Call for "Fair, Uniform, and Simple" State Taxes on Internet and Online Services

By Fineman, Marshall L | The CPA Journal, April 1997 | Go to article overview

Call for "Fair, Uniform, and Simple" State Taxes on Internet and Online Services


Fineman, Marshall L, The CPA Journal


A task force of Interactive Services Association (ISA) member companies recently issued an executive summary of a white paper on state and local Internet and online taxation. The document recommends that policymakers take time to consider the unique nature of the emerging industry before imposing taxes that would be difficult to implement and collect.

The white paper, entitled "Logging On to Cyberspace Tax Policy," was commissioned last summer by the ISA, a trade association serving the Internet and online industry, to provide information to government policymakers about the issues related to taxes on Internet and online services. The ISA task force is preparing the white paper with assistance provided by Ernst & Young LLP. The ISA task force members include America Online, Inc., AT&T, CompuServe Incorporated, GE Information Services, Inc., IBM, Microsoft, Corporation and NETCOM On-Line Communication Services.

The ISA task force recommends that if states impose taxes on Internet and online services, they should be

* based on a set of uniform definitions adopted by all the states;

* based on uniform rates adopted within states;

* imposed on the purchaser, with respect to a specific transaction; and

* attributed, in the absence of better information about the location of the purchaser, to the state to which the sales are billed.

"If the states move too quickly, they will risk creating, rather than resolving, major problems," cautions the executive summary. "Since relatively small amounts of tax are currently at stake, there is time in which to work together to develop a fair and efficient tax system....A deliberate and cooperative approach will avoid the dangers that lurk in precipitate and uninformed action on the part of the states, dangers that could hinder the development of the industry."

The executive summary points out that, while the industry is experiencing rapid growth, it is still relatively young. According to estimates from industry research firms, revenues from Internet access and consumer online services totaled $1.Cr$2.2 billion in 1995, which was less than 0.8 percent of total communication services spending (including telephone, television and radio broadcasting, cable and pay television services), as defined by the Census Bureau. In addition, sales of tangible property over online services and the Internet were estimated at only about $500 million last year, which was less than 0.4 percent of total consumer mail order sales.

The executive summary expresses the task force members' willingness to work closely with policymakers to help them understand the industry and to try to resolve the issues raised by taxing these types of services and transactions. Among the issues identified by the task force were

* the difficulty of determining the physical location of a seller operating through the Internet;

* the difficulty of determining the location of a buyer of a product that is transmitted electronically;

* the need to recognize that Internet and online services are not telecommunications services; instead Internet service providers and online services are the purchasers of telecommunications services as are their individual customers;

* the application of different tax systems from state to state;

* different tax rates imposed by different jurisdictions within a state; and

* the application of traditional nexus standards, which determine whether a state has taxing jurisdiction over a party. …

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Call for "Fair, Uniform, and Simple" State Taxes on Internet and Online Services
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