Recently, the scope of consumer class-action lawsuits based upon alleged erroneous over-collection of trustee taxes (such as sales taxes and telecommunications services taxes) has been expanded to include purported failures to adhere to the strictures of the Internet Tax Freedom Act (the “ITFA”).

In these situations, a class-action lawsuit seeking large monetary damages is initiated against a party responsible for the collection and remittance of a sales tax or telecommunications tax based upon often vague assertions of the collection of taxes from customers related to services that are protected under the ITFA. These class-action lawsuits are typically pled in the form of various state law causes of action such as breach of contract, fraud, conversion, etc.—instead of as a tax refund action—in order to avoid the potential application of state laws that may require the consumer to proceed directly against the state or locality that actually received the benefit from the collected taxes, or that may preclude the class-action procedure in a tax refund action altogether. Nevertheless, there are numerous procedural defenses to these claims and suits, many of which should be and are defeated early in the litigation process upon a motion to dismiss. With the introduction of an expanded list of protected services included in the 2007 amendments to the ITFA, which are noted briefly below, businesses providing Internet, telecommunications or other advanced communications or data services potentially subject to the ITFA should be particularly careful to ensure compliance with the federal legislation, and to take steps to maintain adequate documentation of remittance of all tax proceeds to the state or local tax authority.

The ITFA was recently amended, effective November 1, 2007, to (1) extend until November 1, 2014, the moratorium on state taxation of Internet access; (2) extend until November 1, 2014, the grandfather provision which allows those states that taxed Internet access prior to the initial passage of the moratorium in 1998 (North Dakota, Ohio, South Dakota, Texas and Wisconsin) to continue taxing such services; and (3) expand the definition of non-taxable “Internet access” to include charges for services such as home pages, email accounts, instant messaging and personal electronic storage capacity. The law does not have any effect on the application of sales and use taxes to purchases over the Internet. The bill also does not apply to charges for voice, audio or video programming that utilize Internet protocol and for which there is a specific, separate charge, nor does it apply to state business taxes enacted between June 20, 2005 and November 1, 2007, that do not discriminate in their application to providers of communication services, Internet access and telecommunications.