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.

Background

The Internet Tax Freedom Act (ITFA) was originally enacted in 1998, and prohibited any state or political subdivision from imposing (1) taxes on Internet access, unless the tax was imposed and enforced prior to October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

Commentary

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.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.