United States: President Obama Signs Legislation Making Internet Tax Freedom Act Permanent

On February 24, 2016, President Barack Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA)1 which makes permanent the moratorium on Internet access taxes and multiple or discriminatory taxes on electronic commerce established by the Internet Tax Freedom Act. Additionally, under the TFTEA, the ability of grandfathered states to tax Internet access will be completely phased out by June 30, 2020.


The Internet Tax Freedom Act (ITFA) was originally enacted in 1998, and prohibited any state or political subdivision from imposing (1) taxes on Internet access, unless the tax was imposed and enforced prior to October 1, 1998; and (2) multiple or discriminatory taxes on electronic commerce. 2 The ITFA contained a grandfather provision that provided an exclusion from the moratorium for states that imposed and enforced a tax on Internet access prior to October 1, 1998. Originally, the grandfather clause was designed to allow states time to revise their tax provisions. 3 Thirteen states originally were protected from the moratorium4 but over time, the number of grandfathered states has decreased to seven (Hawaii, New Mexico, North Dakota, 5 Ohio, South Dakota, Texas, and Wisconsin), 6 due to several states voluntarily eliminating such taxes. 7

The ITFA has been extended several times throughout the years. 8 In the face of the impending expiration of the moratorium and grandfather clause, on September 30, 2015, the ITFA was extended through December 11, 2015 as part of the Continuing Appropriations Act of 2016, 9 and on December 18, 2015, it was extended through October 1, 2016 as part of the Consolidated Appropriations Act of 2016. 10

Permanent Ban and Marketplace Fairness Act

The enactment of the permanent ban was made possible by a deal struck between two senators. 11 Including the permanent ban in the TFTEA was a move criticized by many who felt that the more popular permanent ban provision should be tied to the Marketplace Fairness Act (MFA), a bill intended to regulate the sales and use tax collection and remittance responsibilities of remote sellers. 12 Senate Minority Whip Richard J. Durbin threatened to "bring a point of order against the tax provision unless it was stripped from the measure" which would have "stalled a vote on the conference report." 13 Under a deal with Senate Majority Leader Mitch McConnell, Durbin agreed to "allow a vote on the bill in exchange for McConnell's promise to hold a Senate vote on . . . the Marketplace Fairness Act, later this year." 14

Contrasting Views of ITFA and Permanent Ban

The decision to permanently extend the ITFA may be good news for those who have been required to pay taxes on access in the grandfathered states, as well as those required to collect and remit those taxes to state governments, but is not uniformly viewed as a positive development. Some have criticized taking the choice of whether to tax Internet access out of the hands of state and local governments. 15 Originally, the goal of the ITFA was to "foster the then fledging Internet in 1998 by temporarily suspending new taxes on Internet access." 16 The temporary extensions were seen as a way for Congress to "revisit whether the benefit of providing preferential treatment to one particular industry outweighed the cost of preempting state and local government authority." 17 Many feel that the Internet does not need the same protection now as it did in 1998, 18 noting that the "Internet has thrived" in states and counties that have taxed Internet access. 19 The permanent extension of the ITFA has been called a "step backward for state tax policy" that "narrows state sales tax bases, makes them less economically neutral, and damages the long-run adequacy and sustainability of state revenues." 20 Furthermore, the moratorium under the IFTA "violates the principle of horizontal equity" which "suggests that like-situated individuals should be taxed in a similar manner." 21 "With the current Internet tax moratorium, two firms that provide almost identical services can be subject to different tax rates based on how the service is provided, either over the Internet or by a brick-and-mortar business." 22

However, proponents feel that the ITFA was necessary to provide students and families access to the Internet without having to pay "onerous taxes." 23 The ITFA protects Internet access from being subject to "the high rates of taxation currently imposed on traditional telecommunication services – which are often taxed at rates more than double those imposed on other goods and services." 24 This protection becomes especially valuable in light of "the FCC's reclassification of broadband services as a telecommunications service." 25

Additionally, proponents for a permanent moratorium argued that the Internet "has become the primary driver of U.S. economic growth, innovation and productivity" and "is indispensable for finding jobs and accessing education and healthcare resources." 26


The revenue impact of the permanent ban is likely to hit the grandfathered states the hardest. These states and counties are expected to lose a substantial, and much needed, revenue stream27 that is used for critical services such as education. 28 Revenue losses for grandfathered states could be as high as $561 million annually and $6.5 billion for all states and the District of Columbia. 29 Given these figures, it would not be surprising to see these states take a narrow view of what constitutes Internet access and test the boundaries of the permanent ban in an effort to recoup some of the lost revenue.

One state that has been very aggressive in this area is Virginia. The Virginia Department of Taxation recently issued a ruling finding that for purposes of the state's communications sales tax, charges related to Internet connectivity did not fall under the protection of the ITFA. 30 The ruling is consistent with others issued by the Department that reflect a view that any charge or fee not solely related to Internet access charges is subject to the communications sales tax, absent an explicit exemption. 31 With the ban being made permanent, states may see an increase in court challenges by taxpayers as the fear of compromising additional extensions of the ITFA with litigation disappears. 32

The federal government's restriction on states' right to tax Internet access is unique, and the only other current instance of a federal restriction of this specific type relates to the state taxation of interstate airline and bus transportation industries. 33 In addition, it is noteworthy that the restriction is one that does not impact the federal government because it is not "foregoing federal corporate income tax" from Internet service providers. 34 Finally, including the permanent ban in the TFTEA may have proved timely for its supporters as the uncertainty surrounding movement this year on the MFA increased just days after the TFTEA passed Congress with the death of U.S. Supreme Court Justice Antonin Scalia. As noted above, the permanent ban was enacted as part of a deal in which the Senate would vote on the MFA. With Justice Scalia's death, the Senate now faces the possibility of a contentious and lengthy process to confirm a new justice. In an election year in which the amount of time that the Senate actually will be in session is already limited, the potential need to conduct Senate confirmation hearings will make it even more difficult to secure enough time for the Senate to consider and vote on the MFA this year.


1 H.R. 644.

2 Pub. L. No. 105-277.

3 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE REPORT, Oct. 5, 2015 citing to a report by the House Committee on the Judiciary in the 113th Congress.

4 Id., citing to U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, GAO-06-273, Jan. 2006.

5 Wisconsin Legislative Fiscal Bureau, Letter to Representative Dale Kooyenga - Estimated State and Local Sales and Use Tax Collections on Internet Access Fees, Jan. 7, 2016. See also Mark Wolski, Dalrymple Signs Bill Repealing North Dakota's Sales Tax on Internet Access, BLOOMBERG BNA WEEKLY STATE TAX REPORT, April 10, 2015. "North Dakota Gov. Jack Dalrymple (R) signed legislation that will exempt Internet access service from the state's 5 percent sales tax." S.B. 2096 is effective for taxable events occurring after June 30, 2017.

6 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE REPORT, Oct. 5, 2015, citing to Henry Reske, Ending Internet Law's Grandfather Clause Could Cost States $500 Million, TAX ANALYSTS, June 24, 2014.

7 Id., citing to U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts Will Vary by State, GAO-06-273, Jan. 2006.

8 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE REPORT, Oct. 5, 2015. According to this, the Internet Tax Nondiscrimination Act (Pub. L. No. 107-75) extended the moratorium and grandfather clause through November 1, 2003; the Internet Tax Nondiscrimination Act (Pub. L. No. 108-435) extended the moratorium and grandfather clause through November 1, 2007 and also made certain changes to the law; the Internet Tax Freedom Act Amendments Act of 2007 (Pub. L. No. 110-108) extended the moratorium and grandfather clause through November 1, 2014 and made certain changes to the law; the continuing appropriations resolution (Pub. L. No. 113-164) extended the moratorium and grandfather clause through December 11, 2014; and the Consolidated and Further Continuing Appropriations Act of 2015 (Pub. L. No. 113-235) extended the moratorium and grandfather clause through October 1, 2015.

9 Pub. L. No. 114-53.

10 Pub. L. No. 114-113.

11 Casey Wooten, Senators Strike Internet Tax Deal, BLOOMBERG BNA DAILY TAX REPORT, Feb. 10, 2016.

12 Id.

13 Casey Wooten, Senate Sends Permanent Internet Tax Ban to President's Desk, BLOOMBERG BNA DAILY TAX REPORT, Feb. 12, 2016.

14 Id.

15 National Association of Counties, Action Alert on Permanent Internet Tax Freedom Act, Feb. 9, 2016.

16 Id.

17 Id.

18 Id.

19 National Association of Counties, Letter to The Honorable Mitch McConnell and The Honorable Harry Reid, Feb. 3, 2016.

20 Carl Davis, Internet Tax Ban is a Defeat for Good Tax Policy, TAX JUSTICE BLOG, accessed Feb. 19, 2015, http://www.taxjusticeblog.org/archive/2016/02/internet_tax_ban_is_a_defeat_f.php.

21 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE REPORT, Oct. 5, 2015.

22 Id.

23 Internet Tax Freedom Act Coalition, Coalition Applauds Senate for Permanently Protecting Consumers from Internet Access Taxation, Feb. 11, 2016.

24 Id.

25 Id.

26 Robert Goodlatte, Report 113-510 to accompany H.R. 3086, Permanent Internet Tax Freedom Act, House of Representatives, July 3, 2014.

27 Congressional Budget Office, Letter to Honorable Bernie Sanders Re: Mandates analysis of section 922 of the conference report for H.R. 644, Jan. 29, 2016. "Beginning in July 2020, the grandfathered states could lose their ability to collect such taxes, and CBO estimates that the cost of the mandate (falling primarily on those states) would then increase significantly and probably would total more than $100 million in the final three months of fiscal year 2020 (July through September). The cost of the mandate would total more than several hundred million dollars annually thereafter, CBO estimates." See also Wisconsin Legislative Fiscal Bureau, Letter to Representative Dale Kooyenga - Estimated State and Local Sales and Use Tax Collections on Internet Access Fees, Jan. 7, 2016.

28 National Association of Counties, Letter to the Honorable Mitch McConnell and the Honorable Harry Reid, Feb. 3, 2016.

29 Jennifer DePaul, Effort Afoot to Remove PITFA From Trade Package, TAX ANALYSTS STATE TAX TODAY, Jan. 11, 2016. "Michael Mazerov of the Center on Budget and Policy Priorities said there are seven states currently taxing Internet services under the ITFA grandfather clause -- Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. Should Congress approve PITFA and remove the grandfather provision, those states stand to lose $561 million annually, Mazerov said. All 50 states, plus the District of Columbia, could potentially lose $6.5 billion annually in forgone revenue, he said."

30 See Ruling of Commissioner, P.D. 15-218, Virginia Department of Taxation, Dec. 8, 2015.

31 Id.

32 Michael Mazerov, State Implications of a Permanent Internet Tax Freedom Act, Center on Budget and Policy Priorities, Jan. 8, 2016.

33 Id.

34 Id.

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