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GRADUAÇÃO
 2016.2
TRIBUTAÇÃO 
NA ERA DA INTERNET
AUTOR: LEONARDO DE ANDRADE COSTA
Sumário
Tributação na Era da Internet
I. PROGRAMA DA DISCIPLINA .................................................................................................................................. 3
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I. PROGRAMA DA DISCIPLINA
I.1 EMENTA
Estudo dos impactos da Internet sobre a tributação na era digital em face 
das transformações do modo de produção, distribuição e prestação de servi-
ços nas cadeias globais, regionais e locais no Século XXI.
I.2 CARGA HORÁRIA TOTAL
30 horas/aula — 15 encontros
I.3 OBJETIVOS GERAIS
A Disciplina Eletiva tem por objetivo identificar os elementos estruturais 
e os desafios para os fiscos e os contribuintes em razão da aceleração do pro-
cesso de integração de mercados e novos modelos de relações econômicas e 
sociais causadas pela Internet e tecnologias digitais.
I.4 OBJETIVOS ESPECÍFICOS
O curso, que é subdividido em 4 Blocos, conforme abaixo apresentado, 
tem como objetivo essencial que os alunos compreendam a estrutura da In-
ternet e a natureza dos vários instrumentos de regulação dessa mídia, a fim de 
permitir a aplicação desses conceitos ao estudo da tributação das atividades 
online e bem assim daquelas decorrentes das novas tecnologias que se conec-
tam a web.
Bloco I (3 aulas) — A Internet: Estrutura, Governança e Regulação.
— Análise e compreensão da estrutura técnica da Internet e dos 
principais atores econômicos e políticos que influenciaram a 
evolução da Internet
— Análise e compreensão dos principais mecanismos de governan-
ça da Internet, ao nível nacional e internacional
— Análise e compreensão do papel do estado e das entidades pri-
vadas a fim de regular as redes eletrônicas e as plataformas que 
compõem a internet
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Bloco II (4 aulas) — O Impacto da Internet na tributação sobre o Con-
sumo na Era Digital
— E-commerce e tributação: uma realidade virtual?
— Conclusões da Conferência Ministerial de Ottawa de 1998
— O paradigma Americano: da proposta do bit tax e do Internet 
Tax Freedom Act (ITFA; P.L. 105-277), de 1998, ao Perma-
nent internet tax freedom act, de Julho de 2014. O Streamlined 
Sales and Use Tax Agreement e o Marketplace Fairness Act.
— Internet e tributação na Europa: o comércio eletrônico e erosão 
da base de tributação.
— O desafio global e o OECD Action Plan on Base Erosion and 
Profit Shifting (BEPS): Addressing the Tax Challenges of the 
Digital Economy (ACTION 1: 2015 Final Report). p. 97-118 
e p.119-129.
— A miopia tributária brasileira no modelo de incidência sobre o 
consumo em face da flexibilização dos conceitos de mercadoria 
e de serviço na Era Digital.
Bloco III (3 aulas) — A Internet e a Tributação da Renda em face da 
globalização
— Análise e compreensão dos efeitos da Internet e das novas tec-
nologias sobre a Tributação da Renda em face da globalização
Bloco IV (2 aulas) — Apresentação de trabalhos em sala
I.5 METODOLOGIA
A metodologia proposta é híbrida, na medida em que envolve tanto aulas 
expositivas como dialogadas, o estudo participativo de casos empíricos bem 
assim a apresentação de trabalhos pelos alunos.
I.6 AVALIAÇÃO
A avaliação será realizada por meio da aplicação de uma prova escrita com 
consulta, no dia 03/10/16, e a apresentação de um trabalho em sala, em gru-
po, nos dias 07/11/16 e 21/11/16, cada qual correspondendo a 45% (qua-
renta e cinco por cento da nota). Os 10% (dez por cento) restantes, para se 
alcançar 100% (cem por cento) da nota atribuível, dependerá da presença e 
efetiva participação do aluno nos debates realizados em sala.
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I.7 CONTEÚDO PROGRAMÁTICO POR SEGMENTO
Aula 1 25.07.16
Apresentação do curso, dos seus objetivos, e da metodologia a 
ser adotada.
BLOCO I
(3 aulas)
A Internet: Estrutura, Governança e Regulação
01.08.16 AULA 2 — A arquitetura da Internet: Code is Law
22.08.16
AULA 3 — A governança da Internet: entre privatização e par-
ticipação
29.08.16
AULA 4 — A regulação da Internet: redes eletrônicas e platafor-
mas online
BLOCO II
(4 aulas)
O impacto da Internet na tributação sobre o Consumo na Era Digital
05.09.2016
AULA 5: Os problemas estruturais da incidência de tributos so-
bre os diferentes canais de consumo na era da Digital (B2B, B2C, 
C2C, streaming, M2M) e o paradigma Americano:
• Do Internet Tax Freedom Act (ITFA; P.L. 105-277), de 1998, ao 
Permanent internet tax freedom act, de JULY 3, 2014.
• State Taxation of Internet Transactions: da proposta do bit 
tax ao Streamlined Sales and Use Tax Agreement (http://
www.streamlinedsalestax.org/index.php?page=modules) 
como resultado das decisões da U.S. Supreme Court em 
Bellas Hess v.IIlinois e Quill Corp. v. North Dakota
• Marketplace Fairness Act: 2013 e 2015 (http://marketplace-
fairness.org/bill-text/)
• The 10th Circuit Court of Appeals decision in Direct Ma-
rketing Association v. Brohl (February 22, 2016)
12.09.2016
AULA 6: O desafio global e o OECD Action Plan on Base Erosion 
and Profit Shifting (BEPS): Addressing the Tax Challenges of the 
Digital Economy
• Conferência Ministerial de Ottawa de 1998
• Internet e tributação na Europa: o comércio eletrônico e 
erosão da base de tributação.
• Base Erosion and Profit Shifting — OECD/G20 Project — 
Action 1: 2015 Final Report. Addressing the Tax Challenges 
of the Digital Economy— Chapter 8. Broader indirect tax 
challenges raised by the digital economy and the options to 
address them. p. 119-129.
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BLOCO II
(4 aulas)
19.09.2016
AULA 7: A miopia tributária brasileira na incidência sobre o con-
sumo em face da flexibilização dos conceitos de mercadoria e 
de serviço na Era Digital:
• A gravação de software em mídia e a confecção de software 
bem como sua transferência por meio eletrônico: Solução de 
Consulta n° 77 Diana/SRRF09, de 12/06/2013 e Solução de 
Consulta Disit/SRRF09 78, 12/06/2013
• O ICMS sobre a comunicação (e telecomunicações) e o im-
pacto da Emenda Constitucional nº 87 de 2015 e do Convê-
nio ICMS nº 93/2015 sobre Comércio Eletrônico.
• O Convênio ICMS 181/2015 e a disciplina da matéria no 
Estado do Rio de Janeiro: o Decreto nº 23.109/97, Decreto nº 
27.307/2000 e o Decreto nº 27.308/2000.
26.09.2016
AULA 8 (26/09/16): O ICMS e o ISS: as propostas em tramitação 
no Congresso Nacional
• Proposta de Lei Complementar 366/13, Projeto de Lei do 
Senado nº 386/2012
• Condecine — Fundo Setorial do Audivisual
03.10.16
10.10.16
Avaliação 1 — P1 (Prova com consulta)
Vista e Correção de Prova
BLOCO III
(3 aulas)
A Internet e a Tributação da Renda em face da globalização
17.10.2016
AULA 10: O impacto da Internet e novas tecnologias sobre a tri-
butação da renda em bases mundiais (worldwide taxation)
• Tax Competition and E-commerce
• O conceito de estabelecimento Permanente
24.10.16 AULA 11: O princípio do arm’s length e o transfer pricing
31.10.16
AULA 12 (31/10/16): Os “paraísos fiscais” na nova ótica de tribu-
tação sobre a renda a ser implementada pelo Plano BEPS — Ac-
tion 1
•	 BEPS_Action 1-Broader direct tax challenges raised by the 
digital economy and the options to address them
BLOCO III
(2 aulas)
Avaliação 2
Temas específicos
07.11.16 •	 Trabalhos em grupo a serem apresentados em sala
21.11.16 •	 Trabalhos em grupo a serem apresentados
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http://www.oecdobserver.org/news/archivestory.php/aid/416/E-
commerce_and_taxation:_a_virtual_reality.html 
E-commerce and taxation: a virtual reality 
Interview with Simon Woodside, Fiscal Affairs at OECD. 
Fiscal AffairsDivision 
 
David Rooney 
Taxing e-commerce is a global challenge for governments and business alike. It is also 
not without its controversies. We asked Simon Woodside of OECD’s Fiscal Affairs 
division to explain. 
Observer: Why is taxing e-commerce such a controversial issue? 
Simon Woodside: Everyone likes to argue about tax. And the tax treatment of e-
commerce is no exception. Some of the controversy stems from such notions as the idea 
that e-commerce is somehow so special that governments shouldn’t tax it at all. That’s 
not an argument that I buy – there’s no rational case for granting e-commerce more 
favourable tax treatment than conventional trade. That would only distort the market 
and if, as expected, e-commerce continues to grow, it could lead to an expanding hole in 
the revenue base. 
E-commerce gets more of the headlines, probably because it’s recognised as such an 
important new feature of the global economy. It does beg fundamental questions about 
the way our taxation systems work – whether it’s taxation of company profits or 
taxation of private consumption. The technology that makes e-commerce what it is puts 
more of a spotlight on the possible challenges to effective taxation – just how do you 
tax a cyber-business, or all those sales over the Net? E-commerce makes international 
trade in particular so much easier, and so the debate about taxation moves up the 
international level, too. That’s where the OECD fits in. 
Most mainstream opinion accepts that e-commerce should properly fall in the taxation 
net. What we need to consider is how that works internationally, to provide the same 
level of certainty to governments and businesses that we aim for today in relation to 
conventional commerce. We need to be clear about where taxation takes place, and how 
– especially to avoid the risks of double taxation, or unintentional non-taxation. 
Observer: What are the problems of taxing e-commerce? 
SW: The priority has to be to identify practical and reasonable ways of applying 
internationally accepted taxation norms to e-commerce; and, where necessary, of 
clarifying or developing those norms. So, for example, for direct tax purposes, we’re 
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FGV DIREITO RIO 8
clarifying how such concepts as ‘permanent establishment’ – that’s the rule which 
determines the right of a state to tax the profits of an enterprise of another state – should 
operate in the electronic world. Elsewhere, for indirect taxes (such as value-added tax, 
or VAT) we’re confirming how international transactions should be treated, and 
tackling such tricky issues as how you collect the tax on a product that is delivered 
online. 
So, yes, there are a good few technical issues that need to be examined in detail. And 
that’s precisely what the OECD process is all about – bringing together, through our 
Technical Advisory Groups, experts from business and government. And those 
government representatives are not only from OECD member economies, but from 
many other economies too – Singapore, Brazil, South Africa, China, India to name just 
a few. And, of course, we are looking for additional input from participants at the Dubai 
2001 conference. 
The key thing is to maintain and strengthen the international dialogue. On the whole, 
there aren't any fundamental differences of opinion, although there are some differences 
of emphasis. It's important that we recognise these. 
Observer: Is it purely a trans-border issue, or are there domestic complications too? 
SW: Not entirely – although the focus of the OECD's work has been on the 
international aspects of taxation. That's where we have the strongest role to play. That's 
why, too, we're so committed to a dialogue that actively involves economies across the 
globe. 
At the domestic level, one of the most important issues is how governments can seize 
the opportunities presented by e-commerce technologies to improve taxpayer service, 
whether it's electronic filing, electronic transfer of payments, or just Internet access to 
tax-related information. There's a lot that governments can do and are doing here – and 
the OECD is actively promoting these efforts. 
Observer: Why is there so much fuss right now about how VAT systems should apply 
to e-commerce? 
SW: Most of the fuss is actually about a relatively small part of the overall picture – 
namely b-to-c (business-to-consumer) cross-border deliveries online from, say, a US 
supplier to private consumers in Germany. The vast majority of e-commerce is b-to-b 
(business to business) – whether it's domestic or international – and there are existing 
VAT principles and collection systems that can be readily applied here. So the focus is 
then on B2C transactions. Here too, in many instances, existing tax collection 
mechanisms can work – especially when the transaction involves goods, or is a 
domestic one. 
It's the international online deliveries that present the greatest challenge, especially 
when the supplier has no presence at all in the jurisdiction of the customer. Self-
assessment by individuals is never a great way to secure this sort of tax – but looking to 
the supplier to collect the tax, as is the norm for VAT-type taxes, is not so easy either 
because the supplier is in another state. There are no simple answers right now – 
governments and businesses are agreed on that. We're agreed too that the best way 
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forward is to look towards technology-based systems – for example, ones where the tax 
calculation and remittal is undertaken by a trusted third party as part of the online 
transaction. There's a lot more work needed on the detail of such systems. In the 
interim, states are probably going to have to consider implementing a simplified 
registration system for such non-resident suppliers. 
Observer: Where do countries stand on e-commerce taxation? 
SW: OECD and many non-OECD countries, as well as the business community, are 
firmly committed to the basic principles as set out in the Taxation Framework 
Conditions (endorsed at the Ottawa Ministerial Conference in October 1998). Those 
conditions are the foundation for all our current work – all the participants in the debate, 
government and business, recognise them as such. 
Observer: What are those basic principles? 
SW: In short, non-discriminatory treatment of e-commerce; the application of existing 
rules and concepts; the importance of a fair sharing of the tax base internationally; and a 
commitment to pursuing these ends through intensified dialogue with business and non-
OECD members. Since Ottawa we've achieved a broad level of consensus on such 
issues as the interpretation of the existing permanent establishment rules, the 
characterisation of business income for tax purposes, and the way forward on VAT. In 
early 2001 we'll be issuing comprehensive reports on these and other topics, and so 
starting to draw firm conclusions from the work of the past couple of years. 
Observer: Finally, some people argue that e-tax is unworkable and go to the extreme of 
saying it will spell an end to government. What do you think of these views? 
SW: I think they're misguided. 
E-commerce can and will be taxed – the important thing is that it be taxed fairly and 
efficiently (just like conventional commerce). There's no question of governments 
suddenly allowing their tax revenues to evaporate. Talk of the "end of government" is 
wishful thinking on the part of a maverick (and slightly naïve) fringe. The truth is, 
governments are duty-bound to provide their citizens with core services (schools, 
hospitals, transport infrastructure, social security provisions, etc.). Private provision 
may be possible in some cases, but in practice taxation still plays a central role in 
securing the funds to pay for thoseservices. So taxation of e-commerce is a normal part 
of the accepted pattern of how our countries operate. What tax administrations have to 
do is exploit the technology available to improve taxpayer service and at a lower cost. 
It's not the "end of government" we should be talking about, but the emergence and 
development of "e-government". 
Visit www.oecd.org/daf 
©OECD Observer No 224, January 2001 
- See more at: http://www.oecdobserver.org/news/archivestory.php/aid/416/E-
commerce_and_taxation:_a_virtual_reality.html#sthash.iFed2LyN.dpuf 
	
  
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The Internet Tax Freedom Act: In Brief 
Jeffrey M. Stupak 
Research Assistant 
April 13, 2016 
Congressional Research Service 
7-5700 
www.crs.gov 
R43772 
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The Internet Tax Freedom Act: In Brief 
 
Congressional Research Service 
Summary 
The Internet Tax Freedom Act (ITFA; P.L. 105-277), enacted in 1998, implemented a three-year 
moratorium preventing state and local governments from taxing Internet access, or imposing 
multiple or discriminatory taxes on electronic commerce. Under the moratorium, state and local 
governments cannot impose their sales tax on the monthly payments that consumers make to their 
Internet service provider in exchange for access to the Internet. In addition to the moratorium, a 
grandfather clause was included in ITFA that allowed states which had already imposed and 
collected a tax on Internet access before October 1, 1998, to continue implementing those taxes. 
Previously under ITFA, the moratorium on Internet access taxes and the grandfather clause were 
temporary provisions. With the passage of the Trade Facilitation and Trade Enforcement Act of 
2015 (P.L. 114-125), the moratorium on taxing Internet access was extended permanently, while 
the grandfather clause was extended temporarily through June 30, 2020. 
The original three-year moratorium had been extended eight times before being converted to a 
permanent statute. As the original moratorium was extended, changes were made to the definition 
of Internet access to include and exclude different services and technology. Notable changes 
include the inclusion of digital subscriber lines under the moratorium and the exclusion of Voice 
over Internet Protocol services from the moratorium. 
Over time the grandfather clause has protected a decreasing number of states’ abilities to tax 
Internet access. While 13 states previously taxed Internet access and were protected under the 
grandfather clause, 7 states now tax Internet access. In addition, changes made to ITFA in 2007 
rendered the grandfather provision inapplicable for states that repealed or nullified their taxes on 
Internet access before the enactment of these changes. 
As a public policy, the moratorium on taxing Internet access has economic and fairness 
implications. The policy likely improves lower income individuals’ ability to purchase Internet 
access, which has economic benefits, but the blanket nature of the moratorium likely results in 
some economic waste. Additionally, the moratorium results in unequal application of state and 
local taxes to the provision of services depending upon how the services are delivered. 
Under the moratorium, state and local governments are prevented from taxing Internet access. 
This may have implications for state and local government revenues and provision of services. 
The Internet Tax Freedom Act and its subsequent extensions are often conflated with issues 
related to the taxation of electronic commerce across state borders. ITFA is largely unrelated to 
these issues. For a discussion of interstate electronic commerce and taxation issues, refer to CRS 
Report R41853, State Taxation of Internet Transactions, by Steven Maguire, and CRS Report 
R42629, “Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis, by Erika K. 
Lunder and Carol A. Pettit. 
 
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The Internet Tax Freedom Act: In Brief 
 
Congressional Research Service 
Contents 
Legislative Status and Background ................................................................................................. 1 
Moratorium on Taxing Internet Access ........................................................................................... 2 
The Grandfather Clause ................................................................................................................... 2 
Moratorium on Multiple or Discriminatory Taxes .......................................................................... 3 
Use Taxes and Interstate E-Commerce ............................................................................................ 4 
Economic Considerations ................................................................................................................ 4 
Equity ........................................................................................................................................ 4 
Horizontal Equity ................................................................................................................ 4 
Vertical Equity .................................................................................................................... 5 
Efficiency .................................................................................................................................. 5 
State Revenues and Autonomy .................................................................................................. 6 
Simplicity .................................................................................................................................. 7 
 
Contacts 
Author Contact Information ............................................................................................................ 7 
 
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The Internet Tax Freedom Act: In Brief 
 
Congressional Research Service 1 
he moratorium on Internet access taxes prohibits states, or their political subdivisions, 
from imposing new taxes on Internet access services. The moratorium was recently 
converted to a permanent provision as part of Trade Facilitation and Trade Enforcement 
Act of 2015 (P.L. 114-125), after being previously extended eight times as a temporary provision. 
Under the Internet Tax Freedom Act (ITFA), states who taxed Internet access before 1998 can 
continue taxing Internet access through June 30, 2020. 
Legislative Status and Background 
The Internet Tax Freedom Act of 1998 (ITFA; P.L. 105-277) imposed on state and local 
governments a three-year moratorium, from October 1, 1998, to October 1, 2001, on (1) new 
taxes on Internet access, and (2) multiple or discriminatory taxes on electronic commerce. It also 
established the Advisory Commission on Electronic Commerce. The moratorium includes a 
grandfather clause allowing states that already had “imposed and enforced” a tax on Internet 
access to continue enforcing those taxes. The evolution of the Internet, its interaction with 
telecommunication services, and disputes over state autonomy have led to a number of changes in 
the law with its successive extensions. 
The Internet Tax Nondiscrimination Act (P.L. 107-75), enacted in 2001, was the first extension of 
ITFA. It extended the Internet tax moratorium and the grandfather clause protections through 
November 1, 2003, but made no additional changes to the law. 
In 2004, the Internet Tax Nondiscrimination Act (ITNA; P.L. 108-435) extended the Internet tax 
moratorium through November 1, 2007. Before the passage of ITNA, some states had 
implemented taxes on digital subscriber line (DSL) Internet connections, claiming they were a 
telecommunication service and thereforeexempt from the ITFA tax moratorium. ITNA changed 
the definition of Internet access to include DSL connections under the moratorium. Taxes on DSL 
service were given grandfather protection through November 1, 2005, and grandfather protection 
for other Internet access taxes in place before October 1, 1998, was extended through November 
1, 2007. Changes in ITNA also excluded Voice over Internet Protocol (VoIP) services from the 
moratorium, allowing state and local governments to tax this service. Lastly, ITNA directed the 
Government Accountability Office (GAO) to investigate the impact of the Internet tax 
moratorium on state and local government revenues and the adoption of broadband technologies.1 
The Internet Tax Freedom Act Amendments Act of 2007 (P.L. 110-108) extended the Internet tax 
moratorium and the original grandfather clause through November 1, 2014. Additionally, the law 
revoked grandfather protections if states had voluntarily repealed their Internet access taxes since 
the passage of ITFA in 1998. 
In the 113th Congress, ITFA was extended twice but no further changes were made to its 
provisions. As part of a continuing appropriations resolution (P.L. 113-164) enacted in 2014, 
ITFA was extended through December 11, 2014. Later in the 113th Congress, ITFA was extended 
through October 1, 2015, as part of the Consolidated and Further Continuing Appropriations Act 
(P.L. 113-235), but no additional changes were made. 
 
1 The results of the GAO investigation were published in two reports in 2006. U.S. Government Accountability Office, 
Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, GAO-06-273, January 2006, 
http://www.gao.gov/new.items/d06273.pdf, and U.S. Government Accountability Office, Telecommunications: 
Broadband Deployment is Extensive Throughout the United States, but it is Difficult to Assess the Extent of Deployment 
Gaps in Rural Areas, GAO-06-426, May 2006, at http://www.gao.gov/new.items/d06426.pdf. 
T 
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The Internet Tax Freedom Act: In Brief 
 
Congressional Research Service 2 
In the 114th Congress, ITFA was extended three times before the moratorium on taxing Internet 
access was made permanent by P.L. 114-125. ITFA was first extended through December 11, 
2015, as part of the 2016 Continuing Appropriations Act (P.L. 114-53). An 11-day extension of 
ITFA was then passed as part of P.L. 114-100 through December 22, 2015. Shortly thereafter, 
ITFA was extended through October 1, 2016, as part of the 2016 Consolidated Appropriations Act 
(P.L. 114-113). Lastly, P.L. 114-125 extended the moratorium on taxing Internet access 
permanently, and temporarily extended the grandfather clause provision through June 30, 2020. 
Moratorium on Taxing Internet Access 
The moratorium on Internet access taxes established by ITFA and its subsequent extensions 
prohibits states or their political subdivisions from imposing any new taxes on Internet access 
services. Internet access service is defined as “a service that enables users to access content, 
information, electronic mail, or other services offered over the Internet and may also include 
access to proprietary content, information, and other services as part of a package of services 
offered to consumers.”2 The sale and purchase of Internet access services is exempt from taxation 
under ITFA; however, costs related to acquired services, such as an Internet service provider 
(ISP) leasing capacity over fiber, are not covered by the moratorium and thus potentially subject 
to taxation.3 Internet access is often bundled with other services such as voice or video service. In 
these situations, if the ISP can reasonably separate the charges related to Internet access from the 
other service charges, the Internet access charges remain exempt from taxation; otherwise the 
Internet access charges can be taxed.4 
The moratorium on taxing Internet access affects consumers of the Internet, ISPs, and state and 
local governments. One of the most significant effects of ITFA is that state and local governments 
cannot impose their sales taxes on the monthly payments that consumers make to their ISP, such 
as Comcast or AT&T, in exchange for access to the Internet. The moratorium prohibits taxes on 
Internet access services regardless of whether the tax is imposed on the consumer or the provider. 
The moratorium affects state and local governments by limiting the activities that can be taxed, 
reducing their potential tax base, which may reduce state and local revenues. One estimate 
suggests that the moratorium on Internet access taxes could reduce potential state and local 
revenues by as much as $6.5 billion each year.5 It should be noted that this estimate assumes that 
all states and local governments would impose their sales tax on Internet access services. This 
revenue estimate is further discussed below in the “State Revenues and Autonomy” section. 
The Grandfather Clause 
ITFA contained a grandfather clause to allow state and local governments to continue taxing 
Internet access if they already had a tax on Internet access that was generally imposed and 
actually enforced before October 1, 1998. Initially 13 states were included under the grandfather 
clause, but a number of states have voluntarily eliminated their Internet access taxes since the 
 
2 47 U.S.C. §151, note. 
3 U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, 
GAO-06-273, January 2006, pp. 10-11. 
4 47 U.S.C. §151, note. 
5 Michael Mazerov, Congress Should End - Not Extend - the Ban on State and Local Taxation of Internet Access 
Subscriptions, Center on Budget and Policy Priorities, Washington, DC, July 10, 2014, Table 2, at 
http://www.cbpp.org/cms/?fa=view&id=4161. 
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The Internet Tax Freedom Act: In Brief 
 
Congressional Research Service 3 
passage of ITFA.6 Currently seven states claim to collect tax revenue from Internet access: 
Hawaii, New Mexico, North Dakota,7 Ohio, South Dakota, Texas, and Wisconsin.8 According to a 
recent survey, these seven states collect a combined $563 million per year from their taxes on 
Internet access.9 The grandfather clause protecting taxes on Internet access implemented before 
October 1, 1998, is set to expire on June 30, 2020 
In addition to the original grandfather clause established in ITFA, an additional grandfather clause 
was established as part of the Internet Tax Nondiscrimination Act (ITNA) for certain taxes on 
Internet access imposed and enforced before November 1, 2003. The grandfather clause 
established under ITNA expired on November 1, 2005, which largely applied to state and local 
taxes on DSL Internet access services. 
Moratorium on Multiple or Discriminatory Taxes 
ITFA also prohibits state and local governments from imposing multiple or discriminatory taxes 
on electronic commerce. The ban on multiple taxes prohibits more than one state, or more than 
one local jurisdiction at the same level of government (i.e., more than one county or city), from 
imposing a tax on the same transaction, unless a credit is offered for taxes paid to the other 
jurisdiction. However, the state, county, and city in which an electronic commerce transaction 
takes place could all levy their own sales (or use) taxes on the transaction. 
The ban on discriminatory taxes prohibits additional taxes or an alternative tax rate on a good, 
service, or information delivered electronically that would differ from the tax or rate applied to 
the same, or similar, good, service, or information if it were purchased through traditional 
commerce (e.g., brick and mortar stores, catalog sales). In other words, under themoratorium the 
same tax rate must be applied to similar items regardless of how they were purchased. For 
example, purchasing a book through a local book store’s website cannot be taxed at a higher rate 
than purchasing it at the local book store’s physical location. 
ITFA also lists conditions under which a remote seller’s use of a computer server, an Internet 
access service, or online services does not establish a minimal connection to a state for taxation 
purposes. These circumstances include the sole ability to access a site on a remote seller’s out-of-
state computer server; the display of a remote seller’s information or content on the out-of-state 
computer server of a provider of Internet access service or online services; and processing of 
orders through the out-of-state computer server of a provider of Internet access service or online 
services. Some businesses have taken advantage of these nexus limits in ITFA’s definition of 
discriminatory tax to establish what are referred to as Internet kiosks or dot-com subsidiaries. The 
businesses claim that these Internet-based operations are free from sales and use tax collection 
requirements. Critics object that these methods of business organization are an abuse of the 
definition of discriminatory tax.10 
 
6 Ibid., p. 18. 
7 North Dakota voted to eliminate their tax on Internet access in 2015, as part of North Dakota Senate Bill 2096. The 
repeal of their Internet access tax is effective as of June 30, 2017. 
8 Henry Reske, “Ending Internet Law’s Grandfather Clause Could Cost States $500 Million,” Tax Analysts, 2014-
15565, June 24, 2014. 
9 Ibid. 
10 See CRS Report RL33261, Internet Taxation: Issues and Legislation, by Steven Maguire and Nonna A. Noto. 
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Use Taxes and Interstate E-Commerce 
The collection of use taxes has become a larger issue in public debates recently; however, this 
issue is largely unrelated to ITFA and its moratorium on Internet taxes. ITFA deals specifically 
with taxes on Internet access, and multiple or discriminatory taxes on electronic commerce, while 
the issues related to taxing interstate electronic commerce center largely on the Supreme Court’s 
decision in Quill Corp. v. North Dakota and the Commerce and Due Process Clauses of the 
Constitution.11 Both clauses require that an entity have some type of connection, or nexus, with a 
state before the state can impose a tax on it. Quill established that, under the Commerce Clause, a 
retailer must have a “physical presence” in the state before the state can require the retailer to 
collect use taxes, while due process imposes a lesser standard.12 A great deal of electronic 
commerce involves firms that have a physical presence in a single state where they house their 
servers or warehouse their goods but sell goods to individuals in the other 49 states. Due to the 
definition of nexus established in Quill, firms cannot be compelled to collect use taxes from 
individuals at the point of sale when engaged in transactions in states where they have no physical 
presence. Instead, individuals making the purchase are supposed to remit a use tax to their own 
state governments; compliance with this requirement is low.13 
For further discussion of interstate electronic commerce issues see CRS Report R41853, State 
Taxation of Internet Transactions, by Steven Maguire, and CRS Report R42629, “Amazon Laws” 
and Taxation of Internet Sales: Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit. 
Economic Considerations 
Tax policy is generally evaluated based on its equity, efficiency, and simplicity. The following 
sections will evaluate the ITFA, specifically the moratorium on taxing Internet access, with 
respect to these characteristics and other relevant factors, including its impact on state and local 
governments. 
Equity 
The equity, or fairness, of tax policy can be thought of along two different axes. One axis, 
referred to as horizontal equity, is concerned with how the tax policy will affect similar 
individuals. All else equal, a tax policy which places a similar tax burden on similarly situated tax 
payers is considered horizontally equitable. The alternative axis, referred to as vertical equity, is 
concerned with how tax policy will affect dissimilar individuals. All else equal, a tax policy is 
viewed as vertically equitable if taxpayers with a greater ability to pay will tend to pay more in 
taxes, than those with a lesser ability to pay. 
Horizontal Equity 
The Internet provides numerous services that are similar to services that are provided through 
more traditional means and are subject to taxation by state and local governments. The 
moratorium on taxing Internet access therefore provides a relative tax advantage to services 
 
11 For more information on this case, see CRS Report R42629, “Amazon Laws” and Taxation of Internet Sales: 
Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit. 
12 Quill v. North Dakota, 504 U.S. 298, 308 (1992). 
13 Linda O’Brien, “Tax Trends: States Address Declining Tax Revenues,” The Tax Magazine, April 1, 2005, p. 9. 
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offered through the Internet. For example, an individual who would like phone service can obtain 
similar service either by purchasing plain old telephone service, which is often subject to state 
and local sales taxes, or they can purchase Internet access and use a free service, like Skype, to 
make phone calls and avoid paying any sales or use taxes. 
The inequitable tax treatment under the moratorium violates the principle of horizontal equity. 
With the current Internet tax moratorium under ITFA, two firms that provide almost identical 
services can be subject to different tax rates based on how the service is provided, either over the 
Internet or by a brick-and-mortar business. 
Vertical Equity 
The Internet tax moratorium acts as a subsidy, lowering the effective price of purchasing Internet 
access by eliminating any state or local tax on the service. Higher-income individuals tend to 
have greater access to the Internet than low-income individuals. In 2013, 24% of adults making 
less than $30,000 per year did not use the Internet, while 4% of adults making more than $75,000 
did not use the Internet. It is possible that this subsidy could help lower-income individuals gain 
access to Internet. However, only about 6% cited the cost of Internet access as the reason they do 
not use the Internet. 14 
The structure of the Internet access tax moratorium and resulting subsidy does not satisfy the 
principle of vertical equity. Upper-income individuals are likely more capable of paying state and 
local sales taxes on their Internet access charges than lower-income individuals, however both 
upper- and lower-income individuals have access to the subsidy. Because these dissimilar 
individuals face similar tax burdens with respect to Internet access, the moratorium does not 
exhibit the concept of vertical equity. 
Efficiency 
The ITFA, specifically the moratorium on taxing Internet access, likely improves economic 
efficiency by expanding access to the Internet among individuals who may not be able to afford 
the service otherwise. However, the blanket nature of the moratorium, where both low- and high-
income individuals receive the benefits of a lower tax burden, likely reduces the economic 
efficiency gains produced by this policy. 
Due to the nature of the Internet, having additional businesses and individuals connecting to the 
Internet provides benefits both to the new Internetusers but also to those who were already using 
the Internet. Or in economic terms, when an individual purchases Internet access they receive 
personal benefits, in the form of increased access to goods, services, and information, but they 
also generate external benefits for other individuals already using the Internet, in that they now 
have another Internet user to interact with or engage in commercial transactions.15 When an 
individual is making a decision about whether to purchase Internet access, they tend to only 
consider their personal benefits from accessing the Internet and are unlikely to consider the 
external benefits they will create by purchasing Internet access. This results in fewer individuals 
accessing the Internet than is socially optimal. The moratorium on taxing Internet access acts as a 
subsidy to individuals and businesses by lowering the cost of Internet access. Lowering the cost 
 
14 Kathryn Zickuhr, Who’s Not Online and Why, Pew Research Center, Washington, DC, September 25, 2013, p. 6, at 
http://pewInternet.org/reports/2013/non-Internet-users.aspx. 
15 George R. Zodrow, “Network Externalities and Indirect Tax Preferences for Electronic Commerce,” International 
Tax and Public Finance, vol. 10 (2003), pp. 83-84. 
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of Internet access should increase the number of individuals using the Internet. And increasing the 
number of individuals on the Internet could improve economic efficiency by bringing the number 
of people on the Internet closer to the socially optimal level. 
Some have argued that the subsidy provided by the Internet access tax moratorium is too large in 
comparison to the external benefits generated by an individual joining the Internet.16 Additionally, 
scholars argue that as the Internet has grown the external benefits associated with an additional 
user have decreased, and at a certain point negative external consequences may arise from 
congestion.17 
The subsidy offered to businesses and individuals through the moratorium on taxing Internet 
access also likely generates a certain amount of waste due to the blanket design of the subsidy. A 
large number of individuals would likely choose to purchase Internet access even if the price was 
higher due to state and local governments applying taxes to the service. Offering the subsidy to 
individuals who would have purchased Internet access regardless of the subsidy is considered 
wasteful from an economic perspective because the forgone revenue associated with the subsidy 
could be used elsewhere in a more productive capacity. Better targeting of the subsidy to 
individuals who struggle to afford Internet access would likely be a more economically efficient 
use of resources. 
State Revenues and Autonomy 
As the Internet has grown in size and popularity, states have forgone a source of potential 
revenues because of the federal moratorium. As mentioned previously, one estimate suggests that 
states could collect as much as $6.5 billion in revenue each year from taxing Internet access.18 
This estimate assumes that all states and local jurisdictions would impose their sales taxes on 
Internet access. This is unlikely to occur when considering that multiple grandfathered states 
eliminated their Internet access taxes voluntarily, and California even implemented a similar 
state-level moratorium on Internet taxes in 1999. Estimating the lost revenue from the Internet tax 
moratorium is difficult because it is necessary to speculate how states would have acted in the 
absence of the moratorium. The seven states that currently collect sales tax on Internet access 
raise an estimated $563 million per year.19 
States have historically been allowed the freedom to determine how they want to raise their own 
revenues. ITFA is one example of a departure from this relationship in that the federal 
government restricted state and local governments from taxing certain activities. The National 
Governors Association has voiced concerns about the federal government encroaching on state 
autonomy, and hopes to revise parts of ITFA to shrink the definition of Internet access to allow 
taxation of more activities related to the provision of Internet access.20 
 
16 George R. Zodrow, “Network Externalities and Indirect Tax Preferences for Electronic Commerce,” International 
Tax and Public Finance, vol. 10 (2003), pp. 85. 
17 Austan Goolsbee and Jonathan Zittrain, “Evaluating the Costs and Benefits of Taxing Internet Commerce,” National 
Tax Journal, vol. 52 (September, 1999), pp. 413-428. 
18 Ibid. 
19 Henry Reske, “Ending Internet Law’s Grandfather Clause Could Cost States $500 Million,” Tax Analysts, 2014-
15565, June 24, 2014. 
20 David Quam, Testimony - Communications, Taxation, and Federalism, National Governors Association, May 23, 
2007, at http://www.nga.org/cms/home/federal-relations/nga-testimony/page_2007/col2-content/main-content-list/may-
23-2008-testimony—communic.html. 
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Simplicity 
The moratorium on taxing Internet access likely simplifies complying with the tax code for ISPs. 
It is estimated that the number of different state and local tax jurisdictions ranges from 7,600 to 
14,500.21 For any ISPs which span multiple tax jurisdictions, the moratorium on taxing Internet 
access likely reduces the administrative burden of complying with those multiple tax 
jurisdictions. 
 
 
Author Contact Information 
 
Jeffrey M. Stupak 
Research Assistant 
jstupak@crs.loc.gov, 7-2344 
 
 
 
21 Glen Kessler, “McConnell’s Claim that There Are ‘Nearly 10,000’ Tax Codes Nationwide,” The Washington Post, 
April 29, 2013. 
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INTERNET TAX FREEDOM ACT PUB.L. 105-277, DIV. C, TITLE XI, §§ 1100 TO 1104, OCT. 21, 1998, 
112 STAT. 2681-719
Sec. 1101. Moratorium
(a) Moratorium.--No State or political subdivision thereof shall impose any of the following taxes during 
the period beginning on October 1, 1998, and ending November 1, 2003. [Oct. 21, 1998]--
(1) taxes on Internet access, unless such tax was generally imposed and actually 
enforced prior to October 1, 1998; and
(2) multiple or discriminatory taxes on electronic commerce.
(b) Preservation of state and local taxing authority.--Except as provided in this section, nothing in this title 
[this note] shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or 
superseding of, any State or local law pertaining to taxation that is otherwise permissible by or under the 
Constitution of the United States or other Federal law and in effect on the date of enactment of this Act [Oct. 21, 
1998].
(c) Liabilities and pending cases.--Nothing in this title [this note] affects liability for taxes accrued and 
enforced before the date of enactment of this Act [Oct. 21, 1998], nor does this title [this note] affect ongoing 
litigation relating to such taxes.
(d) Definition of generally imposed and actually enforced.--For purposes of this section, a tax has been 
generally imposed and actually enforced prior to October 1, 1998, if, before that date, the tax was authorized by 
statute and either--
(1) a provider of Internet access services had a reasonable opportunity to know
by virtue of a rule or other public proclamation made by the appropriate administrative agency of the State or 
political subdivision thereof, that such agency has interpreted and applied such tax to Internet access services; or
(2) a State or politicalsubdivision thereof generally collected such tax on charges 
for Internet access.
(e) Exception to moratorium.--
(1) In general.--Subsection (a) shall also not apply in the case of any person or 
entity who knowingly and with knowledge of the character of the material, in interstate or foreign commerce by 
means of the World Wide Web, makes any communication for commercial purposes that is available to any minor 
and that includes any material that is harmful to minors unless such person or entity has restricted access by minors 
to material that is harmful to minors
(A) by requiring use of a credit card, debit account, adult access code, or 
adult personal identification number;
(B) by accepting a digital certificate that verifies age; or
(C) by any other reasonable measures that are feasible under available 
technology.
(2) Scope of exception.--For purposes of paragraph (1), a person shall not be 
considered to making a communication for commercial purposes of material to the extent that the person is—
(A) a telecommunications carrier engaged in the provision of a 
telecommunications service;
(B) a person engaged in the business of providing an Internet access
service;
(C) a person engaged in the business of providing an Internet information 
location tool; or
(D) similarly engaged in the transmission, storage, retrieval, hosting, 
formatting, or translation (or any combination thereof) of a communication made by another person, without 
selection or alteration of the communication.
(3) Definitions.--In this subsection:
(A) By means of the World Wide Web.--The term 'by means of the 
World Wide Web' means by placement of material in a computer server-based file archive so that it is publicly 
accessible, over the Internet, using hypertext transfer protocol, file transfer protocol, or other similar protocols.
(B) Commercial purposes; engaged in the business.--
(i) Commercial purposes.--A person shall be considered to make 
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a communication for commercial purposes only if such person is engaged in the business of making such 
communications.
(ii) Engaged in the business.--The term 'engaged in the business' 
means that the person who makes a communication, or offers to make a communication, by means of the World 
Wide Web, that includes any material that is harmful to minors, devotes time, attention, or labor to such activities, 
as a regular course of such person's trade or business, with the objective of earning a profit as a result of such 
activities (although it is not necessary that the person make a profit or that the making or offering to make such 
communications be the person's sole or principal business or source of income). A person may be considered to be 
engaged in the business of making, by means of the World Wide Web, communications for commercial purposes
that include material that is harmful to minors, only if the person knowingly causes the material that is harmful to 
minors to be posted on the World Wide Web or knowingly solicits such material to be posted on the World Wide 
Web.
(C) Internet.--The term 'Internet' means collectively the myriad of 
computer and telecommunications facilities, including equipment and operating software, which comprise the 
interconnected world-wide network of networks that employ the Transmission Control Protocol/Internet Protocol,
or any predecessor or successor protocols to such protocol, to communicate information of all kinds by wire or 
radio.
(D) Internet access service.--The term 'Internet access service' means a 
service that enables users to access content, information, electronic mail, or other services offered over the Internet 
and may also include access to proprietary content, information, and other services as part of a package of services 
offered to consumers. Such term does not include telecommunications services.
(E) Internet information location tool.--The term 'Internet information 
location tool' means a service that refers or links users to an online location on the World Wide Web. Such term 
includes directories, indices, references, pointers, and hypertext links.
(F) Material that is harmful to minors.--The term 'material that is harmful 
to minors' means any communication, picture, image, graphic image file, article, recording, writing, or other matter 
of any kind that is obscene or that--
(i) the average person, applying contemporary community 
standards, would find, taking the material as a whole and with respect to minors, is designed to appeal to, or is 
designed to pander to, the prurient interest;
(ii) depicts, describes, or represents, in a manner patently
offensive with respect to minors, an actual or simulated sexual act or sexual contact, an actual or simulated normal 
or perverted sexual act, or a lewd exhibition of the genitals or post-pubescent female breast; and
(iii) taken as a whole, lacks serious literary, artistic, political, or 
scientific value for minors.
(G) Minor.--The term 'minor' means any person under 17 years of age.
(H) Telecommunications carrier; telecommunications service.--The
terms 'telecommunications carrier' and 'telecommunications service' have the meanings given such terms in section 
3 of the Communications Act of 1934 (47 U.S.C. 153).
(f) Additional exception to moratorium.--
(1) In general.--Subsection (a) shall also not apply with respect to an Internet 
access provider, unless, at the time of entering into an agreement with a customer for the provision of Internet 
access services, such provider offers such customer (either for a fee or at no charge) screening software that is 
designed to permit the customer to limit access to material on the Internet that is harmful to minors.
(2) Definitions.--In this subsection:
(A) Internet access provider.--The term 'Internet access provider' means a 
person engaged in the business of providing a computer and communications facility through which a customer 
may obtain access to the Internet, but does not include a common carrier to the extent that it provides only 
telecommunications services.
(B) Internet access services.--The term 'Internet access services' means 
the provision of computer and communications services through which a customer using a computer and a modem 
or other communications device may obtain access to the Internet, but does not include telecommunications 
services provided by a common carrier.
(C) Screening software.--The term 'screening software' means software 
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that is designed to permit a person to limit access to material on the Internet that is harmful to minors.
(3) Applicability.--Paragraph (1) shall apply to agreements for the provision of 
Internet access services entered into on or after the date that is 6 months after the date of enactment of this Act [Oct. 
21, 1998].
Sec. 1102. Advisory Commission on Electronic Commerce
(a) Establishment of commission.--There is established a commission to be known as the Advisory
Commission on Electronic Commerce (in this title [this note] referred to as the 'Commission'). The Commission 
shall--
(1) be composed of 19 members appointed in accordance with subsection (b), 
including the chairperson who shall be selected by the members of the Commission from among themselves; and
(2) conduct its business in accordance with the provisions of this title [this note].
(b) Membership.--
(1) In general.--The Commissioners shall serve for the life of the Commission.
The membership of the Commission shall be as follows:
(A) 3 representatives from the Federal Government, comprised of the 
Secretary of Commerce, the Secretary of the Treasury, and the United States Trade Representative (or their 
respective delegates).
(B) 8 representatives from State and local governments (onesuch 
representative shall be from a State or local government that does not impose a sales tax and one representative 
shall be from a State that does not impose an income tax).
(C) 8 representatives of the electronic commerce industry (including 
small business), telecommunications carriers, local retail businesses, and consumer groups, comprised of--
(i) 5 individuals appointed by the Majority Leader of the Senate;
(ii) 3 individuals appointed by the Minority Leader of the Senate;
(iii) 5 individuals appointed by the Speaker of the House of Representatives; and
(iv) 3 individuals appointed by the Minority Leader of the House of 
Representatives.
(2) Appointments.--Appointments to the Commission shall be made not later 
than 45 days after the date of the enactment of this Act [Oct. 21, 1998]. The chairperson shall be selected not later 
than 60 days after the date of the enactment of this Act [Oct. 21, 1998].
(3) Vacancies.--Any vacancy in the Commission shall not affect its powers, but 
shall be filled in the same manner as the original appointment.
(c) Acceptance of gifts and grants.--The Commission may accept, use, and dispose of gifts or grants of 
services or property, both real and personal, for purposes of aiding or facilitating the work of the Commission. Gifts 
or grants not used at the expiration of the Commission shall be returned to the donor or grantor.
(d) Other resources.--The Commission shall have reasonable access to materials, resources, data, and other 
information from the Department of Justice, the Department of Commerce, the Department of State, the 
Department of the Treasury, and the Office of the United States Trade Representative. The Commission shall also 
have reasonable access to use the facilities of any such Department or Office for purposes of conducting meetings.
(e) Sunset.--The Commission shall terminate 18 months after the date of the enactment of this Act [Oct. 21, 
1998].
(f) Rules of the Commission.--
(1) Quorum.--Nine members of the Commission shall constitute a quorum for 
conducting the business of the Commission.
(2) Meetings.--Any meetings held by the Commission shall be duly noticed at 
least 14 days in advance and shall be open to the public.
(3) Opportunities to testify.--The Commission shall provide opportunities for 
representatives of the general public, taxpayer groups, consumer groups, and State and local government officials to 
testify.
(4) Additional rules.--The Commission may adopt other rules as needed.
 (g) Duties of the Commission.--
(1) In general.--The Commission shall conduct a thorough study of Federal, State 
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and local, and international taxation and tariff treatment of transactions using the Internet and Internet access and 
other comparable intrastate, interstate or international sales activities.
(2) Issues to be studied.--The Commission may include in the study under 
subsection (a)--
(A) an examination of--
(i) barriers imposed in foreign markets on United States 
providers of property, goods, services, or information engaged in electronic commerce and on United States 
providers of telecommunications services; and
(ii) how the imposition of such barriers will affect United States 
consumers, the competitiveness of United States citizens providing property, goods, services, or information in 
foreign markets, and the growth and maturing of the Internet;
(B) an examination of the collection and administration of consumption 
taxes on electronic commerce in other countries and the United States, and the impact of such collection on the 
global economy, including an examination of the relationship between the collection and administration of such 
taxes when the transaction uses the Internet and when it does not;
(C) an examination of the impact of the Internet and Internet access 
(particularly voice transmission) on the revenue base for taxes imposed under section 4251 of the Internal Revenue 
Code of 1986 [26 U.S.C.A. § 4251];
(D) an examination of model State legislation that--
(i) would provide uniform definitions of categories of property, 
goods, service, or information subject to or exempt from sales and use taxes; and
(ii) would ensure that Internet access services, online services,
and communications and transactions using the Internet, Internet access service, or online services would be treated 
in a tax and technologically neutral manner relative to other forms of remote sales;
(E) an examination of the effects of taxation, including the absence of 
taxation, on all interstate sales transactions, including transactions using the Internet, on retail businesses and on 
State and local governments, which examination may include a review of the efforts of State and local governments 
to collect sales and use taxes owed on in-State purchases from out-of-State sellers; and
(F) the examination of ways to simplify Federal and State and local taxes imposed on the 
provision of telecommunications services.
(3) Effect on the Communications Act of 1934.--Nothing in this section shall 
include an examination of any fees or charges imposed by the Federal Communications Commission or States 
related to:
(A) obligations under the Communications Act of 1934 (47 U.S.C. 151 et 
seq.); or
(B) the implementation of the Telecommunications Act of 1996 [Pub.L. 
104-104, Feb. 8, 1996, 110 Stat. 56, which enacted part II of subchapter II of chapter 5 of this title (47 U.S.C.A. § 
251 et seq.); for complete classification, see Tables] (or of amendments made by that Act).
(h) National Tax Association Communications and Electronic Commerce Tax Project.--The Commission
shall, to the extent possible, ensure that its work does not undermine the efforts of the National Tax Association 
Communications and Electronic Commerce Tax Project.
Sec. 1103. Report
Not later than 18 months after the date of the enactment of this Act [Oct. 21, 1998], the Commission shall 
transmit to Congress for its consideration a report reflecting the results, including such legislative recommendations 
as required to address the findings of the Commission's study under this title. Any recommendation agreed to by the 
Commission shall be tax and technologically neutral and apply to all forms of remote commerce. No finding or 
recommendation shall be included in the report unless agreed to by at least two-thirds of the members of the 
Commission serving at the time the finding or recommendation is made.
Sec. 1104. Definitions
For the purposes of this title [this note]:
(1) Bit tax.--The term 'bit tax' means any tax on electronic commerce expressly imposed 
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on or measured by the volume of digital information transmitted electronically, or the volume of digital information 
per unit of time transmitted electronically, but does not include taxes imposed on the provision of 
telecommunications services.
(2) Discriminatory tax.--The term 'discriminatory tax' means--
(A) any tax imposed by a State or political subdivision thereof on electronic 
commerce that--
(i) is not generally imposed and legally collectible by such State or such 
political subdivision on transactions involving similar property, goods, services, or information accomplished 
through other means;
(ii) is not generally imposed and legally collectible at the same rate by 
such State or such political subdivision on transactions involving similar property, goods, services, or information 
accomplished through other means, unless the rate is lower as part of a phase-out of the tax over not more than a 5-
year period;
(iii) imposes an obligation to collect or pay the tax on a different person 
or entity than in the case of transactions involving similar property, goods, services, or information accomplished 
throughother means;
(iv) establishes a classification of Internet access service providers or 
online service providers for purposes of establishing a higher tax rate to be imposed on such providers than the tax 
rate generally applied to providers of similar information services delivered through other means; or
(B) any tax imposed by a State or political subdivision thereof, if--
(i) except with respect to a tax (on Internet access) that was generally
imposed and actually enforced prior to October 1, 1998, the sole ability to access a site on a remote seller's out-of-
State computer server is considered a factor in determining a remote seller's tax collection obligation; or
(ii) a provider of Internet access service or online services is deemed to 
be the agent of a emote seller for determining tax collection obligations solely as a result of--
(I) the display of a remote seller's information or content on the 
out-of- State computer server of a provider of Internet access service or online services; or
(II) the processing of orders through the out-of-State computer 
server of a provider of Internet access service or online services.
(3) Electronic commerce.--The term 'electronic commerce' means any transaction conducted over the 
Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, 
services, or information, whether or not for consideration, and includes the provision of Internet access.
(4) Internet.--The term 'Internet' means collectively the myriad of computer and telecommunications 
facilities, including equipment and operating software, which comprise the interconnected world-wide network of 
networks that employ the Transmission Control Protocol/Internet Protocol, or any predecessor or successor 
protocols to such protocol, to communicate information of all kinds by wire or radio.
(5) Internet access.--The term 'Internet access' means a service that enables users to access content, 
information, electronic mail, or other services offered over the Internet, and may also include access to proprietary 
content, information, and other services as part of a package of services offered to users. Such term does not 
include telecommunications services.
(6) Multiple tax.--
(A) In general.--The term 'multiple tax' means any tax that is imposed by one 
State or political subdivision thereof on the same or essentially the same electronic commerce that is also subject to 
another tax imposed by another State or political subdivision thereof (whether or not at the same rate or on the same 
basis), without a credit (for example, a resale exemption certificate) for taxes paid in other jurisdictions.
(B) Exception.--Such term shall not include a sales or use tax imposed by a State 
and 1 or more political subdivisions thereof on the same electronic commerce or a tax on persons engaged in 
electronic commerce which also may have been subject to a sales or use tax thereon.
(C) Sales or use tax.--For purposes of subparagraph (B), the term 'sales or use 
tax' means a tax that is imposed on or incident to the sale, purchase, storage, consumption, distribution, or other use 
of tangible personal property or services as may be defined by laws imposing such tax and which is measured by 
the amount of the sales price or other charge for such property or service.
(7) State.--The term 'State' means any of the several States, the District of Columbia, or any 
commonwealth, territory, or possession of the United States.
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(8) Tax.--
(A) In general.--The term 'tax' means--
(i) any charge imposed by any governmental entity for the purpose of 
generating revenues for governmental purposes, and is not a fee imposed for a specific privilege, service, or benefit 
conferred; or
(ii) the imposition on a seller of an obligation to collect and to remit to a 
governmental entity any sales or use tax imposed on a buyer by a governmental entity.
(B) Exception.--Such term does not include any franchise fee or similar fee 
imposed by a State or local franchising authority, pursuant to section 622 or 653 of the Communications Act of 
1934 (47 U.S.C. 542, 573), or any other fee related to obligations or telecommunications carriers under the 
Communications Act of 1934 (47 U.S.C. 151 et seq.).
(9) Telecommunications service.--The term 'telecommunications service' has the meaning given such term 
in section 3(46) of the Communications Act of 1934 (47 U.S.C. 153(46)) and includes communications services (as 
defined in section 4251 of the Internal Revenue Code of 1986) [26 U.S.C.A. § 4251].
(10) Tax on Internet access.--The term 'tax on Internet access' means a tax on Internet access, including the 
enforcement or application of any new or preexisting tax on the sale or use of Internet services unless such tax was 
generally imposed and actually enforced prior to October 1, 1998.
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II 
113TH CONGRESS 
2D SESSION H. R. 3086 
IN THE SENATE OF THE UNITED STATES 
JULY 16, 2014 
Received 
AN ACT 
To permanently extend the Internet Tax Freedom Act. 
Be it enacted by the Senate and House of Representa-1
tives of the United States of America in Congress assembled, 2
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2 
HR 3086 RDS
SECTION 1. SHORT TITLE. 1
This Act may be cited as the ‘‘Permanent Internet 2
Tax Freedom Act’’. 3
SEC. 2. PERMANENT MORATORIUM ON INTERNET ACCESS 4
TAXES AND MULTIPLE AND DISCRIMINATORY 5
TAXES ON ELECTRONIC COMMERCE. 6
(a) IN GENERAL.—Section 1101(a) of the Internet 7
Tax Freedom Act (47 U.S.C. 151 note) is amended by 8
striking ‘‘ during the period beginning November 1, 2003, 9
and ending November 1, 2014’’. 10
(b) EFFECTIVE DATE.—The amendment made by 11
this section shall apply to taxes imposed after the date 12
of the enactment of this Act. 13
Passed the House of Representatives July 15, 2014. 
Attest: KAREN L. HAAS, 
Clerk. 
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for more information see http://marketplacefairness.org 
 
 
What is the Marketplace Fairness Act? 
Summary 
The Marketplace Fairness Act grants states the authority to compel online and catalog retailers ("remote 
sellers"), no matter where they are located, to collect sales tax at the time of a transaction - exactly like local 
retailers are already required to do. However, there is a caveat: States are only granted this authority after 
they have simplified their sales tax laws. 
Simplification is required because of two Supreme Court rulings (Bellas Hess and Quill, described below) cite 
concern that collecting sales tax for multiple states would be too difficult. 
The Marketplace Fairness Act requires that states must simplify their sales tax laws in order to ease those 
concerns and make multistate sales tax collection easy. Specifically, states seeking collection authority have 
two options for simplifying their sales tax laws. 
Option 1: A state can join the twenty-four states that have already voluntarily adopted the simplification 
measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last 
eleven years by forty-four states and more than eighty-five businesses with the goal of making sales tax 
collection easy. Any state which is in compliance with the SSUTA and has achieved FullMember status as a 
SSUTA implementing state will have collection authority on the first day of the calendar quarter that is at 
least 180 days after enactment. 
Option 2: Alternatively, states can meet essentially five simplification mandates listed in the bill. States that 
choose this option must agree to: 
• Notify retailers in advance of any rate changes within the state 
• Designate a single state organization to handle sales tax registrations, filings, and audits 
• Establish a uniform sales tax base for use throughout the state 
• Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a 
consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax 
collected is remitted to California to fund projects and services there) 
• Provide software and/or services for managing sales tax compliance, and hold retailers harmless for 
any errors that result from relying on state-provided systems and data 
With states adhering to these provisions or the similar measures in SSUTA, retailers across the country will 
find collecting sales tax for multiple states much easier than it has ever been in the past. 
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for more information see http://marketplacefairness.org 
How did we get here? 
The 1967 Supreme Court case National Bellas Hess v. Illinois Department of Revenue set the stage for the 
debate on taxing internet sales when, in its majority (5 to 4) opinion, the court ruled that: 
“the many variations in rates of tax, in allowable exemptions, and in administrative and record-
keeping requirements could entangle [the company]'s interstate business in a virtual welter of complicated 
obligations to local jurisdictions” (emphasis added). 
This quote demonstrates the ruling’s basis in complexity and burden, which has rippled forward to create 
today a tidal wave of unanticipated consequences. Since Bellas Hess, out-of-state retailers have been shielded 
from the obligation to collect sales tax, based purely on the notion that it would place too much of a burden 
on their businesses. To provide a sense of perspective, keep in mind that the year this ruling was issued was 
the same year the floppy disk was invented at IBM. It was also one year before the first plans were developed 
at MIT to create ARPANET, which laid the foundation for the internet we know today. 
In 1992, the matter of sales tax on remote sales came before the high court again in Quill v. North Dakota. 
This time, the court reaffirmed the earlier Bellas Hess decision (8 to 1), primarily on the basis of stare decisis 
(“to stand by decision,” a doctrine that requires the court to respect the precedent set by prior rulings). The 
ruling went on to state, 
“[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be 
better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how 
we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree 
with our conclusions” (emphasis added). 
Conclusion 
The retail world is a very different place today, forty-eight years after Bellas Hess, and twenty-three years 
after Quill. Today, keeping track of a few thousand local tax rates is no longer an insurmountable technical, 
administrative, or financial burden - certainly no more difficult than calculating real-time-shipping, a 
common feature on most web sites and online sales marketplaces. Thus, the basis for the Bellas Hess ruling 
no longer applies and the Marketplace Fairness Act will help the many states now facing significant budget 
shortfalls. Although some suggest these States have a "spending problem" rather than a "revenue problem," 
it is important to recognize that these States have already been reducing their spending levels year-over-year 
and increasing collection and enforcement efforts based upon their existing sales and use tax laws. However, 
a State can only enforce these laws within its own borders unless (or until) Congress recognizes the 
significant advances made by "man and his ingenuity with machines" over the last 48 years. Simply put, 
without the Marketplace Fairness Act, our States are unable to require remote retailers to collect the existing 
sales or use tax already approved by that state's residents. 
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CRS Report for Congress
Prepared for Members and Committees of Congress 
 
 
State Taxation of Internet Transactions 
Steven Maguire 
Specialist in Public Finance 
May 7, 2013 
Congressional Research Service 
7-5700 
www.crs.gov 
R41853 
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State Taxation of Internet Transactions 
 
Congressional Research Service 
Summary 
The United States Bureau of the Census estimated that $4.1 trillion worth of retail and wholesale 
transactions were conducted over the Internet in 2010. That amount was 16.1% of all U.S. 
shipments and sales in that year. Other estimates, based on different data, projected the 2011 so-
called e-commerce volume at approximately $3.9 trillion. The volume, roughly $4 trillion, of e-
commerce is expected to increase, and state and local governments are concerned because 
collection of sales taxes on these transactions is difficult to enforce. 
Under current law, states cannot reach beyond their borders and compel out-of-state Internet 
vendors (those without nexus in the buyer’s state) to collect the use tax owed by state residents 
and businesses. The Supreme Court ruled in 1967 that requiring remote vendors to collect the use 
tax would pose an undue burden on interstate commerce. Estimates put this lost state tax revenue 
at approximately $11.4 billion in 2012. 
Congress is involved because interstate commerce typically falls under the Commerce Clause of 
the Constitution. Opponents of remote vendor sales and use tax collection cite the complexity of 
the myriad state and local sales tax systems and the difficulty vendors would have in collecting 
and remitting use taxes. Proponents would like Congress to change the law and allow states to 
require out-of-state vendors without nexus to collect state use taxes. These proponents 
acknowledge that simplification and harmonization of state tax systems are likely prerequisites 
for Congress to consider approval of increased collection authority for states. 
A number of states have been working together to harmonize sales tax collection and have created 
the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA member states hope that 
Congress can be persuaded to allow them to require out-of-state vendors to collect taxes from 
customers in SSUTA member states. 
In the 112th Congress, S. 1452 and H.R. 2701 would have granted SSUTA member states the 
authority to compel out-of-state vendors in other member states to collect sales and use taxes. 
H.R. 3179 would have also granted states the authority to compel out-of-state vendors to collect 
use taxes provided selected simplification efforts were implemented. S. 1832 would have granted 
SSUTA member states and non-member states that met less rigorous simplifications standards the 
authority to compel out-of-state vendors to collect sales and use taxes. For a constitutional 
analysis of the legislation, see CRS Report R42629, “Amazon Laws” and Taxation of Internet 
Sales: Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit. 
In the 113th Congress, S. 743, which was approved in the Senate on May 6; S. 336; and their 
House counterpart, H.R. 684, would grant SSUTA member states and non-member states that 
meet less rigorous simplifications standards the authority to compel out-of-state vendors with 
greater than $1 million in remote sales to collect