library. . . . [A]ccess to Gartner’s
affiliate and a customer. It also determined a click-through
link was no different from print and broadcast
Research Library is a digital automated service that
advertisements with promotional codes, because they could
is transferred electronically and uses one or more
be used to track and generate sales and be disseminated
software applications.
nationally and internationally. Thus, the court held, “by
Preemption of State Taxing Authority
singling out retailers with [i]nternet performance marketing
arrangements for use tax collection, the [law] imposes
From the inception of the ITFA, state government
discriminatory taxes within the meaning of the ITFA.” The
advocates have argued that restrictions on the ability of
court did not consider the trade group’s alternative
state and local authorities to levy internet-specific taxes are
argument that the law violated the Commerce Clause.
unconstitutional infringements on state sovereignty. There
are few cases discussing the intersection of the Tenth
In 2019, in Labell v. City of Chicago, an Illinois appellate
Amendment’s anti-commandeering doctrine and Congress’s
court examined whether the City of Chicago’s amusement
power to preempt state taxes under the Commerce Clause
tax was a discriminatory tax under the ITFA. Chicago
because Congress rarely exercises this power. In addition,
extended its 9% tax on charges paid for the privilege of
potential plaintiffs may be reluctant to bring lawsuits based
witnessing, viewing, or participating in Chicago
on the Supreme Court’s past statements in state taxing
amusements (e.g., sporting events, motion picture shows) to
power cases underscoring a presumption against
include Chicago customers watching electronically
preemption.
delivered television shows, movies, and videos, listening to
electronically delivered music, and participating in online
Courts may give Tenth Amendment challenges to the ITFA
games. Relying on Performance Marketing, the taxpayers
more credence after the Supreme Court’s 2018 decision in
in Labell argued that the extension of the tax to streaming
Murphy v. NCAA. In Murphy, the Court held that a
services was a discriminatory tax under the ITFA because
provision in the Professional and Amateur Sports Protection
Chicago taxed automatic amusement devices (e.g.,
Act that made it “unlawful” for a state to authorize sports
jukeboxes and pinball machines) and live cultural
betting violated the Tenth Amendment’s anti-
performances with a limited seating capacity (e.g., fine art
commandeering doctrine. Some legal scholars expansively
performances) in a different manner. The Illinois appellate
construe Murphy to extend the anti-commandeering
court ruled that Performance Marketing was not dispositive
doctrine to statutes like the ITFA that prohibit state
and the tax did not violate the ITFA because, unlike in
legislatures from taking a specific action. Other legal
Performance Marketing, the services at issue were not
scholars read Murphy narrowly—Murphy does not suggest
“identical.” The court explained, “Streaming services are
that the anti-commandeering doctrine should be applied to
primarily used privately in the home or on devices owned
invalidate a valid federal preemption provision under the
and maintained by the patron” while “automatic amusement
Supremacy Clause. Thus, the doctrine might not invalidate
devices are used publicly, outside the home and are owned
a valid exercise of an enumerated power conferring a
and maintained by businesses.” Labell does not include a
federal right on private actors to be free from a specific
similar comparative analysis of streaming services and live
state law that conflicts with federal law. As applied to the
cultural performances.
ITFA, a court might view the ITFA as a valid exercise of
the Commerce Clause that confers rights on private actors
In 2020, in Gartner, Inc. v. Department of Revenue, a
to be from specific state taxes interfering with interstate
Washington appellate court considered whether the ITFA
commerce.
preempted a higher combined rate of tax on “digital
automated services.” Under Washington’s tax regime, a
Milan N. Ball, Legislative Attorney
business selling digital automated services was generally
subject to the retailing business and occupation (B&O) tax
IF11947
https://crsreports.congress.gov
The Internet Tax Freedom Act and Federal Preemption
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