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February 11, 2016

US Congress passes permanent Internet Tax Freedom Act with a 2020 sunset date for taxes imposed by grandfathered states

On February 11, 2016, the US Congress approved the Trade Facilitation and Trade Enforcement Act of 2015 (HR 644) (the Act), provisions of which make the Internet Tax Freedom Act (ITFA) permanent, and place a four-year sunset on the ITFA "grandfathering" provisions, discussed later. The current version of ITFA, passed in December 2015, had been set to expire on October 1, 2016. The Act will now be sent to the President, who is expected to sign the measure within the next two weeks.

Originally enacted in 1998, ITFA bars federal, state and local governments from taxing internet access and from imposing "multiple and discriminatory taxes on electronic commerce," but provides an exception for those states that imposed a tax on Internet access prior to October 1, 1998 (the so-called grandfathered states). The current provision contained in HR 644 would allow the grandfathered states to continue to tax Internet access for an additional four-and-a-half years, through June 30, 2020, at which point the prohibition would apply and those states that were imposing taxes on internet access services would no longer be allowed to do so. The grandfathered states are: Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin.

HR 644 was expected to pass in December 2015, but was held up when Sen. Dick Durbin (D-IL) prevented the bill from advancing in the Senate in an effort to advance the Marketplace Fairness Act (MFA). The MFA (S 698)1 would allow states to compel certain remote sellers to collect and remit sales and use taxes on transactions involving in-state customers, regardless of the seller's physical presence in the state. In return for dropping his efforts to stall the permanent ITFA provision, Sen. Durbin reportedly received assurances from Senate Majority Leader Mitch McConnell (R-KY) that a vote on some version of the MFA would take place later in the year.


Given that ITFA had been renewed six times since 1998, and that a move to make its provisions permanent had been proposed in the last two Congressional sessions, passage of HR 644 is not particularly noteworthy in isolation. Nevertheless, it is expected that the grandfathered states will lose significant revenue once the ban on Internet access taxes takes effect. Over the past few years, opponents of barring the ability of the states to impose Internet access taxes estimated that eliminating the tax could cost these grandfathered states more than $500 million per year. Accordingly, taxpayers in the grandfathered states should prepare for tax law changes and/or cuts in services to make up for the anticipated revenue shortfalls beginning in 2020.

Taxpayers also should monitor Congressional activity with respect to legislating a national nexus standard for sales and use tax purposes, given Sen. McConnell's statements indicating that the Senate would consider the MFA proposal at some point in 2016.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
Karl Nicolas(202) 327-6585


1 A similar bill, entitled the "Remote Transactions Parity Act" (HR 2775), has been introduced in the House.