The Final Frontier

by Stephen Kass on July 20, 2012

Who – if anyone – gets to tax transactions that take place in cyberspace?
The question becomes more pressing as,, and similar
Web sites become a more popular way to buy everything.
The Internet Tax Freedom Act (ITFA) enacted in 1998, puts a three-year
moratorium on the imposition of new taxes on Internet access and electronic commerce.
It also creates a 19-member commission to recommend how – and if – remote commerce
including web sales should be taxed.
One proposal under consideration would declare the Internet a permanent tax-free
zone. State governments, which depend heavily on sales tax revenue, see such a proposal
as a threat to their sovereignty. Others are concerned such a change would give Internet
sellers an advantage over conventional merchants.
Another solution is to extend current sales tax concepts to Internet transactions.
Taxes would be levied based on the destination of a sale – usually the state where the
buyer is located. To make this easier, the National Association has reached an agreement
that would result in each state changing a single tax rate on all transactions.
A third possible outcome is to formulate a new method of taxation that recognizes
the unique nature of remote commerce. One such proposal is a seller-based tax system
that grants the seller’s state the sole right to tax a transaction. While this is consistent
with European methods, it differs dramatically from the way transactions are currently
It is unlikely the ITFA Commission will reach a decision within the required 19-
month timetable. It does seem likely, however, that the days of untaxed Internet
commerce are numbered.

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