By: Andrew Landrum, Associate Technical Editor

The global advent of interconnectivity has led to breakthroughs in communication, innovation, scientific collaboration, and, most importantly, how to spend money in the comfort of your pajamas.  Online shopping has become the way of the future.  No more will store hours, location, or Netflix conflict with the impulse to buy.  Indeed, this past August, the United States Department of Commerce has reported a steady growth of E-Commerce, as it now comprises an adjusted total of almost 7% of all total retail sales.[1]  For just the second quarter of 2014, the United States E-Commerce sales totaled $75.0 billion.[2]  The problem, however, is that these sales run zero-sum with brick-and-mortar companies.[3]

Brick-and-mortar companies are those businesses that maintain a physical presence in a state.  Their presence supports the local economy, provides jobs, and offers face-to-face customer experiences.  However, it also succumbs them to state and local regulations, like sales taxes.  These sales taxes support state and local governments but also constitute extra burdens on local consumers.[4]  These burdens, however beneficial, are pushing consumers online.[5]

States have attempted to react by passing Internet sales taxes.[6]  These taxes are meant to level the playing field between brick-and-mortar companies and E-Commerce industries.[7]  However, these measures have not gone without resistance.  Policymakers have also been weary of unfair taxation and thus passed the Internet Tax Freedom Act, meant to protect, “unfettered access to one of the most unique gateways to knowledge and engines of self-improvement in all of human history.”[8]  This legislation has served as a springboard for litigation. Online companies argue Internet sales taxes implicate Internet tax freedom and discriminate against out-of-state companies solely because of the nature of their business.

The Internet Tax Freedom Act was passed in 1988 and will likely be extended indefinitely by the end of this year.  The text of the act clearly prohibits two things: (1) taxes on internet access; and (2) multiple of discriminatory taxes on electronic commerce.[9]  Clearly the first prohibition on internet access has no relevance to online sales tax litigation.  The real issue falls on what is defined as a “discriminatory tax” on E-Commerce.  There has been much debate among online service providers, and state and local governments as to what constitutes a discriminating tax.  These businesses hold that taxing a service or good merely because the transaction occurs online should constitute discrimination and runs in the face of the Internet Tax Freedom Act.[10]  However, as explained by the 7th Circuit, the misleading name does not ensure “tax freedom” but only freedom from unfair taxation.[11]

According to the relevant provisions of the Act itself, discriminatory E-Commerce taxes are those taxes that: (1) are not imposed on the same or similar property, goods, services, or information accomplished through other means; (2) are imposed at a higher rate than those goods, services, or information accomplished through other means; (3) imposes an obligation to collect or pay the tax on a different entity than would otherwise be normally taxed; or (4) the taxes are imposed on an internet access service provider merely because the provider displays the resellers information or processes the orders through an out-of-state computer server.[12]

Accounting for the first three sections, courts have allowed E-Commerce tax statutes for purposes of levelling the playing field between online industries and companies physically present.[13]  E-Commerce taxes that run at a similar rate as those imposed on brick-and-mortar companies have not been found to qualify as “discriminatory” under the Internet Tax Freedom Act.[14]  This statute, despite its name, does not create “tax freedom” per se but instead merely prohibits disadvantaging one type of retailer over another.[15]

The fourth provision has created litigation between cities and states, and online auction and solicitation websites such as Ebay, Craigslist, or Stubhub!.[16]  Courts have drawn a line between these service providers and have declared that if an intermediary takes an active role in, “staging an auction and exchanging goods for money” they have so involved themselves in the transaction that state imposed taxation on the providers service is not discriminatory.[17]  Those that play an active role act as an agent of the reseller and can be taxed accordingly, whereas passive websites that merely list the offer and the offeror’s information cannot.[18]

The availability of online services has blurred the commercial lines, making comparisons between internet companies and brick-and-mortar businesses difficult.  States are, however, allowed to tax each type of company similarly, assuming their services provided are comparable and the tax imposed is equitable.  In an increasingly diverse market, all states can do it ensure all companies have a fair shot at competing for your business.


[1] U.S. Census Bureau, Quarterly Retail E-Commerce Sales, U.S. Department of Commerce (Aug. 15, 2014, 10:00 AM) available at,

[2] Id.

[3] Grant Gross, U.S. residents oppose Internet sales tax, say they’ll shop online less, Computer World (May 13, 2013 5:43 PM),–residents-oppose-internet-sales-tax–say-they-ll-shop-online-less.html; See, U.S. Census Bureau, supra at note 1 (displaying an increase of E-Commerce makes up an increasingly large amount of overall retail transactions).

[4] U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue for 2014:Q2, p.2, Sept. 23, 2014, available at (sales tax totaled $89.5 billion in Q2 of 2014).

[5] See, U.S. Census Bureau, supra at note 1.

[6] Kate Tummarello and Bernie Becker, Senators renew Internet sales tax push, the Hill (July 16, 2014, 6:00 AM), available at

[7] Id.


[9] Interstate Tax Freedom Act, § 1101(a)(1), (2), 47 U.S.C. § 151 note.

[10] Id.

[11] Id.

[12] Interstate Tax Freedom Act, § 1105(2); 47 U.S.C. § 151 note.                     

[13] StubHub!, Inc., 624 F.3d at 366.

[14] Id.

[15] Id., at 365;, LP v. Wyo. De
p’t of Revenue
, 2014 WY 43, 103 (Wyo.2014) (Noting that policies that do not single out individual consumers and generally apply to all willing to engage in taxed commercial practices are not discriminatory).

[16] Stubhub!, Inc., 624 F.3d at 366.

[17] Id. At 366-67 (“Because the ordinance applies equally to ticket resales at physical auction houses, the Chicago Board of Trade, and venues such as StubHub!, the tax is not “discriminatory”).

[18] Id.