The Internet Tax Freedom Act (ITFA) provides a temporary moratorium on states from taxing Internet access or placing discriminatory taxes on e-commerce, and is set to expire on Dec. 11, 2014 (based on a recent extension signed into law on Sept. 19, 2014).
Currently, the United States Senate is considering legislation, the Permanent Internet Tax Freedom Act (the PITFA), which would permanently extend the ITFA. The PITFA passed the United States House of Representatives on July 15, 2014. More information regarding the PITFA can be found in our June 26, 2014 Multistate Tax Update.
Due to the possibility that Congress may allow the ITFA to expire and then retroactively extend it or make it permanent, some states, such as Massachusetts and Michigan, have issued guidance regarding the potential expiration of the ITFA.
The Massachusetts Department of Revenue (MDOR) issued a release (Massachusetts Technical Information Release 14-10, 09/11/2014) for vendors providing Internet access to customers in Massachusetts, due to the impending expiration of ITFA. The release explains that for sales tax collection and remission purposes, vendors may continue to rely on the lists of taxable telecommunications services and non-taxable and exempt services, including Internet access charges, as published in Massachusetts TIR 05-8 until further notice. Vendors may also continue to rely on the provisions of ITFA (Section 1106. Accounting rule) in taxing retail sales of bundled charges, including Internet access.
The release notes that purchasers of taxable services are not relieved of potential use tax liability in the event that ITFA expires. However, resulting liability from use tax does not need to be reported until further notice from the MDOR and there will be no penalties for late reporting or payment of use tax. MDOR anticipates providing further guidance if neither Congress nor the Massachusetts legislature has acted by Dec. 31, 2014.
The Michigan Department of Treasury (MDOT) has also issued guidance (Guidance on Expiration of Federal Moratorium on State Taxation of Internet Access Charges, Mich. Dept. of Treasury) regarding the expiration of the ITFA. According to the guidance, Michigan does not tax a service that directly enables users to connect to the Internet. Such non-taxable services include the purchase, use, or sale of telecommunications by a provider of Internet access service to the extent such telecommunications are purchased, used, or sold to provide direct Internet access. MDOT plans to issue further guidance if and when either Congress or the Michigan Legislature enacts legislation addressing the tax prohibitions set forth in the ITFA.
The ITFA extension will only last until Dec. 11, 2014. Beyond this date, the future of ITFA is uncertain. Therefore, taxpayers should consult a tax advisor regarding matters related to the tax prohibitions set forth in the ITFA and related state guidance. The Multistate Tax Update will continue to update taxpayers as to the status of ITFA.