What is the Internet Tax Freedom Act?

The Internet Tax Freedom Act (ITFA) was enacted by Congress and signed by President Bill Clinton in 1998 with the intent of preventing Internet access from being taxed by local and state governments.

Why does it exist?

First, some believe this will prevent harm to this economic sector, claiming that the Internet enhances productivity and creates jobs. According to a 2012 OECD report, the Internet is a key economic infrastructure that is critical for the continued business growth and innovation. Since the U.S. Internet economy is projected to grow 6.5 percent and comprise just over 5 percent of the U.S. GDP by 2016, taxing Internet access would be counterproductive, according to Eric Cederwall of the Tax Foundation.

However, economic growth is not the only consideration when it comes to preventing the taxation of Internet access. An additional reason for government taxation is when goods or services have a perceived negative externality (e.g. cigarettes). Having tax-free access to the Internet does not seem to have a negative external factor. There are positive factors such as access to information, rapid communication and database storage.

Also, due to the fact that the government is not the one bearing the cost of providing the Internet, it cannot be taxed for the benefit of defraying government costs.

What is the current status?

Since its origin the ITFA has been extended several times as the Internet and its expanse continues to develop everyday. Most recently, in June of 2015, the U.S. House of Representatives voted to pass the Permanent Internet Tax Freedom Act (H.R. 3086; 113th Congress). This bill would make the ITFA permanent and ban state and local taxation of Internet access for the foreseeable future. This bill would also ban multiple or discriminatory taxes on electronic commerce. The bill does not deal with Internet sales tax. The bill is currently awaiting Senate review and voting, so the future of the PITFA is unknown at this time.

There are many changes to tax legislation, policies and procures that have taken place over the past year, or are still currently being decided upon. How does this affect you as a tax professional as you advise your clients going forward into 2016? Our Best Federal Tax Update will keep you up to date on the latest changes.