Deadline nears to decide internet service taxes

By next week, consumers could see their internet service subject to taxation. Currently, internet service providers do not charge state or local sales tax, under a piece of federal legislation called the Internet Tax Freedom Act.

But that law, authored 16 years ago by former California Congressman Chris Cox and U.S. Sen. Ron Wyden of Oregon, will expire on Dec. 11 unless Congress acts to extend it or make it permanent. Wyden says that if the ITFA is allowed to expire, “millions of American Internet users could face multiple and discriminatory taxes from thousands of state and local tax collectors around the country.”

Supporters of a permanent ITFA contend that letting the act expire would lead to decreased internet access.

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.

Although barely a week before the expiration date, it is still unclear how – or if – Congress will act.

Though the ITFA originally was intended to last one year, it has been extended four times, most recently in September 2014. Discussions about extending the ITFA again are under way in the House of Representatives.

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 Oregon’s Ron Wyden and South Dakota’s John Thune. Senate leaders attached the Permanent ITFA to the Marketplace Fairness Act, which would enable states and localities to collect sales and use taxes from large internet retailers, such as Amazon, who have no physical presence in their jurisdiction.

Both the Permanent ITFA and the MFA have bi-partisan 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.”

The study also points out that states and localities are missing out on billions of dollars in potential revenue thanks to the ITFA.

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%.

However, current internet usage in the seven states in which ISPs charge sales tax (Hawaii, Ohio, New Mexico, Texas, Wisconsin, and the Dakotas were had their sales taxes “grandfathered in” ), internet access appears equal to or greater than in those states that do not tax internet service.

Additionally, a study released by the Center of Budget & Policy Priorities found that other countries with much higher taxes on internet service enjoy higher access than in the US. For example, Denmark, Norway, and Sweden tax broadband subscriptions at 25 percent and have subscription rates of 26 percent to 37 percent. The U.S. broadband subscription rate is at 19 percent.

The study also points out that states and localities are missing out on billions of dollars in potential revenue thanks to the ITFA.

According to researcher Michael Mazerov, “permanently banning taxation of Internet access charges would deny the non-grandfathered states almost $6.5 billion in potential state and local sales tax revenues each year in perpetuity.” California lost $1.2 billion in potential sales tax revenue in 2012 – at an extra cost to the consumer of $3.84 in sales taxes per month, he noted.

Mazerov contends that continuing to extend or make permanent the ITFA is a breach of public trust.

As initially adopted, the ITFA was to be a temporary act which was to help give this new thing called the internet a kickstart and to give state and local governments time to figure out how to tax access. Mazerov quotes the Senate Commerce Committee report on ITFA, “A temporary moratorium on Internet-specific taxes is necessary to facilitate the development of a fair and uniform taxing scheme.” Continuing to subvert the original intent of the ITFA, Mazerov says, will further erode public trust in government. “If Congress approves a permanent ITFA, it will be ratifying the industry’s longstanding intransigence. This would be a profound breach of faith with state and local governments and will come back to haunt Congress in the future when it seeks to regulate other aspects of state and local taxation where affected industries might well have more legitimate objectives.”

There seems to be no intention of Senate Majority Leader Harry Reid to unlink a Permanent ITFA from the MFA. In November House Speaker John Boehner kept the MFA from a House vote. The result is that once again the Internet Tax Freedom Act’s future is reliant on an extension. While there are discussions of extending the ITFA through a Continuing Resolution in the House, whether this gets done by the December 11 expiration date is anyone’s call.