Unless Congress acts soon, a federal moratorium on taxing internet access will expire before the end of the year, allowing states and localities to tax consumers online access. The ban, the Internet Tax Freedom Act, was passed in 1998, during the infancy of the online world. It has been extended several times as the internet became a bigger part of daily life. The current extension, however, expires on November 1st. There has been little legislative action to extend the ban.
Under the current moratorium, state and local governments cannot apply their sales or telecommunications taxes to the amount consumers pay for internet or wireless services. A few states have passed their own versions of an internet tax moratorium, but it is unclear how the majority of states would react if the moratorium expires. According to the Wall Street Journal, several telecommunications companies are preparing to send notices to their customers, advising them of the potential new tax.
Ironically, the future of the prohibition on internet access taxes may rest on allowing states, counties and cities to collect sales taxes on online purchases. Several business groups and a bipartisan group of legislators are considering pairing the moratorium with the Marketplace Fairness Act, legislation that would allow state and local governments to collect sales taxes on online purchases. They are generally prohibited from doing so because of a 1992 Supreme Court case, Quill v. North Dakota.
“I think enough interested parties would insist that if we’re going to pass that [Internet-access tax moratorium], this other component might be attached to it,” said Rep. Jason Chaffetz (R-UT), a supporter of the sales tax collection legislation. “To think the first would move unattached is fantasy land at this point.”
Although both measures deal with the internet, they raise very different issues. Allowing states to extend their sales and telecommunications taxes to the service of providing internet access would constitute a new tax on consumers. There is, however, a robust debate about whether allowing states to collect sales taxes on online purchases is a new tax or an extension of existing tax law.
There are arguments to be made on both sides of the sales tax debate. Linking that controversial measure to the broadly popular ban on access taxes, though, risks the current moratorium expiring.