State Internet Tax Freedom Act

Summary

The borderless nature of the 21st century economy makes the preemption of certain taxes necessary for a growing economy and sound business environment.  The U.S. Constitution’s grant of authority to Congress to regulate commerce among the states and the borderless nature of the economy make Federal legislation the more appropriate vehicle to accomplish the pre-emption. Pursuant to its Constitutional authority, Congress made the Federal Internet Tax Freedom Act permanent in 2016. However, a state model bill is still needed to prevent either a state or local tax on Internet access, or discriminatory taxes on electronic commerce, in those cases where the Federal Internet Tax Freedom Act may not apply.

State Internet Tax Freedom Act

State Internet Tax Freedom Act

Summary:

The borderless nature of the 21st century economy makes the preemption of certain taxes necessary for a growing economy and sound business environment.  The U.S. Constitution’s grant of authority to Congress to regulate commerce among the states and the borderless nature of the economy make Federal legislation the more appropriate vehicle to accomplish the pre-emption. Pursuant to its Constitutional authority, Congress made the Federal Internet Tax Freedom Act permanent in 2016. However, a state model bill is still needed to prevent either a state or local tax on Internet access, or discriminatory taxes on electronic commerce, in those cases where the Federal Internet Tax Freedom Act may not apply.

 

Model Policy:

{Title, enacting clause, etc.}

Section 1. {Short Title.} This Act may be cited as the “{Insert State} Internet Tax Freedom Act.”

Section 2. {Declarations.}

(A) As a massive global network spanning not only state but international borders, the Internet is inherently a matter of interstate and foreign commerce within the jurisdiction of the United States Congress under Section 8 of Article I of the United States Constitution.

(B) Even within the United States, the Internet does not respect state lines and operates independently of state boundaries. Addresses on the Internet are not designed to be geographically relevant. Internet transmissions are insensitive to physical distance and can have multiple geographical addresses.

(C) Taxes and fees imposed on Internet access by state and local governments could subject consumers, businesses, and other users engaged in interstate and foreign commerce to multiple, confusing, and burdensome taxation, could restrict the growth and continued technological maturation of the Internet and electronic commerce, and could call into question the continued viability of this dynamic medium.

(D) Services provided by state and local governments are important and valuable to both consumers and businesses, and this bill is not intended to interfere with existing sources of revenue that provide funding for state and local government services. This act is intended to impose a moratorium on any taxes imposed on Internet access, as well as the discriminatory application of existing or new taxes, as defined herein, to Internet access and electronic commerce. Nothing in this act shall be interpreted as precluding the imposition or collection of new or existing taxes of general application that are imposed or assessed in a uniform and nondiscriminatory manner without regard to who is providing such goods and services or whether the activities or transactions taxed are conducted via electronic commerce.

(E) A permanent, uniform and coherent policy concerning state and local taxation of Internet access and electronic commerce, in a manner that does not unreasonably burden interstate and foreign commerce, should be developed by the Congress of the United States, acting pursuant to the powers granted to it by clause 3 of Section 8 of Article I of the United States Constitution. Although Congress permanently extended the Internet Tax Freedom Act, a restriction on state and local taxing authority of electronic commerce and a preemption of state and local taxing authority of Internet access is still appropriate.

(F) It is the intent of this Legislature that no existing or future taxes or fees be imposed by the state or locality in a discriminatory manner upon electronic commerce and no taxes or fees be imposed on Internet access. This statement of legislative intent is meant to place the greatest possible barrier to the creation of discriminatory taxes or fees upon electronic commerce or the imposition of any taxes or fees on Internet access upon this Legislature and all future Legislatures.

(G) For these reasons, the Legislature finds that, subject to certain exceptions designed to protect existing state or local government revenue, preemption of state or local government authority to levy taxes on Internet access or discriminatory taxes on electronic commerce is a matter of statewide concern.

Section 3. {Definitions.} The following definitions apply in this Act:

(A) 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.

(B) Internet Access –

(1) means a service that enables users to connect to the Internet to access content, information, or other services offered over the Internet (“Internet access”);

(2) includes the purchase, use or sale of transmission services by a provider of a service described in subparagraph (B)(1) to the extent such transmission services are purchased, used or sold to provide Internet access; or to otherwise enable users to access content, information, or other services offered over the Internet;

(3) includes services that are incidental to the provision of Internet access when furnished to users as part of Internet access, such as a home page, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity;

(4) does not include voice, audio or video programming, or other products and services (except services described in subparagraphs (1), (2), or (3) or (5) that utilize Internet protocol or any successor protocol and for which there is a charge, regardless of whether such charge is separately stated or aggregated with the charge for services described in those subparagraphs; and

(5) includes a homepage, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access;

(C) “Discriminatory tax” means a tax that is any of the following:

(1) Imposed by a State or political subdivision thereof on electronic commerce that 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.

(2) 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.

(3) 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 through other means;

(4) 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;

(5) imposed if 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

(6) imposed if a provider of Internet access service or online services is deemed to be the agent of a remote 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.

(D) “Bit tax” means any transactional tax imposed on or measured by the amount of digital information transmitted electronically, or any transactional tax imposed on or measured according to any of the technological or operating characteristics of the Internet, but does not include taxes imposed on the provision of telecommunications services.

(E) “Bandwidth tax” means any transactional tax imposed on or measured by the physical capacity of an available signal to transmit information electronically or by fiber optics.

(F) “Tax” means”:

(1) any charge that is imposed by a State or political subdivision thereof for the purpose of generating revenues for governmental purposes and, except as provided in section (3), is not a fee imposed for a specific privilege, service, or benefit conferred; or

(2) the imposition on a seller of an obligation to collect and to remit to the state or a political subdivision of the state any gross retail tax, sales tax, or use tax imposed on a buyer by such a governmental entity.

(3) a tax includes any fee that:

(i) is not imposed for the purpose of recovering direct costs incurred by a governmental authority from providing a specific privilege, service, or benefit conferred to the payor of the fee; or

(ii) is imposed for the use of a public right-of-way based on a percentage of the service revenue and the fee exceeds the incremental direct costs incurred by the governmental authority associated with the provision of that right-of-way to the provider of Internet access service.

(4) For purposes of Section (3), “direct costs” means costs incurred by a governmental authority solely because of an Internet service provider’s use of the public right-of-way. The term does not include costs that the governmental authority would have incurred if the Internet service provider did not make such use of the public right-of-way. Direct costs shall be determined in a manner consistent with generally accepted accounting principles.

(G) “Tax on Internet access or the use of Internet access” means a tax on Internet access, or any use of Internet access, regardless of whether the tax is imposed on a provider of Internet access or a purchaser of Internet access and regardless of the terminology used to describe the tax. The term does not include a tax levied upon or measured by net income, capital stock, net worth, or property value.

Section 4. {Prohibition.}

(A) Except as provided in subdivision (B), neither the state, nor any city or county may impose, assess, or attempt to collect any of the following:

(1) A tax on Internet access, or the use of Internet access.

(2) A bit tax or bandwidth tax.

(3) Any discriminatory tax on electronic commerce

(B) The prohibition in subdivision (A) (3) against the imposition of discriminatory taxes on electronic commerce shall not apply to any new or existing tax of general application, including but not limited to any sales and use tax, business license tax, or utility user tax that is imposed or assessed in a uniform and nondiscriminatory manner on transactions involving similar property, goods, services, or information accomplished through other means.

 

Adopted by the Tax and Fiscal Policy Task Force at the Spring Task Force Summit, May 1, 2004. Approved by the ALEC Board of Directors May, 2004.

Amended by the Tax and Fiscal Policy Task Force at the Spring Task Force Summit, May 3, 2013.

Approved by the ALEC Board of Directors August 5,2013.

Amended by the Tax and Fiscal Policy Task Force at the Spring Task Force Summit, April 27, 2018.

Reapproved by ALEC Board of Directors May 24, 2018.