Status of the Internet Tax

From the beginning of the internet era until the latter part of 90’s the internet was free from any directive from the US government on all aspects. The internet also remained free from any tax accountability, levies, license fees, imposts and duties. However, by the year 1996, the US government sees the growing internet services and decided that it could potentially be a massive source of revenue.

The Internet Tax Freedom Act was a US law and was signed on October 21, 1998 by Pres. Bill Clinton with aims to conserve and promote the educational, informational and commercial potential of internet usage. The law protects internet access from being taxed or imposing discriminatory internet only taxes. However, it does not exempt the sales transaction that was processed on the internet from taxation. Internet sales tax will be the same with the local sales tax. The act did not cancel any use tax or sales tax. The law has been extended three times by the US Congress since the first enactment. The latest extension was signed by Pres. George W. Bush and further extended the moratorium until November of 2014.

Forms of internet taxation include: Internet Access Tax, Telecommunications Tax, Bit Tax, Franchise Tax, Bandwidth Tax and Email Tax.

  • Internet Access Tax- is considered as service tax and is actually exempt on some states.
  • Telecommunications tax- is what some states would call the internet service wherein different ways of accessing the internet such as cable, wireless, satellite, etc. are usually subject to various levels of taxation.
  • Bit Tax – a lot of countries have presented a proposal that internet should be taxed by internet usage volume. The tax rate will rely solely upon the volume of the data transferred regardless of the content (whether it’s voice, images, videos or other content).
  • Franchise Tax – both localities and states have commonly levied franchise taxes on cable television operators and utilities. Before the approval of the Internet Tax Freedom Act, a lot of municipalities were analyzing the feasibility of extending the franchise taxes to the customers, ISPs or both.
  • Bandwidth Tax – advancement is the idea of bandwidth tax. The tax rate will be based on the speed of one’s internet connection that’s why it is banned in the internet tax freedom act.

 

Conceptual Issues about Internet Tax

Location Issue – There is no easy way to identify location, as there are basically no boundaries in internet usage. The web browsers can and regularly access their accounts everywhere, even from remote locations; internet providers are always situated in several different taxing jurisdictions. The data traffic through the internet’s packet-switched structure is directed towards numerous locations. This issue is significant not only because of the need to identify the incidence of the tax and its application but also because the law requires that the taxing sub jurisdiction or the state have connections with the transaction so that it can apply its taxing power and that identification solely rely on those considerations.

Product/good or Service Issue – If the internet access is determined to be a “service”, then no sales taxation should apply while if it determined to be a “good/product” the sales tax rate may vary.

Installation and monthly fee – In the US, taxing authorities and a few states make a distinction between the installation or the initial set up fee to get internet access from the per-minute, hourly and monthly fee for actual online access. For example in Nebraska, the state only taxes the initial set up if the software is provided and it doesn’t tax the monthly fee. Then in the state of Tennessee, there are taxes both for the initial set up and the monthly fee.

Collection issue – There is an issue whether the states should collect the tax themselves or shall they pass the burden of collecting the tax to the internet service providers.

The latest on internet taxation talks about how online consumers should get ready to pay more for the products and services that they will be purchasing. Both the Republicans and Democrats in Congress have agreed to support a bill that would provide sales authority to require Ebay, Amazon and other online shopping websites and companies to collect sales tax. Consequently, it would also require the online shoppers to shoulder the cost and increase the price of the purchases to 5 percent more than they shell out today. According to a report from The Wall Street Journal, the governors are excited for the new source of revenue to resolve the shortage of budget. These republican governors used to oppose the sales tax on internet purchases. Regardless of the shift in position when it comes to internet sales tax, the bottom line is the online consumers are the ones who will be affected as tax hike would mean increased prices on products and services.

A new definition of the term “internet access” was coined on the latest ITFA amendment. It means a service that allows the users to access information, electronic mail, content, and other services offered online and it may also provide access to proprietary information, content and other services as part of the subscription package provided to users. The term internet access would not include telecommunication services except to the level such services are used, sold or purchased by the internet provider to provide internet access.

The latest amendment on ITFA (or Internet Tax Freedom Act) states that the term “tax on internet access” pertains to the tax on internet access not considering if the tax is applied on an internet provider or an internet access subscriber. So this means that the local government and states cannot apply internet access tax on either the internet access provider or the individual internet subscriber. More over, the term “tax on the internet access” would not cover a tax gauged by net income, net worth, property value or capital stock. This means that internet access tax is a “consumption” tax and not a property “tax”. As the internet technology further advances, the ISPs may put together or package the internet subscription that would consist of the regular communication service and increase the monthly bill. If internet access is tax exempt then the regular communication access and services may also be tax free altogether. Then the government will lose around $12 billion per year.