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Sales & Use Tax Tips for NOVEMBER 2007
Taxing Internet Sales - New Law Provides Extension/ Revision of the Internet Moratorium What Is It and How Does It Affect Me?
Internet Sales: The Myth - Internet Sales Are Not Taxable.
The reality is that Internet Sales are usually taxable through either seller collected Sales Tax or through a state's compensating Use Tax. Problems arise when a business' activities trigger nexus and a requirement to collect Sales & Use Tax for other states. Whether the obligation is ignored
or unknown, Internet Sellers can subject themselves to owing the tax they should have collected, plus interest and penalties. Though an out-of-state seller may not be required to collect Sales or Use Tax, businesses and individuals who purchase tangible personal property or taxable services via the
Internet may find themselves subject to unexpected Use Tax assessments, plus penalties and interest if not paid on time.
The perception that goods purchased over the Internet are not subject to Sales & Use Tax commonly stems from a misunderstanding of the Federal Internet Tax Freedom Act of 1998 (Title XI of P.L. 105-277) moratorium on new taxes imposed
on the Internet ("the Internet Moratorium"). The Internet Moratorium was modified and extended through November 1, 2007 as the Internet Tax Nondiscrimination Act of 2004 (P.L. 108-435).
It prohibited the imposition of new or discriminatory taxes on the Internet. However, many of the states' Sales & Use Tax laws are not new. Such laws, in most instances, were in existence decades before enactment of the Internet
Moratorium and these states may tax such services. The primary impact of the Internet Moratorium was to effectively prevent most states (i.e., states that were not already taxing Internet access) from imposing Sales & Use Tax on Internet Access and to prevent states from trying to differentiate
out-of-state Internet Sellers from out-of-state mail order business when asserting nexus. Prior to the Internet Moratorium, some states were considering whether the in-state accessibility of an out-of-state business' website could be deemed a nexus creating presence. The Internet Moratorium does
not generally prohibit the imposition of Sales & Use Tax on tangible personal property or taxable services merely because the Internet was used to solicit the sale, place the order, accept the order, transmit the deliverable or otherwise used in connection with an otherwise taxable
transaction.
New Legislation Extends and Revises Internet Moratorium for Seven Years.
On Oct. 31, 2007 the President signed into the law a seven year extension of the moratorium on state and local internet access taxes which was set to expire November 1, 2007. The new legislation extends the moratorium until November 1, 2014. However, there have been some clarifications and changes
with respect to the grandfather clause and taxability of ancillary services.
Under the old versions of the moratorium a state that had imposed and enforced the imposition of Sales & Use Tax on the sale of Internet access prior to October 1, 1998 could continue to impose the tax. However, under the new
legislation the grandfather clause will not apply to any state that has repealed its tax on such services or issued a ruling that it no longer applies such a tax more than 24 months prior to the enactment of the legislation (i.e. prior to October 31, 2005).
Additionally, the definition of "Internet access" has been revised to shield home pages, electronic mail, instant messaging, video clips, and personal electronic storage capacity from taxation even if provided separately from
the Internet access service. However, voice, audio, video programming or other products and services using internet protocol, regardless of whether the charge is bundled with charges for Internet access are not included within the definition and states can impose taxes on such services.
Further, under the old legislation, states disputed the issue as to whether they could impose a Sales & Use Tax on telecommunications services purchased and used by a provider of Internet access to connect their customers to the
Internet. The new legislation makes clear that states that have continued to impose taxes on telecommunication services purchased, used or sold by an Internet access service provider have until June 30, 2008 to end the taxation on such services. However, this provision will only apply to states
that have either had a public ruling applying the tax prior to July 1, 2007 or such tax is the subject of litigation which began prior to such date. Therefore, some states could potentially be grandfathered in and be able to continue taxing such services.
Lastly, the new law attempts to clarify that the moratorium does not apply to general business taxes, such as taxes on gross receipts that are designed to be a substitute or supplement a states corporate income tax. This would mean that
states like Michigan, Ohio, Texas and Washington would continue to be able to tax Internet access under such tax regimes.
Our professionals can help you navigate this complex and changing area of Sales & Use Tax to protect purchasers from over or underpaying and to assist businesses in appropriately collecting and remitting.
* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.
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