The Future of E‐mail Taxation in the Wake of the Expiration of the Internet Tax Freedom Act

• DOI: http://doi.org/10.1111/ablj.12029
• Date: 01 June 2014
• Published date: 01 June 2014

The Future of E-mail Taxation in the

Wake of the Expiration of the

Internet Tax Freedom Act

Kathryn Kisska-Schulze*

INTRODUCTION

During a Berkeley, California, city council meeting in March 2013, City

Councilman Gordon Wozniak proposed imposing a tax on e-mails to raise

revenue.1In the modern electronic age, where state sales tax imposition

efforts have been broadened to include Internet sales, telecommunication

services, and cloud computing, it is not unforeseeable that proposals

to tax e-mail messaging will continue to be considered.2Further, in an

*JD, LL.M. (taxation), Assistant Professor, Department of Management, School of Business

and Economics, North Carolina Agricultural and Technical State University. I want to thank

the North Carolina A&T State University School of Business and Economics, Department of

Management for awarding me a 2013 summer stipend to assist in the development of this

article. I also wish to express my sincere appreciation to Ben Siegel, Kristin Rizzi, and Ting

Ting Liu for their diligence in reviewing the final drafts, and to the anonymous ABLJ

reviewers who offered insightful observations on the initial draft of this article.

1See Emilie Raguso, Wozniak’s Email Tax: Good Sense or Nonsense?,BERKELEYSIDE (Mar. 7,

2013, 9:14 AM), http://www.berkeleyside.com/2013/03/07/wozniaks-email-tax-good-sense-or

-nonsense/. Specifically, Wozniak stated, “There should be something like a bit tax. I mean a

bit tax could be a cent per gigabit and they would still make, probably,billions of dollars a year

. . . And there should be, also, a very tiny tax on email.” Id.

2With respect to the taxation of Internet sales, for example, see the Marketplace Fairness Act,

S. 743, 113th Cong. (2013), which the U.S. Senate passed in support of allowing states to

require certain remote sellers to collect sales and use tax on sales made to customers in the

state. See also Amazon.com LLC v. New York State Dep’t of Taxation & Fin., 23 Misc. 3d 418

(N.Y. Sup. Ct. 2009), aff ’d in part and modified in part, Amazon.com, LLC v. New York State

Dep’t of Taxation& Fin., 81 A.D.3d 183 (N.Y. App. Div.1st Dep’t 2010), aff’d, Overstock.com,

Inc. v. New York State Dep’t of Taxation & Fin., 20 N.Y.3d 586, 597 (N.Y. 2013). Regarding

the taxation of telecommunication services, see Goldberg v. Sweet, 488U.S. 252 (1989); see

also Mobile Telecommunications Sourcing Act, Pub. L. No. 106-252, § 2(a), 114 Stat. 626

(2000) (codified as amended at 4 U.S.C. § 116-126 (Supp. 2002)). Cloud computing has

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American Business Law Journal

Volume 51, Issue 2, 315–363, Summer 2014

© 2014 The Author

American Business Law Journal © 2014 Academy of Legal Studies in Business

315

era where state and federal governments are facing budget deficits

requiring legislators to seek innovative tax opportunities to boost

revenue, it is not surprising that taxes on e-mail messaging might be

recommended.3

The plausibility of such a tax scheme requires a thorough under-

standing of the following: (1) how e-mail messages travel within cyber-

space, (2) the arguments for and against the permanent extension of the

Internet Tax Freedom Act (ITFA), (3) the likely characterization of e-mails

for sales and use tax purposes, (4) to what extent state and local taxing

jurisdictions could successfully establish a nexus connection with e-mail

service providers or account holders, and (5) the proper approach to

sourcing e-mail messaging.

This article first explores the evolution of state sales and use tax

imposition from brick-and-mortar stores to e-commerce taxation. Part II

analyzes the recent opportunities that deficit-burdened states have consid-

ered to impose new taxes in order to raise revenue; Part III examines the

possibility and plausibility of taxing e-mails; and Part IV offers proposals

for congressional policy makers in the wake of the expiration of the ITFA.

Ultimately, this article provides an analytical approach to realistically

taxing e-mails in the United States should Congress not permanently enact

or extend the ITFA by November 2014.

I. THE NEXUS QUAGMIRE:FROM

BRICK-AND-MORTAR TO E-TAIL SHOPPING

The launch of the Internet into modern society in the 1980s revolutionized

the way policy makers and federal and state judicial systems consider the

recently become a topic of sales tax consideration, and some states have begun addressing the

characterization of such transactions for sales tax purposes. See Stephen J. Lusch, State

Taxation of Cloud Computing,29S

ANTA CLARA COMPUTER &HIGH TECH. L.J. 369, 374 (2013)

(citing Carolynn Iafrate Kranz & Iris Kitamura, Special Report,Taxing Software and Cloud

Computing: Yesterday’s Law, Today’s Technology,62S

T.TAX NOTES 737, 741 (2011)).

3In fiscal year 2012, forty-two states closed out $103 billion in budget shortfalls, forty-six states

reduced services, and thirty states raised taxes. See Adam Levitin, Bankrupt Politics and the

Politics of Bankruptcy,97C

ORNELL L. REV. 1399, 1400 (2012) (citing Phil Oliff et al., States

Continue to Feel Recession’s Impact,CTR.ON BUDGET &POLICY PRIORITIES at 6 (June 27, 2012),

http://www.cbpp.org/files/2-8-08sfp.pdf.

316 Vol. 51 / American Business Law Journal

imposition of tax on tangible property and services.4Even before the

advent of electronic retail (e-tail), when only brick-and-mortar businesses

existed, the ideal of the term nexus standard—the due process requirement

that there be some nexus or definite link, some minimum connection,

between a state and the person, property or transaction it seeks to tax—

developed into a “time-honored concept.”5In essence, a nexus must be

established before any jurisdiction can impose a tax.6While the obvious

physical presence of a brick-and-mortar business with retail stores, solici-

tors, or property within a taxing jurisdiction is a straightforward example

of establishing a minimum connection with a taxing jurisdiction, the e-tail

market has thrived as a business species that has been judicially protected

from state taxing jurisdictions.

Complications stemming from the requirement of a nexus between a

taxing state and a vendor first arose more than forty years ago when

brick-and-mortar businesses began soliciting out-of-state customers

through mail-order catalogs.7Beginning with two prominent judicial deci-

sions, the U.S. Supreme Court considered the extent of nexus boundaries

with respect to out-of-state businesses.8

The first of these cases, National Bellas Hess, Inc., involved a mail-

order company incorporated in Delaware with its principal place of busi-

ness in Missouri.9Bellas Hess, Inc.’s (Bellas Hess) only connection with the

state of Illinois was through U.S. mail or common carrier, which delivered

the company’s catalogues to Illinois residents twice a year.10 Goods pur-

chased by Illinois residents from Bellas Hess’s catalogs were mailed from

4See Lusch, supra note 2, at 371.

5National Bellas Hess, Inc. v. Dep’t of Revenue of Illinois, 386 U.S. 753, 762 (1967) (citing

Miller Bros. Co. v. Maryland, 347 U.S. 340, 344–45 (1954)); Scripto, Inc. v. Carson, 362 U.S.

207, 210–11 (1960); American Oil Co. v. Neill, 380 U.S. 451, 458 (1965)), overruled in part by

Patterson v. Shumate, 504U.S. 753 (1992). See also Kathryn Kisska-Schulze, Taxation of

Internet Sales—Where in the Cyberspace is Nexus?,1R

OCKY MNT. L.J. 8, 14 (2012).

6See Allied-Signal, Inc. v. Dir., Div.of Taxation, 504 U.S. 768, 777 (1992) (quoting Miller Bros.

Co., 347 U.S. at 344–45).

7See, e.g.,National Bellas Hess, 386 U.S. at 759–60; see also Quill Corp. v. North Dakota,

504 U.S. 298, 322 (1992).

8See National Bellas Hess, 386 U.S. at 753; see also Quill, 504 U.S. at 298 (1992).

9National Bellas Hess, 386 U.S. at 754.

10Id.

2014 / States Taxing Our E-mail Messages 317