electronic commerce Archives

ITFA Is Alive and Well: New York Advisory Opinion Reaffirms Sales Tax Exemption for Internet Access Services

by Eric D. Carstens and Jonathan C. Hague | Oct 2, 2024 | Constitutional Issues, Local Tax, Nationwide Importance, New York, Sales Tax

In its latest Advisory Opinion, TSB-A-24(4)S (June 26, 2024), the New York State Department of Taxation and Finance (the Department) reaffirmed the broad protections offered by the Internet Tax Freedom Act (ITFA) against state and local taxation of internet access. The Petitioner, a New York-based business, sought clarity on whether its subscription to a secure hosted exchange service, which facilitates critical email functions without requiring internal IT infrastructure, would be subject to New York State sales tax.

KEY FACTS AND BACKGROUND

The Petitioner subscribes to a secure hosted exchange service from a provider located in Florida. This service offers comprehensive email management, including mobile device synchronization and Microsoft Exchange functionalities. The service includes (1) unlimited mailbox storage, (2) premium email security protection, (3) anti-virus protection, and (4) live phone support. The service relies on the Petitioner maintaining its own internet connection, with software licensing obligations dictated by agreements with third-party vendors.

THE DEPARTMENT’S RULING

After acknowledging that email service qualifies as taxable telephony or telegraphy service under New York Tax Law § 1105(b)(1), the Department concluded unequivocally that “[e]lectronic mail services are included in the ITFA definition of Internet access, regardless of whether such services are provided independently or packaged with Internet access” and are, therefore, not subject to New York State sales tax. This decision hinges on the protections established by ITFA, which precludes state and local governments from imposing taxes on Internet Access.

ITFA: A CRITICAL SAFEGUARD AGAINST STATE TAXATION

ITFA, enacted in 1998 and made permanent in 2016, has consistently served as a bulwark against state efforts to impose tax on Internet Access and multiple or discriminatory taxes on electronic commerce. See ITFA § 1101(a). Under ITFA’s Internet Access prong, services that enable users to access content, information, email, or other services offered over the internet are shielded from state and local sales taxes.[1] The Advisory Opinion underscores this federal protection, categorizing the Petitioner’s email services as an Internet access service, which is exempt from New York State sales tax under ITFA.

REINFORCING ITFA’S PREEMPTIVE POWER: RECENT CASES

This is not an isolated application of ITFA. ITFA has recently been at the center of significant legal challenges, reinforcing its importance in protecting digital services from state taxation. For example, in Petition of Verizon New York Inc., DTA No. 829240 (N.Y. Div. Tax App. May 4, 2023), an administrative law judge (ALJ) ruled that the gross receipts tax on transportation and transmission corporations could not be applied to revenues from asymmetric digital subscriber line and fiber broadband services because these services are federally preempted under ITFA as Internet Access. In rejecting the Department’s narrow interpretation of internet access services, which only included services provided to end-user consumers, the ALJ emphasized that US Congress intended ITFA’s prohibition on taxing Internet Access to be broad, using the definition from ITFA rather than state tax law.

ITFA’S ONGOING RELEVANCE

New York’s Advisory Opinion highlights the continued importance of ITFA in today’s digital economy. As businesses increasingly [...]

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Fatally Flawed? Illinois Municipal League’s Model Streaming Subscription Tax

by Stephen P. Kranz, Mark Nebergall, Catherine A. Battin and Jonathan C. Hague | Aug 24, 2022 | Illinois, Local Tax, Nationwide Importance

The Illinois Municipal League (IML) represents the interests of 219 home rule municipalities in Illinois.[1] The IML recently released a revised draft model, “Municipal Streaming Tax Ordinance,” (the model) for use by the home rule municipalities in imposing an “amusement tax” on, inter alia, music and video streaming services and online gaming.[2] If the subscriber’s residential street address is within the corporate limits of the municipality, the subscription fee would be subject to the tax.[3] However, the tax proposed by the model has at least two fatal flaws: it is barred by the Internet Tax Freedom Act (ITFA) as a discriminatory tax on electronic commerce and is an unconstitutional extraterritorial tax under the home rule article of the Illinois Constitution.[4]

NATURE OF THE STREAMING TAX

The model proposes a tax on the privilege of viewing an amusement, including electronic amusements that either “take place within the” municipality or are delivered to subscribers “with a primary place of use within the jurisdictional boundaries of” the municipality.[5] The model incorporates the definition of “place of primary use” from the Illinois Mobile Telecommunications Sourcing Conformity Act.[6] That statute requires sourcing to the subscriber’s “residential street address.”[7] The streaming tax operates like a familiar sales tax in that it is imposed on the subscriber but collected by the streaming provider and remitted to the municipality.[8] The model tax would also be imposed on “paid television programming” (sat TV), but not paid radio programming (sat radio), transmitted by satellite.[9] The tax is not imposed on transactions that confer “the rights for permanent use of an electronic amusement” on the customer.[10]

THE NATURE OF MUSIC AND VIDEO STREAMING AND ONLINE GAMING SUBSCRIPTIONS

There are many service providers that allow internet access to the databases of music, videos and games (content). Customers typically enter into an automatically renewing subscription agreement with the provider that allows access to a database such that the subscriber can “stream” the content from any fixed or mobile device with internet connectivity. Subscribers are able to access the content from anywhere at anytime so long as their subscription is current and they have internet access.

Because the subscription fees are paid in advance, there is no way for either the provider or the subscriber to know where and when the subscriber might access the content, if at all, during the month. Also, because the streaming tax proposed under the model is on the subscription fee, the tax must be collected before any streaming occurs. It may be that the subscriber doesn’t access the content either from within the corporate limits of the municipality or at all during the subscription period.

FATAL FLAWS

1. Barred Discriminatory Tax on Electronic Commerce

The ITFA generally bars state and local taxes that discriminate against electronic commerce.[11] A tax discriminates against electronic commerce if it is imposed on transactions that occur over the internet but not [...]

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Lame-Duck Congress Mulls Laws to Ease State Tax Headaches

by Arthur R. Rosen | Dec 8, 2014 | Constitutional Issues, Income Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

As it heads into the final weeks of its session, Congress is considering various bills that would restrict or expand states’ taxing authority. Almost every business in the country would be affected by at least some of these bills. While some of these bills have progressed further than others, any could become law—particularly if bundled into legislation that Congress must, as a practical and political matter, pass before the session ends. Businesses thus have an opportunity to ask their Senators and Representatives to take action to rein in some of the problems with state and local taxes.

Read the full article on CFO.com.