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On June 18, 2014, the House Judiciary Committee of the U.S. Congress passed the Permanent Internet Tax Freedom Act bill by a 30 to 4 vote, moving it forward to be considered by the House of Representatives. The Permanent Internet Tax Freedom Act bill seeks to modify the Internet Tax Freedom Act by permanently banning state and local governments from taxing access to the Internet and from imposing multiple or discriminatory taxes on electronic commerce. (See prior Multistate Tax Update articles on June 12, 2014 and October 24, 2013, in which the Illinois courts and legislature dealt with the impact of the Internet Tax Freedom Act on certain tax laws aimed at remote sellers.) Currently, the Internet Tax Freedom Act only places a temporary moratorium on state and local government taxing access to the Internet or imposing multiple or discriminatory taxes on electronic commerce. This ban has been extended three times and is set to expire on Nov. 1, 2014.

 

The Internet Tax Freedom Act currently allows for a small number of grandfathered states to tax Internet access if they were already imposing an Internet access tax at the time the law was originally enacted. The House’s Permanent Internet Tax Freedom Act bill would also remove the grandfather clause in the current legislation, prohibiting those states from continuing to impose an Internet access tax. The affected states are Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington, and Wisconsin.

 

The Permanent Internet Tax Freedom Act was introduced by Republican Rep. Bob Goodlatte. In a statement by Rep. Goodlatte concerning the bill, he provided his main reasoning for advocating for a permanent ban in taxing Internet access: “[t]he Internet is a meritocracy...It offers opportunity to anyone willing to invest time and effort. It is the greatest gateway to knowledge and engine for self-improvement that has ever existed. That is precisely why Congress has worked assiduously to keep Internet access tax free.” Rep. Goodlatte also justified removing the grandfather clause that allows certain states to tax access to the Internet by explaining that the purpose of the grandfather clause was to allow those states to modify their tax codes. He noted that these states have had 16 years to change their tax codes.

 

On the other side of the debate, many Democrats attempted to challenge the bill by backing an amendment proposed by Democratic Rep. John Conyers. The amendment would have simply extended the current law by another four years and allow the states which were given the exception under the current bill to continue to tax Internet access. The House Judiciary Committee defeated this amendment by 12 to 21. Conyer’s argument supporting the amendment pointed out that the law “may adversely impact State revenues and thereby impede the ability of those States to provide needed services to their residents. Unfortunately, [the bill], if enacted as it is, will result in some States losing millions of dollars in revenue.”

 

Some political pundits think Congress will quickly pass the modified bill before it leaves for a five week summer recess on July 31. However, others believe that since the similar Senate bill, the Internet Tax Freedom Forever Act, has been held up since last year, that the House bill will face a similar fate. Bill passage may also be held up by some legislators who wish to tackle the issues of the ban on Internet access taxes and the ban on discriminatory taxes on electronic commerce in the same law as the issue surrounding states' abilities to tax out-of-state merchants for online sales made to customers within their borders. Currently, the Permanent Internet Tax Freedom Act bill does not address the remote sales tax issue (which has been discussed in several other Multistate Tax Update articles including in Colorado and Illinois and in articles about the Marketplace Fairness Act).

 

However, it is clear if Congress does nothing, then the ban will expire and state and local governments would be permitted to pass laws imposing Internet access taxes and may be able to impose certain discriminatory taxes on electronic commerce (subject to the risk of various Constitutional challenges against inter-state discrimination). The Multistate Tax Update will keep you updated about the status of the Internet Tax Freedom Act.

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