The Commission could ultimately recommend that Congress grant states the power to tax remote sellers, both Web-based vendors and traditional mail-order companies. Should Congress grant such powers, these companies would lose a major competitive advantage-that is, the ability to make sales that are not subject to sales tax.

Exemption for Internet Access Services
The ITFA exempts Internet access from state and local taxes. For this purpose, a tax includes any kind of charge other than a fee imposed on account of a specific benefit or service. The exemption is only temporary, however, and contains many exceptions.

The exemption applies to taxes that were not imposed and enforced prior to October 1, 1998. This means that Internet access providers cannot be subjected to any new taxes, but that taxes already in force may still be imposed.

Taxes that May Continue to Be Imposed on Internet Access
As of October 1, 1998, the income, or franchise, taxes of each state were generally enforced on all taxpayers. Accordingly, ISPs will continue to be subject to these taxes in all states that impose them.

As of October 1, 1998 a limited number of states and localities imposed and actually enforced taxes, other than income taxes, on Internet access. The most common tax imposed is the gross receipts tax (sales tax) levied by states. The ITFA provides rules for determining which states and localities these are.

There are two tests to determine if a tax was imposed and actually enforced on Internet access. Under both tests the tax must be authorized by statute. This will be an easy requirement since most statutes, especially those related to sales and use tax, are fairly broad.

Assuming a tax is authorized by statute, under the first test, taxes will be considered imposed and enforced if a provider of Internet access had reasonable opportunity to know that such taxes would be imposed. Under the ITFA, an ISP had reasonable opportunity to know that a tax would be imposed on Internet access if there was a rule or other public proclamation saying specifically that Internet access would be subject to tax. Few states meet this criteria because few have made specific rulings on such taxes.

Under the second test, a tax will be considered imposed and enforced if the state or local government generally collected such taxes on Internet access. Whether a tax was generally collected is a difficult question to answer. States and localities often have unpublished internal guidelines on what is and what is not subject to tax. However, states and localities may have a difficult time proving that taxes are generally collected if they have not previously made a public announcement of their rules.

Internet Access That is Not Exempt From Tax
Congress has decided to use the ITFA as a backhanded way of censoring the Internet. Congress has had a difficult time in the past imposing direct censorship on Internet content. Accordingly, Congress is using the ITFA to encourage Internet access providers to exercise self-censorship.

The ITFA does this by providing an exception to its provisions. The exception generally applies to companies that knowingly engage in the business of providing access to materials that are harmful to minors, unless access to those materials is restricted.

This exception does not apply to Internet access providers, to the extent they are providing Internet access. Presumably, an ISP engaged in providing Internet access, and engaged in the business of providing unrestricted access to materials harmful to minors would be partly taxable. In addition, the ITFA provides that an Internet access provider will not be exempt from tax unless the ISP offers to customers software that filters harmful content. This provision applies to new contracts entered into six months from date of enactment of the ITFA.

Advisory Commission on Electronic Commerce
The most important part of the newly enacted Internet Tax Freedom Act may be the establishment of the Advisory Commission on Electronic Commerce. The Commission will consist of 19 members, three federal, eight state and local, and eight industry. It will meet for 18 months from date of enactment and then submit its recommendations to Congress.

The Commission's mandate ranges far beyond electronic commerce issues. It will study state and local taxation of Internet access, remote commerce involving other countries, sales and use taxes in the United States, and consumption taxes, such as VAT, in other countries. It will also examine possible model state sales and use tax legislation, and the advantages and disadvantages of authorizing states and local governments to require remote sellers to collect and remit sales and use taxes.

The most important function of the Commission will be to examine and make recommendations on the taxation of remote sellers, electronic or otherwise.

Since the 1992 Supreme Court decision in Quill v. North Dakota, Congress has had the power to enact legislation allowing states to levy sales and use tax on remote sales, including mail-order and electronic sales. Congress has failed to act, despite heavy lobbying by the states. States have clearly used the debate relating to the Internet Tax Freedom Act to "stick a foot in the door" on this issue.

The creation of the Commission, which will include a large number of state representatives, gives states a continuing forum in which to press the case for authority to tax remote sales, both electronic and traditional.

Prohibition of Discriminatory Taxes
The ITFA prohibits discriminatory taxes on electronic commerce. Discriminatory taxes include taxes imposed on electronic commerce that are not generally imposed on transactions accomplished by other means. For example, a state could not impose a tax on access to an online newspaper where the sale of a newspaper from a street corner is free of tax.

In addition, discriminatory taxes include taxes imposed at a different rate on electronic commerce than on the same transactions accomplished by other means. For example, a state could not impose a 7 percent sales tax on sales of flowers via the Internet where it imposes a 5 percent tax on sales from a local flower shop.

Taxation of Remote Sellers
The ITFA includes provisions that relate to the ability of a state to require a remote seller to collect sales and use tax. Generally, a state cannot require an out-of-state vendor to collect sales and use tax unless that vendor has nexus in the state. Usually, nexus exists only if the vendor has physical presence in a state. However, a vendor can have nexus in a state if it has agents in that state.

One provision relates to the effect of access to a Web site on a vendor's liability to collect sales tax. According to the ITFA, states may not require a vendor to collect a tax if "the sole ability to access a site on a remote seller's out-of-state computer server is considered a factor in determining a remote seller's tax collection obligation..."

Example: USWebCo is a California vendor of apparel. Clothing is sold from a California-based Web server owned by USWebCo. The Web site is accessible, and orders may be placed, from all 50 states. However, the fact that the Web site may be accessed in a state cannot be used to determine if USWebCo has nexus in any state outside California.

A similar rule applies where a Web site is housed on a Web server owned by an ISP.

Note that the provision specifically relates to a remote seller's "out-of-state computer server." This language is clearly intended to open the door to a nexus claim where a server is located in a state. The ITFA does not preclude a finding of nexus where a Web site is hosted on a Web server located in a state. The ITFA prohibits a finding of nexus only where an out-of-state computer server is used. In writing the ITFA this way, Congress may be sending a message to states that it does not object to such a claim of nexus.

Considering the way the ITFA is written, it seems likely that some states will pursue a nexus claim where a Web server is used in a state. For instance, if a California company uses a Michigan ISP to host its Web site, Michigan may claim the California company has nexus for sales and use tax in Michigan.

The ITFA prevents states from imposing an obligation to collect or pay tax on a different person than in the case of non-Internet transactions involving similar goods and services.

Example: USWebCo operates an Internet mall from a server based in Michigan. USWebCo clearly has nexus in Michigan for sales and use tax, and Michigan can compel the company to collect sales and use tax on its own sales to Michigan customers. Assume that USWebCo's clients do not have nexus for sales and use tax in Michigan. Because the clients do not have nexus in Michigan, that state cannot compel them to collect tax on sales in Michigan. Under the ITFA, Michigan cannot compel USWebCo to collect tax on behalf of its mall clients.

Conclusions
The ITFA has no real effect on companies engaged in electronic commerce, other than a few Internet access providers. On the other hand, the Commission the ITFA sets up can have a major impact both on Web-based vendors and on traditional mail-order companies. For the future, it is the Commission that companies should watch.