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House Passes Permanent US Internet Tax Moratorium

by Mike Godfrey,, Washington

17 July 2014

On July 15, by a voice vote, the United States House of Representatives passed the Permanent Internet Tax Freedom Act (PITFA), which would permanently extend the Internet Tax Freedom Act (ITFA) and avert a possible tax increase on internet access later this year.

First enacted in 1998, ITFA placed a moratorium on the ability of state and local governments to impose new taxes on internet access, or to impose multiple or discriminatory taxes on e-commerce. ITFA has been extended three times since 1998, and is currently scheduled to expire on November 1, 2014.

The original ITFA moratorium also included a grandfather clause to give states that were taxing internet access before October 1, 1998, a period of time to transition to other sources of revenue. Some have discontinued taxing internet access in support of a national broadband policy, but, for the remaining states, PITFA eliminates the grandfather clause in order to make the moratorium consistent nationwide, and therefore would require states to repeal their levies.

The Chairman of the House Judiciary Committee Chairman Bob Goodlatte (R – Virginia), who introduced the bill, has said that "if the moratorium is not renewed, the potential tax burden on consumers will be substantial. The average tax rate on communications services in 2007 was 13.5 percent, more than twice the average rate on all other goods and services. To make matters worse, low income households pay ten times as much in communications taxes as high income households, as a share of income."

PITFA has been welcomed by internet providers and others in the telecommunications industry. The ITFA Coalition, a partnership of businesses, associations, and consumers dedicated to its permanent extension, applauded its passage by the House as ensuring that "consumers, students, small businesses, and others who use the internet will not face new taxes on internet access – taxes that could be as high as double the average sales tax rate nationwide."

"The House's action today protects millions of Americans across the country who use the internet daily to look for employment, participate in online courses, or access government services from state and local taxes on internet access – regardless of whether they access the internet through a laptop, tablet or smartphone," said Annabelle Canning, its Executive Director.

The Information Technology Industry Council, the advocacy and policy organization for leading innovation companies, also supported PITFA "because it will help provide certainty for consumers and businesses and enable them to invest in advanced internet broadband services and new technologies in the coming years."

Others – particularly those concerned at the effect on revenue in those states that have continued to tax internet access – were not convinced. The National League of Cities (NLC) pointed out that the Congressional Budget Office has reported that "the revenue losses would be significant: Texas could lose an estimated USD358m in revenue; Ohio could lose USD65m; South Dakota could lose USD13m; and Wisconsin could lose USD127m."

In a letter to the House, the Government Finance Officers Association (GFOA), along with several other national associations representing local governments, including the NLC, also opposed PITFA, stating that the burden of taxation will be unfairly switched onto other taxpayers.

"In addition," the GFOA noted, "now that internet access is ubiquitous and its use generates scores of billions of dollars in revenue annually, it no longer justifies protection from state and local taxation. When the law was first enacted in 1998, the intent of the moratorium was to give the then-nascent Internet industry time to grow and become established. However, even at that time, Congress recognized that the ban should not be permanent."

"As the telecommunications and cable service industries transition to broadband, the scope of what the ITFA immunizes from state and local taxation is rapidly expanding," it continued. "Over time, the ITFA would arbitrarily exempt this fast growing, prosperous sector of the economy from taxation."

A companion bill to PITFA, the Internet Tax Freedom Forever Act, has been introduced into the Senate, where it has also received broad bipartisan co-sponsorship. PITFA's supporters are hoping that the Senate will follow the House in moving its bill forward before the August recess so as to ensure an extension of the internet tax moratorium before it expires.

Finally, however, it has been stressed that PITFA does not address the issue of state and local sales taxes on online purchases, contained in the proposed Marketplace Fairness Act (MFA).

The MFA, a version of which was approved by the Senate in May last year and sent to the House for approval, and which would allow US states to impose sales taxes on internet purchases made from online retailers outside their borders, is currently still being examined by the House Judiciary Committee.

TAGS: Finance | tax | business | sales tax | commerce | law | internet | e-commerce | legislation | United States | retail | services | Other | Tax

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