A state and local tax expert foresees increasing litigation over taxes on internet access and electronic commerce, primarily due to ambiguous definitions in the Internet Tax Freedom Act (ITFA).
The ITFA prohibits states and their political subdivisions from imposing taxes on internet access or imposing multiple or discriminatory taxes on electronic commerce.
However, during a March 11 KPMG webinar titled “What We Know and What We Are Watching in Federal and State Tax Controversy,” Audra Mitchell, managing director in KPMG’s Washington National Tax – State and Local Tax practice, pointed out that while the law defines “internet access” to include “homepage,” “electronic mail,” “instant messaging,” “video clips,” and “personal electronic storage capacity,” it does not define these terms. She also described the law’s definition of electronic commerce as “very broad.”
“Those are the two key areas where I think we’re going to see litigation going forward,” Mitchell said during the webinar, noting that some cases have already emerged.
In Florida, the Department of Revenue determined in a 2023 ruling (Technical Assistance Advisement No. 23A19-001, March 7, 2023) that customized messages pre-recorded by entertainers, athletes, musicians, and other social media personalities are a taxable video service subject to the state’s communications services tax.
Offering her take on this ruling, Mitchell questioned whether these personalized messages qualify as “video clips” under the ITFA and would fall under the definition of “internet access,” exempting them from Florida’s communications services tax.
She highlighted a Louisiana case, Apple, Inc. v. Romy S. Samuel, where the state’s Board of Tax Appeals determined that iCloud subscription fees represent charges for personal electronic storage, excluding them from New Orleans sales tax and the French Quarter Economic Development District sales/use tax.
“There are more concerns in those areas with video clips, instant messaging and things like that,” Mitchell added. “What are these services, and should they be included in the definition of internet access that states are prohibited from taxing?”
Mitchell predicted “even more litigation” over the issue of what constitutes a discriminatory tax on e-commerce. She noted that the ITFA was devised with input from communications and video industry advisors to ensure parity between taxation of electronic transactions and the same transactions when conducted “in physical form.”
Additionally, she noted ongoing legal challenges in Maryland, which taxes gross revenue from digital advertising while not taxing non-digital advertising—something that has been characterized as a discriminatory tax on e-commerce. In response, Maryland is attempting to distinguish digital advertising from print advertising and to persuade the court that they don’t need to be treated the same way.
Again looking to Florida’s communications services tax, Mitchell pointed to a 2023 Department of Revenue ruling (Technical Assistance Advisement No. 23A-009, April 6, 2023) that the tuition for a bar review preparation course was taxable as a digital video service because it included prerecorded online lectures. The same bar review preparation course would not be subject to the tax if the lectures were provided in person, raising the possibility that the tax could be considered discriminatory.
“We’re seeing and have seen and probably will continue to see more litigation around—is a state incorrectly trying to apply a current tax already in existence to one of these types of services?” Mitchell said. “Or are states either applying a current tax that already exists in a discriminatory manner, or coming up with new taxes that would discriminatorily treat electronic commerce?”
She noted that many state legislatures are actively moving forward bills in the 2025 sessions that would tax digital advertising or digital content in various forms. “Until there are some answers and, you know, states kind of understand the parameters, I think we’ll continue to see litigation in these areas,” Mitchell added.
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