Academic journal article Federal Communications Law Journal

Taxing the Nontaxable: Are State and Local Governments Allowed to Tax Internet Streaming Service Providers?

Academic journal article Federal Communications Law Journal

Taxing the Nontaxable: Are State and Local Governments Allowed to Tax Internet Streaming Service Providers?

Article excerpt

TABLE OF CONTENTS  I.   INTRODUCTION                                                    180 A.   INTERNET STREAMING SERVICE PROVIDERS ARE FACED WITH A           181      CONFUSING WEB OF CONFLICTING CONSUMER TAXATION LAWS II.  THE CONFUSION AND COMPLEXITY FACING INTERNET STREAMING          182      SERVICE PROVIDERS III. STATE AND LOCAL GOVERNMENTS CANNOT REQUIRE INTERNET             184      STREAMING SERVICE PROVIDERS TO COLLECT AND REMIT SALES      AND USE TAXES      A. THE PERMANENT INTERNET TAX FREEDOM ACT                       185         1. APPLICABILITY OF THE PERMANENT INTERNET TAX               186            FREEDOM ACT         2. THE PURPOSE OF THE PERMANENT INTERNET TAX                 189            FREEDOM ACT      B. THE COMMERCE CLAUSE                                          190         1. THE TAXATION OF ISSPS BY STATE AND LOCAL                  191            GOVERNMENTS' FAILS TO SATISFY THE SUBSTANTIAL            NEXUS TEST REQUIRED BY THE COMMERCE CLAUSE         2. COUNTER ARGUMENTS RAISED BY PROPONENTS OF                 195            TAXING ISSPS VIOLATE THE COMMERCE CLAUSE      C. THE DUE PROCESS CLAUSE                                       196 IV. CONCLUSION                                                       198 

I. INTRODUCTION

For Netflix, Hulu, and other Internet streaming service providers ("ISSPs"), the years 2015 through 2017 have been filled with confusion and frustration. ISSPs are required to collect and remit varying tax amounts from customers based on state and local governments' sales and use tax codes. (1) Yet, imposing such taxes violates the Permanent Internet Tax Freedom Act, burdens interstate commerce in violation of the Commerce Clause by requiring the ISSP to sort through hundreds of tax codes, and possibly violates the Due Process Clause of the Fourteenth Amendment by enforcing statutes and regulations on companies that are not under the state or local government's jurisdiction.

The application of existing state and local governments' sales and use tax codes imposes a substantial burden on ISSPs. According to the Federal Communications Commission ("FCC"), "the current patchwork of state and local laws and regulations relating to taxation of digital goods and services . . . may hinder new investment and business models," (2) thus hindering interstate commerce. For example, a double or triple taxation issue could arise if a resident of Washington, D.C. streams a video through an ISSP based in California during a layover at Dallas Fort Worth International Airport, and each jurisdiction claimed a right to tax the streamed video. (3) Adding to the complexity and confusion, "some [state and local governments] tax [online sales] as part of the sales tax imposed on tangible personal property; others tax them as a separate category of services." (4) Furthermore, each taxing jurisdiction differs on the content and products that are subject to be tax. (5)

Various sources of law, however, suggest that it is impermissible to require ISSPs to collect and remit sales and use taxes. (6) The United States Congress enacted the Internet Tax Freedom Act in 1998, which prohibited the introduction of new taxes on Internet access. (7) In 2016, Congress passed the Trade Facilitation and Trade Enforcement Act, which extended the Internet Tax Freedom Act's applicability to 2020. (8) Importantly, ISSPs fall within the category of "Internet access" as defined by the Internet Tax Freedom Act. (9) Further, a state or local government violates the Commerce Clause by requiring an ISSP to collect and remit sales and use taxes, unless the ISSP has a "substantial nexus" with the taxing jurisdiction. (10) Finally, the exercise of jurisdiction over ISSPs by state and local governments may also violate the Due Process Clause. (11)

A. Internet Streaming Service Providers Are Faced with A Confusing Web of Conflicting Consumer Taxation Laws

ISSPs are in a state of confusion regarding its tax obligations for online streaming services. …

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