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What are Internet Taxes?

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  • Written By: Florence J. Tipton
  • Edited By: John Allen
  • Last Modified Date: 01 September 2016
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For many, the advent of the Internet ushered in changes that came faster than the speed of light. Some changes were expected and met with prompt preparation; others were not. One of those changes was Internet taxes, the levy of monetary charges for commercial goods and services sold on the Internet. Eventually, local, regional and international laws in most countries caught up with online commerce, and regulations governing the levy of Internet taxes were passed.

Governments in most countries have passed regulations on the taxation of digital goods, which are generally defined as goods and services purchased on the Internet. The regulations set forth may vary, but they typically set standards for how much a business can expect to pay into the tax system within the country. They were created to create an acceptable form of Internet governance that did not affect the business market by controlling the sale and production of these goods.

Internet taxes are typically collected for most online purchases. In general, goods and services purchased online are subject to a sales tax. Most local and regional laws have predetermined tax tables that calculate how much is charged based on the total amount of the purchase. The amount of tax charged is usually based on the location of the purchaser.

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A relatively broad term, Internet tax holds several slightly different meanings in different parts of the world. An issue for defining collectable Internet taxes is what is considered taxable goods and services. Some governments may want to charge businesses for Internet access, the production of goods, and a sales tax. With respect to the production of goods, Internet taxes on businesses are banned in the U.S. On the contrary, most European countries charge taxes on the production of goods and services sold through Internet transactions.

Essentially, the U.S. government cannot collect taxes on the usage of the Internet. The Internet Tax Nondiscrimination Act extended the moratorium on collecting Internet taxes from businesses for operations specific to Internet use such as email and bandwidth. This act excludes taxing net income from Internet sales. Another exception is charging access taxes paid by consumers through Internet service providers (ISPs).

The European Union (EU) has a Value Added Tax (VAT) for the taxation of digital goods and services. Charged as a consumption tax, businesses in the EU pay a tax based on the value added to a product. Additionally, the cost of purchasing materials to make the product is taxed separately under the VAT system.

Each member country in the EU is responsible for setting the VAT rate. One member country is not allowed to collect VAT from a foreign country that pays VAT in its respective country. Additionally, the VAT rate does not apply to EU businesses that may export to foreign countries that are not a member country.

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