INTERNET TAXATION -Internet Develpoment Act of 1998


Technology is reinventing the way Americans do business in the global marketplace of the twenty-first century. The twentieth century marketplace of consumers going to the place they want to do business is being replaced by a twenty-first century global marketplace of businesses coming to consumers at computers in their home or office. Tax policy should encourage connecting citizens to this marketplace.

The twenty-first century marketplace requires a twenty-first century sales tax system that is more uniform, consistent, and streamlined. The Governors propose enactment of the Internet Development Act of 1998 to prohibit further taxes on access to the Internet and to establish the simplified twenty-first century state sales tax system.

Today there are thousands of jurisdictions across the country imposing sales taxes. The new simplified system will reduce costs and administrative burdens for businesses and consumers. This will provide U.S. companies, large and small, competitive advantage in the global marketplace. It also will provide a tool for states to create equity between Main Street businesses and remote sellers.

Not only will tax simplification make businesses more competitive, but it will make government more efficient, resulting in personal benefits to every consumer and citizen. Further, this dramatically simplified system does not come at the expense of state and local governments. Their integrity is preserved, and they are provided an opportunity to participate in the twenty-first century global marketplace.

The Governors believe that the Internet offers citizens a chance to access worldwide information, goods, and services with the push of a button. It also offers a unique opportunity for restructuring government services, making them more cost effective and readily available. The more widespread the use of the Internet becomes, the faster business, government, and citizens can benefit. One of the Governors' primary objectives is to avoid discriminatory and multiple taxation that could inhibit growth of the Internet.


To lead business, consumers, and state and local governments into the twenty-first century global marketplace, the Governors propose the following federal legislation.

16.2.1Prohibition on Any New Federal, State, and Local Taxes Levied on Internet Access Fees, As Well As Taxes on Bandwidth Capacity and Bit Volume. The Internet Development Act of 1998 would prohibit new federal, state, and local laws to tax charges to individual consumers for access to the Internet (the monthly fee, e.g., $19.95). The legislation also would prohibit taxes on bandwidth capacity and bit volume, both designed solely to tax electronic commerce. These prohibitions are part of a broad solution-oriented approach to the serious issues involved in the taxation of electronic commerce. The act will not allow the preemption of any other state or local taxes.

16.2.2One Sales Tax Rate per State. The Internet Development Act of 1998 would call on each state to establish a single statewide sales tax rate on all taxable electronic commerce and mail order purchases. States will continue to have the option of not imposing the sales tax. If a sales tax is levied, remote sellers, regardless of whether or not they use the Internet, will be able to collect the tax with a single rate per state. The act also would call on states to establish a method of distributing to local governments their appropriate share of such taxes.


The Internet Development Act of 1998 would require a simplified state sales tax structure and simplified administration. The Governors call for joint industry/government development of a system in which the definitions of the goods or services that may be taxed are uniform and consistent across state lines. States will be allowed to choose whether or not to tax specific goods or services that are uniformly defined across all states. Beyond uniformity in the sales tax, these definitions will give states the ability to identify and address instances where discriminatory or multiple taxation currently exists. The Governors also call for joint industry/government development of significant simplifications in the administration of the sales tax in areas such as uniform registration, tax returns, remittance requirements, and filing procedures. The Governors urge the National Tax Association's Communications and Electronic Commerce Taxation Project to address these issues as soon as possible.

One potential approach to administration of sales taxes would be to encourage establishment of a system of independent third-party organizations that would be responsible for remitting taxes to the states. Remote sellers would use a software package preapproved by the states that would calculate the tax due on the purchase based on the state rate where the item is sent, and electronically remit that tax to the collection organization. Remote sellers that opt to use the third-party system would enjoy additional benefits of simplification, including not filing returns and not remitting funds to states.


The Internet Development Act of 1998 would reward those states that achieve one rate, uniform definitions, and simplified administration of the sales tax by authorizing those states to require certain remote sellers to collect the appropriate sales/use tax on goods and services sold into the state. This expanded duty to collect would replace the concept of physical nexus that currently limits remote sellers' duties to collect sales/use tax to states where they have a physical presence. States that choose not to simplify the sales tax would retain a narrow and limited physical nexus standard. The expanded duty to collect would require electronic commerce and mail order vendors to collect sales and use tax in every state where they sold taxable products and services only if:

It is the Governors' intention that small companies (for example with annual gross sales below $100,000 or $200,000) should not be required to collect state sales taxes on out-of-state sales except under the proposed independent third-party administration system described above. Even in that instance, there should be no charge to such small companies.

Time limited (effective Winter Meeting 1998-Winter Meeting 2000).