The Basics - Internet Tax Moratorium

Posted on April 15, 2005

With multiple tax codes, legislation and initiatives, things can get a bit confusing when it comes to sales tax and the Internet. Here's some help defining the major issues: 1. Sales tax on Internet access
  • This is a state sales tax levied on the monthly subscription fees paid by customers to an Internet service provider.
  • Some providers don't charge the tax to Tennessee customers, saying the state legally can't require collection.
  • The issue has pitted five Internet service providers against the Tennessee Department of Revenue in court. This tax does not apply to the sale of goods over the Internet. (See item No. 3 below.)
2. Internet Tax Moratorium
  • This law was passed by Congress in 1998 and prohibited states from charging sales tax on Internet access.
  • Tennessee, which already was collecting tax on Internet service, was one of 10 states, along with the District of Columbia, allowed to continue collecting the tax.
  • The moratorium expired Saturday, and the House and Senate are hashing out a new Internet sales tax law. Both versions, so far, would end the collection of Internet access sales tax for the 10 grandfathered states, although the House's bill would postpone its expiration for another three years. The Senate bill has been stalled by Tennessee Sen. Lamar Alexander because of controversial provisions that states say would hinder collection of sales tax on a broad array of telecommunications services.
3. Tax on sales via the Internet
  • This is sales tax charged on items bought over the Internet.
  • This issue has been in the news recently because Congress is contemplating a bill, separate from the tax moratorium, that would mandate collection of state and local sales tax on goods sold via the Internet to customers in states that comply with the Streamlined Tax Initiative.
  • This currently voluntary initiative includes a simplified tax structure that allows companies to more easily collect state and local sales tax on goods sold online. Tennessee has passed legislation changing its tax code to comply with the streamlined tax guidelines.