One-year extension for tax-free Internet service law

Californians concerned about an internet service tax can breathe easier — at least for a year.

The federal law known as the Internet Tax Freedom Act, or IFTA, was extended Wednesday. It has been extended several times since it was passed in 1998.

Sen. Ron Wyden of Oregon, coauthor of the original act with former California Congressman Chris Cox, said that “by extending this bill, the Congress has, for the short term, ensured that this longstanding policy keeps Internet access tax-free.”

ITFA prohibits all but 7 states and localities from having internet service providers charge a sales tax. It was set to expire on Thursday. The House extended it by including it in a spending bill. The states with the tax are Hawaii, Ohio, New Mexico, Texas, Wisconsin, and North and South Dakota.

Earlier in the year, Wyden had tried to make the act permanent but ran into trouble when the Senate’s Democratic leadership attached the Permanent ITFA to the Marketplace Fairness Act, which would have let states and localities collect sales and use taxes from big internet retailers, such as Amazon, who do not have a physical presence in their jurisdiction.

The MFA passed the Senate, but House Speaker John Boehner, a Republican, blocked the legislation from a House vote.

With the Senate passing into Republican hands, the future of the MFA is unknown.

The ITFA “prohibited state and local governments from taxing Internet access and from imposing Internet-only taxes, such as bandwidth and e-mail taxes,” according to an analysis by the California Senate Office of Research.

Though the ITFA originally was intended to last one year, it has been temporarily extended at least four times over the years.

In July, with bipartisan support, the House moved to make permanent the ITFA, approving H.R. 3086, the Permanent Internet Tax Freedom Act. Similar legislation was introduced in the Senate by Wyden and South Dakota’s John Thune.

Both the Permanent ITFA and the MFA have bipartisan support, based more on geography than party politics. But linking ITFA provisions to the marketplace measure may make ultimate passage of the legislation more difficult, Senate sources said.

In July, Chris Cox, who now serves as council for NetChoice – representing companies who oppose the MFA and support the Permanent MFA – told Bloomberg News,  “Everyone knows that if a clean ITFA bill as passed by the House were to come to a vote on the Senate floor, it would pass with a healthy bipartisan majority — just as it did in the House.”

Supporters of a permanent ITFA contend that letting the act expire would lead to decreased internet access. George Ford, chief economist for the Phoenix Center, a Washington think tank, wrote that “given the size of communication service taxes and the price sensitivity of consumers, the effects on broadband adoption from failing to extend the ITFA could be substantial.” He contends that a 10 percent increase in cost could lead in a drop of internet usage of 7 to 15 percent.

However, current internet usage in the seven states in which ISPs charge sales tax had their sales taxes “grandfathered in,”  and their internet access appears equal to or greater than in those states that do not tax internet service.
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Ed’s Note: Updates our Dec. 3 story on IFTA to include the approval of one-year extension.