This paper examines internet commerce taxation. It concerns who is responsible for collecting sales tax - the seller or the buyer, which depends on nexus between the seller and the state. If there is a nexus, it is the seller’s responsibility; otherwise, it is the buyer’s duty. Nexus further depends on physical presence. However, in today’s e-business, the concept of physical presence has changed. Effective June 1, 2008, New York State enacted the so called “Amazon Tax Law” that an out-of-state online retailer is presumed to have nexus with New York State if it enters into a contract with an affiliate in the state to engage in soliciting businesses in the state by means of web site linkage for an annual gross receipts of more than $10,000. As such, the online retailer is required to collect sales tax from the in-state buyer. The concept of physical presence has been extended from employee or office to web site connection. This paper examines its impact.
Current Status Of Internet Commerce Taxation
The Internet commerce taxation is governed by the “Internet Tax Freedom Act of 1998” (ITFA) (U. S. Congress, 1998). It concerns the taxation on Internet access fees. Telecommunication services, such as telephone, are subject to Federal excise tax and state and local taxes. Nowadays, Internet access services are mingled with communication services. For example, Verizon provides both Internet access and telephone services as a package. Should the Internet access fees be also subject to Federal excise tax and state and local taxes? The Act prohibits the taxation on Internet access fees with a specific deadline, but it was amended in 2004 and now becomes permanent (U.S. Senate bill S-43, 2009). Internet access may be achieved by means of conventional telephone dial up service, fiber optical system, “digital subscriber lines” (DSL), TV cable, wireless linkage, iPhone, twitter, cell phones, laptop computers, satellite linkage, etc. By Internet access it includes all information services provided by the internet service provider, such as e-mail, chat room, yellow pages, medical information, stock quotes, news report, corporate financial information, library services, magazines, journal articles, real estate listing, job search sites, consumer product evaluation, etc. In other words, any service associated with internet access is tax-free. Therefore, there is a need to distinguish Internet access charges from telecommunication service fees.
For example, Verizon offers $69 fees a month for internet access or $100 for both internet access and unlimited telephone calls. What is non-taxable and what is taxable? The $69 Internet access fee is non-taxable, while the remaining $31 ($100 – 69) telephone service is taxable. It should be noted that, for the internet access fees to be tax-free, it must be clearly and separately identified.
If the Internet service provider fails to do so, the entire package becomes taxable. The amended ITFA provides that “If charges for Internet access are aggregated with and not separately stated from charges for telecommunications services or other charges that are subject to taxation, then the charges for Internet access may be subject to taxation unless the Internet access provider can reasonably identify the charges for Internet access from its books and records kept in the regular course of business” (Internet Tax Freedom Act of 1998) (U. S. Congress, 2004). This indicates that the tax treatments for Internet access services and telecommunication services are quite different. There is a necessity to make a distinction. If no distinction is made, the entire amount of fees is taxable.