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Congress Just Made the Internet Tax Free. Permanently?


Written By: A. Wilt

February 2016

On February 11, 2016, Congress passed HR 235- the Permanent Internet Tax Freedom Act (PIFTA), and sent it to President Obama for signature into law. It's a short act, merely changing 12 words in an earlier act making that act permanent. However, it's been anything but a short journey to get it passed.

Free Internet

What's IFTA?

PIFTA makes permanent the tax moratorium that was first passed in 1998 under the Internet Tax Freedom Act (IFTA). That Act placed a ban on taxing internet access, though it's important to note that it did not free internet service providers from paying income tax, and did not prohibit states from collection sales tax on goods purchased online. Spoiler alert - that sales tax issue is one that will come up again.

IFTA merely prohibited charging tax on the actual access to the internet, under two main arguments.
Many felt that information that was available to the public online should not be taxed. This ran counter to other communication technologies, which services are taxed, such as phone or cable service.

More importantly, IFTA was passed during a period of huge internet growth and development. Lawmakers believed that by taxing the new technology, they would slow the rapid growth. 

Issues with IFTA

IFTA contained a grandfather clause, which meant that states that were already charging tax on internet service were able to continue doing so. That grandfather clause allowed 10 states and Washington D.C. to continue taxing internet access. These states are still allowed to collect taxes on internet services because the act hasn't been signed into law yet, though it appears likely that President Obama will do so. If he does, those states have until 2020 to cease collections on these services. 

The other issue with IFTA was that it was temporary. Every few years, Congress had to renew it, which they did in 2001 and 2004 – essentially kicking the can down the road. Last week's 75-20 vote to make the act permanent puts an end to that debate every few years.  

What took so long?

Many have also tried to tie in clauses to the Act that require ecommerce sites to collect sales tax. Mail order and internet companies do not have to pay taxes in a state where they don't have a physical presence – which makes sense, as the taxes are supposed to be to pay for the costs of the services of the state that the brick and mortar stores relied on.

Free Internet

However, many of the local brick and mortar stores are unhappy about this claiming that online retailers have an unfair advantage over them because they don't have to pay that sales tax. They often point to this as a "tax loophole" and one of the reasons that people are choosing to shop at online retailers rather than physical stores.

That "loophole" is nothing new, and was upheld in a 1992 Supreme Court decision in Quill Corp. v North Dakota, where the Court held that a company without a physical presence was not required to collect sales tax. However, even if the e-retailer is not required to collect the tax, the purchaser is obligated to remit the tax, though of course, many people are unaware of this or do not comply.

Mitch McConnell did comment publicly on February 9 that Congress would take up the internet sales tax issue later this year. That will be an interesting fight, and one that small business owners in particular should pay close attention to. It's one thing for a company like Amazon to know sales tax regulations in each municipality, but it's a much different burden on a small Etsy or EBay business.

Permanent? Maybe.

Calling PIFTA "permanent" is a bit of a stretch as future sessions of Congress could obviously undo the act – there's very little permanent in law. But for now, in any case, access to the internet remains tax-free.

References

H.R. 235-Permanent Internet Tax Freedom Act. (2015, June 10). Retrieved from Congress.gov.
H.R. 3529 (105th): Internet Tax Freedom Act of 1998. (1998, March 23). Retrieved from govtrack.us.
Supreme Court of the United States. (1992, May 26). Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). Retrieved from Cornell University Law School: Legal Information Institute.

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Other Articles of Interest:

The Freedom of Information Act: Are We Really Free to Obtain Information?

A Right to Clean Water: Flint's Water Crisis

HR-1599: Safe and Accurate or Keeping You in the D.A.R.K.?

Eminent Domain: Does Your Property REALLY Belong to You?

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