Mazerov on the Risks of Permanently Banning Sales Taxes on Internet Access Charges

July 14, 2014 at 4:04 pm

Writing today in The Hill, I explain why policymakers should reject an effort to permanently bar states from applying their normal sales taxes to the monthly charges that households and businesses pay for Internet access.  Such a permanent ban, which the House is expected to consider this week, could cost states roughly $7 billion a year in potential revenue.

Here’s an excerpt:

For starters, the bill would strip Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin of at least $500 million in annual state and local revenue from their existing taxes on these charges.

Beyond costing states the $7 billion a year in potential revenue to support education, healthcare, roads, and other services, the bill would violate an understanding between Congress and the states dating back to the 1998 Internet Tax Freedom Act (ITFA):  that any ban on applying sales taxes to Internet access charges would be temporary and not apply to existing access taxes.

Enacted when Internet commerce was still in its infancy, ITFA sought to balance Congress’ desire to encourage development of the Internet against states’ and localities’ need to finance essential services.  Thus, it imposed only a temporary “moratorium” on new taxes on Internet access and protected existing taxes through a “grandfather” clause.

Congressional extensions of ITFA in 2001, 2004, and 2007 maintained those two key features.  This latest ITFA legislation, though, eliminates both — the first time Congress has seriously considered doing so.

Congress should end, not extend, the ban on state and local taxation of Internet access, as I explained in our recent paper.  As I point out in The Hill:

The Internet is no longer an infant industry needing protection from taxes that apply to other services for which Internet access is a close substitute.  Cable television service is widely taxed, for example, but if someone decides to pay Verizon $50 a month so that they can stream Netflix to their TV, ITFA bans the taxation of the access charge.  This unequal treatment doesn’t makes sense.

Read the full op-ed here.

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More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

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