Internet Taxation

October 7, 2000 update

In May the House passed a bill that would extend the moratorium on taxes by 5 years. That bill has not passed in the Senate, where reports of a recent closed-door Commerce Committee meeting confirmed the unlikelihood of legislation this year. The Clinton Administration announced that it will oppose the attaching of this extension bill to any legislation dealing with other issues. The Administration’s fear is that attaching this extension bill to an unrelated piece of legislation might get it passed and result in the states dragging their feet on the tax issue. As it stands the current moratorium will expire in October 2001, at which time some sort of resolution for taxation on the Internet will be proposed.

Though retail sales over the Internet still constitute a very small percentage of retail sales overall, the states, which depend largely on sales tax revenues, are very concerned about their inability to effectively tax those sales. Projections of Internet sales growth are such that state governments are very concerned that loss of sales tax revenues resulting from Internet sales growth will devastate their budgets in a few years. Hence the sense of urgency pervading these discussions.

State Action

Some states (Michigan, Wisconsin, North Carolina, Tennessee, and South Dakota) have banded together to conduct tests of streamlined taxation solutions through pilot programs but nothing concrete has progressed.

California Update Sept. 1, 2000

The Internet sales tax bill is awaiting approval from the California State Assembly and the governor. This bill, if passed would impose a sales tax on all online purchases from California based companies. It will be interesting to watch how the approval of this bill (if accepted) will affect other states as California lays the groundwork for taxing online.

California Update Sept. 18, 2000

The Governor of California did veto the Internet tax bill, stating that the Internet is still too young to be taxed and that for California to be the frontiers of internet sales tax at this point would send the wrong message about California's role in the dot.com world. A task force has been established to study the issue and develop strategy concerning Internet taxes in California.