Kent Lassman*

The heart of the Internet Tax Freedom Act (ITFA) is a prudent application of traditional commerce clause jurisprudence to electronic transmissions. The legislation, sponsored by Representative Chris Cox (R-CA) and Senator Ron Wyden (D-OR), would limit state and local taxation of electronic commerce and impose a moratorium on discriminatory taxes. The main opposition to the legislation comes from a handful of state and local officials. However, support and momentum is building for the ITFA and Congress could pass it this year.

While the Internet appears to be like many forms of electronic media, it is fundamentally different. The size, resources, and speed of the Internet change every time a user connects or disconnects. As a result, the physical architecture of the Internet is always changing and constantly in multiple legal jurisdictions.

Fearful of losing sales tax revenue, some state and local authorities are clamoring to retain sovereignty over economic activity that occurs within their jurisdiction. The ITFA treats the Internet as an inherently multi-jurisdictional and interstate medium. If regulation is even possible, it is Congress that has the authority to regulate the interstate, international and parallel computer networks that constitute the Internet.

Sales and use taxes have long been a critical battleground for state and local policymakers. Yet the ITFA does not prevent state or local authorities from taxing electronic commerce, provided that there are such taxes on similar non-electronic commerce. The ITFA holds that the utilization of the Internet alone cannot be considered a "substantial economic presence" which is the current legal litmus test for assessing, collecting and remitting sales taxes on interstate transactions. However, if a company otherwise has a substantial economic presence in a state, then transactions over the Internet may be subject to sales taxes.

The short-term benefit of the ITFA is to alleviate tax-related confusion. Current tax law is unclear with regard to interstate electronic activity. States have in place a variety of definitions and obligations for online services and activities. The result is a multitude of confusing and potentially overlapping tax policies. By putting discriminatory taxation on hold, the ITFA prevents consumers from paying taxes to multiple jurisdictions for a single economic transaction. When taking a long view of policy, the ITFA would allow the necessary infrastructure (legal, commercial and physical) for electronic commerce to continue its development.

In effect, states could tax electronic commerce in the same way as mail order or catalog sales, but only for the duration of the ITFA's moratorium. The length of the moratorium is still the subject of debate, the House version calls for a moratorium of not less than four years or six years after the legislation is enacted while the Senate legislation proposes to end the moratorium in 2004.

The ITFA is on the agenda for second session of Congress. In 1997 the legislation passed out of the Senate Committee on Commerce by a 14-5 vote and gathered more than one hundred cosponsors in the House. Action may come as soon as early spring 1998, and hopefully, Congress will end a great deal of tax related confusion.

*Kent Lassman is a telecommunications policy analyst at Citizens for a Sound Economy. He can be reached at lassman@cse.org.