State Tax Complications Continue

August 29, 2000

The question of taxation on the Internet has been a puzzling battle and usually revolves around the sale of goods. Recently a ruling by the Illinois Department of Revenue issued a resolution to taxation of services.

A Virginia based professor taught a course over the Internet to students at an Illinois university. The professor was paid by the Illinois university but no Illinois state tax was withheld from his paycheck. The Illinois Department of Revenue stated that under the Illinois Compensation Statute the tax does not have to be paid because the services were not performed in Illinois, but rather in Virginia.

Therefore, depending on the state and its compensation statute it is highly possible that certain services are not subject to state income tax withholdings.

Opinion

For my fellow Texans, who are not concerned with state income taxes, don't be smug. States that depend on sales taxes for their primary source of income are hurting and just plain scared because of U.S. Congressional actions, both real and threatened, limiting their ability to tax Internet transactions and threatening to redefine the "nexus" rules that determine which state (if any) can tax a transaction. Internet tax limitations are already taking a big bite out of state sales tax revenues. If these limitations are increased, even Texas may have to look at an income tax to assure adequate state revenues. (I write this fully aware that it is considered blasphemy in the State of Texas, to the point where many would consider it justifiable homocide to kill any state legislator seriously proposing such a thing.)