LegiStorm

Summary:

The Internet Tax Freedom Act (ITFA; P.L. 105-277), enacted in 1998, implemented a three-year moratorium preventing state and local governments from taxing Internet access, or imposing multiple or discriminatory taxes on electronic commerce. Under the moratorium, state and local governments cannot impose their sales tax on the monthly payments that consumers make to their Internet service provider in exchange for access to the Internet. ITFA has been extended a number of times. As of the end of the 113th Congress, ITFA was scheduled to expire on October 1, 2015. In the 114th Congress, ITFA has been extended three times. ITFA was first extended through December 11, 2015, as part of the 2016 Continuing Appropriations Act (P.L. 114-53). An 11-day extension of ITFA was then passed as part of P.L. 114-100 through December 22, 2015. Shortly thereafter, ITFA was extended through October 1, 2016, as part of the 2016 Consolidated Appropriations Act (P.L. 114-113). In addition to these temporary extensions, legislative proposals to permanently extend parts of ITFA have been introduced in both houses of Congress. The Permanent Internet Tax Freedom Act (H.R. 235), which would permanently extend the moratorium on Internet access taxes while allowing the grandfather clause to expire, was passed by the House on June 9, 2015. Companion legislation has been introduced in the Senate (S. 431), but has yet to receive a vote. The original three-year moratorium has been extended eight times. As the original moratorium was extended, changes were made to the definition of Internet access to include and exclude different services and technology. Notable changes include the inclusion of digital subscriber lines under the moratorium and the exclusion of Voice over Internet Protocol services. ITFA includes a grandfather clause allowing state and local governments to continue taxing Internet access, provided the tax had been imposed and enforced before October 1, 1998. Over time the grandfather clause has protected a decreasing number of states' abilities to tax Internet access. While 13 states previously taxed Internet access and were protected under the grandfather clause, 7 states now tax Internet access. In addition, changes made to ITFA in 2007 rendered the grandfather provision inapplicable for states that repealed or nullified their tax laws on Internet access before the enactment of these changes. Policy options, including allowing the moratorium to expire, extending the moratorium either permanently or temporarily, and eliminating the grandfather clause, have been continually debated. Proponents of the moratorium argue that it provides a subsidy to consumers, increasing the number of individuals that have access to the Internet. Additionally, proponents cite the reduced administrative burden for businesses under the moratorium. Opponents of the moratorium cite unequal tax treatment of similar services, impacts on state revenues, and an encroachment on states' autonomy over their tax laws as reasons to allow the moratorium to expire. The Internet Tax Freedom Act and its subsequent extensions are often conflated with issues related to the taxation of electronic commerce across state borders. ITFA is largely unrelated to these issues. For a discussion of interstate electronic commerce and taxation issues, refer to CRS Report R41853, State Taxation of Internet Transactions, by Steven Maguire, and CRS Report R42629, "Amazon Laws" and Taxation of Internet Sales: Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit.