Case Overview, Applying and Collecting Taxes on the Internet and Remote Commerce


This document provides background information and summarizes the debate over internet sales taxes. The links to the left will lead you to public documents that we have found.


           With the development of the Internet many new issues have emerged, but one of the most politically vexing is the matter of sales tax. When one goes to a sporting goods in Massachusetts and purchases a pair of outdoor pants, the total at the checkout counter is the price plus five percent sales tax. If one were to order that same pair of pants online from L.L. Bean, identically priced, the total charge is just the cost of the pants. No sales tax is applied. In short, it's cheaper to buy the pants online even though that particular product was priced the same.

           Almost all states have some form of sales tax, though the amount of the tax and what kinds of products the tax covers, varies considerably. Some cities apply a separate sales tax. As shopping on the Internet began to take off, retailers with conventional stores, cried foul. These so-called "bricks and mortar" retailers believed that they were being discriminated against. Why should tax policy favor those selling products online over those operating stores in communities and neighborhoods where residents can shop in person? As one lobbyist working for a national retail chain put it, "All channels of commerce should be tax neutral. The government should not be in the business of picking winners and losers."

           The Supreme Court considered the issue and ruled that a state could not tax an Internet retailer unless that company had bricks and mortar stores within its boundaries. A lobbyist for Internet retailers noted, however, "there are over 6,000 sales tax jurisdictions in this country, and Internet businesses cannot reasonably keep track of them all. We need a simplified sales system." Yet there is more to the issue than simplifying or rationalizing the nation's aggregate tax system. For many Republicans, an Internet sales tax represents a new tax and goes against the party's philosophy of trying to reduce taxes and shrink government. On the other hand Democrats tended to sympathize with governors and mayors who come to them and claim that the lack of an Internet sales tax damages local businesses, raises unemployment, decreases revenues, and threatens vital programs. As one observer argued, "cities cannot use 'virtual fire trucks' to fight fires." Still, it isn't an entirely partisan issue as legislators' views are also influenced by geography: how much their state depends on sales taxes and what kinds of businesses predominate there.

           When this issue first arose, Congress responded with the Internet Tax Freedom Act, passed in 1998 and expiring in 2001. In 2000, during the time of our interviews, Congress was trying to come to terms with a new law to replace the expiring one. The House had passed a bill to extend the moratorium on Internet taxes another five years and the Senate had taken up a similar bill. There was extensive lobbying on both sides, with the e-Freedom Coalition, composed primarily of anti-tax lobbies and online retailers, pushing to extend the moratorium for five years, if not permanently. They were opposed by the "e-Fairness Coalition," composed primarily of bricks and mortar retailers and state and local government associations, who wanted to limit the length of the new Internet tax moratorium and allow sales taxes to be collected on Internet commerce.

           In the end, the coalition of brick and mortar retailers and state and local governments succeeded in limiting the Internet tax moratorium. In late 2001, Congress passed a law extending the Internet tax moratorium for only two years. The short extension was intended to allow states to simplify their sales tax codes and then revisiting the issue of allowing states to collect sales taxes on Internet and other remote commerce.

           As of this writing the issue is still unresolved, although policy has moved a bit in the direction of allowing sales taxes on Internet commerce. 42 states have approved an agreement on uniform sales taxes and definitions, and some states have begun collecting sales taxes on goods purchased over the Internet. When Congress extended a moratorium on taxation of Internet access in 2004, it did not apply the moratorium to Internet sales taxes.