Tax Law Review, Vol. 52, No. 3 (Spring 1997), pp. 425-505


The coming of the information age has profound implications for state taxation as it does for just about everything else. The exponential growth and increasing commercialization of the Internet, along with the sweeping technological and regulatory changes that have reconfigured the telecommunications industry, pose a daunting challenge to the states’ traditional approaches to taxing business activity and the telecommunications system that facilitates it. State tax administrators and policymakers, alarmed at the prospect that their tax bases will disappear into cyberspace, are seeking means to accommodate their taxing regimes to the new technological environment. The business community, on the other hand, has voiced fears that state legislative or administrative action in this domain could lead to extensive – and potentially destructive – taxation of electronic commerce. These concerns already have led to the enactment by Congress of the Internet Tax Freedom Act, which imposes a three-year moratorium on certain state taxes on Internet access and electronic commerce, while establishing a commission to study and make legislative recommendations regarding taxation of Internet-related activities. This Article explores the critical issues spawned by state taxation of electronic commerce. Section II provides a broad overview of the technological background from which these issues emerge and briefly surveys the legal landscape in the closely related area of state taxation of telecommunications. Section III analyzes the treatment of the principal questions raised by state taxation of electronic commerce within the framework of existing state law and federal constitutional restraints. Section IV takes a step back from the battle lines forming over state taxation of electronic commerce under current law. Instead, it evaluates these issues from a normative perspective, offering some preliminary thoughts on the content of model state legislation designed to resolve these questions on a more satisfactory basis than they are likely to be resolved under existing law.