Internet Taxes

Internet Taxes

From the inception of the Internet until the late 1990s, the Internet was free of regulation by government in the United States at all levels, and also free of any specially targeted tax levies, duties, imposts, or license fees. By 1996, however, that began to change, as several U.S. states and municipalities began to see Internet services as a potential source of tax revenue.

The 1998 Internet Tax Freedom Act halted the expansion of direct taxation of the Internet, grandfathering existing taxes in ten states. In the United States alone, some 30,000 taxing jurisdictions could otherwise have laid claim to taxes on a piece of the Internet. The law, however, did not affect sales taxes applied to online purchases. These continue to be taxed at varying rates depending on the jurisdiction, in the same way that phone and mail orders are taxed.

The enactment of this legislation has coincided with the beginning of a period of spectacular Internet growth. Its proponents argue that the benefits of knowledge, trade, and communications that the Internet is bringing to more people in more ways than ever before are worth the tax revenue losses, if any, and that the economic and productivity growth attributable to the Internet may well have contributed more revenues to various governments than would otherwise have been received. Opponents, on the other hand, have argued that the Internet would continue to prosper even if taxed, and that the current federal ban on Internet-specific levies denies government at all levels a much-needed source of revenue.

It must be emphasized that the absence of direct taxation of the Internet does not mean that all transactions taking place online are free of tax, or even that the Internet is free of all tax. In the United States, nearly all online transactions are subject to one form of tax or the other. The Internet Tax Freedom Act merely precludes states in the United States from imposing their sales tax, or any other kind of gross receipts tax, on certain online services. For example, a state may impose an income or franchise tax on the net income earned by the provider of online services, while the same state may be precluded from imposing its sales tax on the gross receipts of that provider. In addition, as noted above, the Internet Tax Freedom Act does not prevent taxation of the sale of goods through the Internet.