December 31, 2003

A Victory for Tennessee Taxpayers

For several years, Tennesseans who use the Internet have paid what, it turns out, was a tax being collected illegally by the state of Tennessee. The good news: They're due a refund. The Knoxville News Sentinel has the details...

Internet service in Tennessee is one step closer to being sales-tax-free. The state Supreme Court last week declined to review an appeals court ruling that said it's OK for Prodigy not to collect sales tax on the Internet service it provides.

Now the state Department of Revenue is evaluating whether to pursue four other cases against Internet service providers or to drop its efforts to collect sales tax on what it has - until now - considered a "telecommunications" service. Telecommunications services, which include phone and cable television connections, are subject to sales tax under state law.

The cases involve AOL, CompuServe, Earthlink and AT&T and are being litigated in Davidson County Chancery Court. If the state decides to drop the cases and reverse its position on taxing Internet access, the Department of Revenue would send notices to Internet service providers across the state, informing them sales tax collection will no longer be required on Internet access services.

If the state reverses its position - which it would seem to have to do given it has lost the court case - the ISPs could file for the return of back taxes, but would have to then refund the money to the consumers who paid it. Although the state has collected the illegal tax since 1996, state law provides a three-year statute of limitations on tax refunds, which means the ISPs - and consumers - are due a refund only for the last three years.