On February 11, the U.S. Senate passed the conference report on H.R. 644, a trade and customs enforcement bill that includes a permanent extension of the Internet Tax Freedom Act (ITFA). As a result, state and local taxes on Internet access services are permanently prohibited and the grandfathered states will have until June 2020 to phase out their existing taxes on Internet access services. The language was “air-dropped” into the conference report, meaning the provision was not part of the underlying bill that either the U.S. House of Representatives or Senate originally voted on in mid-2015. Click here to see how your Senators voted on H.R. 644.
ITFA, enacted in 1998, preempts state and local government authority to tax Internet access services. Currently, seven states (Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin) are grandfathered under ITFA and are still collecting over $500 million a year in taxes.
When first enacted, ITFA was only intended to be temporary in order to allow the Internet to “grow.” For over a decade, NACo and other state and local government groups fought off attempts to permanently extend the preemption, resulting in eight short-term extensions. The primary goal was to ensure that Congress was periodically compelled to revisit whether the preemption of state and local authority was still necessary in light of the law’s original intent of allowing the Internet to grow. Despite the tremendous growth of the Internet over the last seventeen years, proponents of the legislation still felt that it needed protection. As more telecommunication and video services transition to the Internet, critical revenue for local governments such as franchise fees, rights-of-way fees and other fees could see a substantial impact. In a letter to Senate leadership opposing the permanent extension, NACo urged lawmakers “not to indefinitely preempt the authority of state and local governments to set our own tax policies.”
In recent years, Senate champions for remote sales tax legislation, like the Marketplace Fairness Act (MFA), have attempted to combine consideration of any extension of ITFA with MFA. Attempts have largely been unsuccessful, despite Senate passage of the Marketplace Fairness Act in 2013 by a strong bipartisan vote. In the days leading up to the Senate vote on the conference report, the strategy by MFA proponents appeared to be to attempt to strip out the permanent language from the report. However, two days before the vote a deal was struck between Senate leaders that resulted in Senators dropping their opposition to the conference report in exchange for a promise from Majority Leader Mitch McConnell (R-Ky.) that MFA would be considered “at some point” this year.
The legislation now heads to the president’s desk for his signature.