State and Local Taxation of Electronic Commerce: The Forging of Cyberspace Tax Policy

Article excerpt

INTRODUCTION

The development of the information superhighway(1) is transforming traditional business practices and creating new competitive industries for the global economy. A major component of the information superhighway, the Internet, has vast potential for conducting electronic commerce and is currently generating significant tax policy implications at the federal, state, and local levels of government. Current tax principles, however, are not easily applied to the attributes of electronic commerce. Accordingly, taxing authorities must implement new and innovative taxing structures for electronic commerce so as not to hinder the progress of the Internet and the information superhighway.

This article analyzes the current development of state and local cyberspace tax policy, as electronic commerce is on the brink of becoming one of the most significant economic stimulants of the century. The discussion will begin by tracing the development of the Internet from its inception as a military project to its current use as a tool to facilitate electronic commerce. This article will then discuss how the judicial, executive, and legislative branches of the federal government have reacted to the state and local tax implications of electronic commerce. The federal judiciary may craft initial tax policy by applying existing tax law to cases involving electronic commerce.(2) The executive branch, particularly the Department of the Treasury, can generate tax policy initiatives.(3) Only Congress, however, may introduce and pass tax legislation combining both tax law and tax policy.(4) Finally, this article discusses the possible future of cyberspace tax law and policy and examines the Internet Tax Freedom Act which is currently pending in Congress.(5)

I. THE RISE OF THE INTERNET

The Internet, short for interconnected networks, is an international aggregation of computer and communication networks that includes the users of the network and the resources available on the network.(6) Though not an entity in and of itself, the Internet is a dynamic group of networks that is constantly changing as users enter and exit.(7) Instead of a central computer or central control location, the Internet has a standard method of transmitting data among different networks.(8) Information is able to travel over the multibillion dollar telephone networks thereby creating a virtual network running on top of the existing physical network of the telecommunications companies(9)

The Internet was originally a networking concept developed by the United States Department of Defense Advanced Research Projects Agency in 1969 designed "to allow computer scientists and engineers working on military contracts all over America to share expensive computers and other resources."(10) Initially, its intent was to connect a small number of large national networks, such as universities and high-tech Department of Defense contractors.(11) By 1978, however, the network had adopted a standard protocol thereby becoming more adept at connecting a larger number of smaller networks and had expanded its access capabilities to include a much broader class of networks.(12) Built on an existing foundation of standard interoperable protocols and technologies, the entire infrastructure of the Internet now constitutes a level playing field on which all companies, small and large, seek innovative applications and new technologies that add value to the existing framework.(13)

Expanded use and popularity of the network in the 1980s came about when the Department of Defense began to relax its hold on the existing network and the National Science Foundation ("NSF") began to develop a high-speed network of its own.(14) The National Science Foundation's network ("NSFnet"), which later evolved into the Internet, created supercomputer centers to link regional networks of research and academic sites.(15) Quickly, use of the NSFnet expanded beyond its research origins to include universities, government agencies, corporations, and the public at large. …