In October of 1998, Congress voted the Internet Tax Freedom Act into law. The law established a three-year moratorium on new Internet access taxes and on multiple or discriminatory taxes on electronic commerce. However, the legislation did not prevent states and localities from collecting existing sales tax on purchases made over the Internet. As it stands now, Internet retailers are subject to the same sales taxes as mail-order retailers. If the seller does not have a physical nexus in the state the consumer is responsible for paying the tax directly to the state.
Few consumers do.
In fact, in 1999, according to Forrester Research, more than half a billion dollars in sales taxes were not collected on Internet purchases. The passage of the Internet Tax Freedom Act mandated that an Advisory Commission on Electronic Commerce be formed to recommend solutions to the taxation question. For instance, if Congress adopts this proposal all books, music and software that currently are subject to state and local sales taxes would be tax-free. It is hard to believe it is the intent of the Advisory Commission to erode the tax base of local governments. But that is exactly what will happen if this legislation is passed and consumers choose to purchase via the Internet because they don't have to pay sales tax.