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State Sales Taxation of Internet Transactions , Record No.: RS20577, Date: January 10, 2001 1 (January 10, 2001)

handle is hein.tera/crstax0331 and id is 1 raw text is: Order Code RS20577 Updated January 10, 2001 State Sales Taxation of Internet Transactions John R. Luckey Legislative Attorney American Law Division Summary There are at least two common mi1sconceptionis in the area of State taxation of In1terniet tranisactionls. Conitrary to popular opinion, (1) States do have the pow\er to impose a Sates tax onl Sales thlat are accorriplishied via the In1ternlet evenl after the eniactment of the Inrterniet Tax Freedom Act in 1998 and (2) States do hav e the pow\er to tax transactions whe1re the seller is located outside of the State and lis nio real connection wi1th the State. The lInterniet Tax Freedom Act placed a three year moratorium oly onl im1positionl of new, taxes onl Initernlet access services (existinig taxes onl access serv ices wvere granidfathiered) or anyv mnultiple or discriminatory taxes onl etectronlic commllerce by State or local g'overrnmenits, not onl application of a genieral sales tax to suIch transactionis. In the I06'Congress, the HouIse patssed H.R. 3709 wh11i w\ould have extenided the moratorium for five years anid repealed the granidfather prov ision for existing taxes onl Internlet access Services. The Seniate took no act(in onl this bitl. Unfrder current law\ a State miay tax a transaction if there is some conniectionl of the transactioni to the State. Thus if the seller or the buyer is located in the State, the transaction miay be subject to the State's sales tax. The Important question in the out-of- State Seller context is not the State's pow\er to ta1x the tran1saIction, but rathffer does the ou~t-of-State Seller have su~fficienlt neCxus to the State SO tha1t the State can requLire thle ou~t-of-State Seller to collect the sales tax from the purchiaser. H.R. 3709 did not address the nexuis issule. This report briefly examines two common misconceptions in the area of State taxation of Internet transactions. These misconceptions are: (1) the Internet Tax Freedom Act of 19981 placed a moratorium on a State's power to impose a sales tax on sales that are accomplished via the Internet; and (2) States may not tax transactions where the seller is located outside of the State and has no real connection to the State. Congressional Research Service 0 The Library of Congress CRS Report for Congress Received through the CRS Web 1 The Internet Tax Freedom Act comprises Titles XI and XII of Division C of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999, P.L. 105-277, 112 Stat. 2681 (1998).

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