The Iowa Court of Appeals has upheld a ruling that prevents the state from charging an out-of-state internet provider sales taxes. The Iowa Department of Revenue had claimed the gross receipts of America Online were subject to state sales taxes because callers first dialed in to an Iowa phone number before being connected to A-O-L’s computers in Virginia.
The department sought to collect taxes from a period between July of 1994 and June of 1999 — which was prior to a new state law that made that exempted the services from sales taxes. A district court ruled that because it is impossible for members to access A-O-L without connecting through servers in Virginia, it is not a communication service provided "in this state." And therefore is not a taxable service.
The Appeals Court upheld the district court ruling, stating simply placing a local call to a local access point in Iowa would not provide any service whatsoever to A-O-L. Moreover, when a member requests termination from an A-O-L session, the A-O-L servers in Virginia make the actual disconnection.
Thus, the transmission is between the member’s computer in Iowa and those servers in Virginia –and as such the communication does not occur "in this state" as is required by rule in order to be taxable.