In 1998, Representative Christopher Cox and Senator Ron Wyden authored the Internet Tax Freedom Act (“the Act”). The purpose of the Act was to promote the commercial, educational, and informational potential of the Internet, without burdening its usage with customary taxes. The Act bars federal, state, and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as those on bandwidth and email usage. It does not, however, exempt sales made on the Internet from taxation, as these sales are subject to the same state and local sales tax rates as non-Internet sales.
Though the Act saw five separate extensions over the last 18 years, it was not until today, February 11, 2016, that Congress finally passed the legislation permanently in a 75-20 vote. Previous attempts to pass the Act with the end date removed, thus giving it permanency, had always stalled in both the House and Senate. However, the Act’s language was recently tacked on to HR 644, the Trade Facilitation and Trade Enforcement Act of 2015. The purpose of HR 644 is to authorize funding for Customs and Border Protection, and the legislation was deemed very likely to pass. Thus, by appending the language of the Internet Tax Freedom Act to HR 644 without an end date specified, Congress effectively passed a permanent version of the Internet Freedom Act.
Previously, the Internet Tax Freedom Act had always included a grandfather clause for the states that had enacted taxes on internet usage prior to the Act. Though some of those states have since eliminated this tax, the following states still collect on the internet tax: Hawaii, New Mexico, North Dakota, South Dakota, Ohio, Texas, and Wisconsin. With the passing of HR 644 and the current version of the Act, however, these states were given a deadline of June 30, 2020 to eliminate their taxes on internet.
Finally, Americans can rest assured they will never pay taxes to connect to the Internet.
Senator Wyden, one of the Act’s biggest proponents, explained that Americans currently residing in grandfathered states will save hundreds of dollars a year in internet taxes after this ban takes effect. Additionally, Wyden explains that the Act is about more than just keeping Internet access tax-free, “it also keeps you from having to pay more in taxes on an item just because it was purchased online.” This legislation is crucial to Internet shoppers and online retailers because it keeps prices low and maintains the Internet as a competitive market.
One big issue the Act does not address, however, is the hotly contested issue of states being allowed to collect sales tax from online retailers with a physical presence in those states. Large retailers like Amazon, for instance, collect sales tax in some states, but not in others. Thus, retailers and states alike have called for a federal law that would be more precise about exactly when states can collect sales tax on online purchases. Though the Act leaves this question open, it is certainly a step in the right direction for the Internet consumers.