Iowa court: No taxes on Internet service

DES MOINES, Iowa (Legal Newsline)-The Iowa Supreme Court has sided with America Online LLC, ruling that there should not be a tax on Internet service.

The state high court's decision this week vacated a decision by an appeals court and affirmed a lower court's decision.

At issue was whether when one Iowan communicated with another Iowan via AOL should there be sales tax attached. The Iowa Department of Revenue brought the case against the Internet provider.

AOL contended that there would be no communication with an AOL user without the communication first reaching the company's home base in Virginia.

The determining issue was where the AOL service begins and where it ends. When a customer connects to AOL in Iowa the connection is than routed to and authenticated to a system in Virginia. It would not be possible for an Iowa customer to communicate with another Iowa customer without going through this system, the company said.

The state Supreme Court said since the system where authentication occurred is in Virginia, that constitutes and out of state action and therefore, does not meet the standards for the tax rule to apply in Iowa.

The state communications service rule states that the gross receipts from the sale of all communication services provided in this state are subject to tax. In state communication is only if the points of origination and termination are both within the borders of Iowa.

The court said the communications service may only be taxed if point A and point B were being reached within the same states boundaries. But in this case they are not, the justices found.