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In 1998, the Internet Tax Freedom Act was signed into law. The law bars federal, state and local governments from taxing Internet access and from imposing discriminatory taxes such as bit taxes, bandwidth taxes, and email taxes. The law also prohibits any multiple taxes on any electronic commerce.

The law has been extended three times since it was originally enacted. The last extension was in 2007. The Internet Access Freedom Act is set to expire November 1, 2014.

As has become common place in Congress, there is no meeting of the minds as to any further extension. On July 15, 2014, the House of Representatives voted to make the law barring taxes on Internet access permanent. The Senate has added stipulations to any acceptance of this position.

The Senate would like to link any extension of the Internet Tax Freedom Act to the Marketplace Fairness Act now sitting in committee in the House. The House has not welcomed with open arms the Marketplace Fairness Act. That Act would allow states to impose sales tax on out-of-state retailers, such as Internet retailers, who ship into the state. The Senate passed the Marketplace Fairness Act last year. The Senate has agreed with the House to a short term extension of the Internet Tax Freedom Act until December 11th but has not backed down from connecting the two pieces of legislation. President Obama has signed the legislation for this temporary fix. 

So what will this mean if there is no consensus on the extension of the Internet Tax Freedom Act? Come November 1, states will be able to impose sales tax on the charge for Internet access. In Texas, a state that was grandfathered into the original Internet Tax Freedom Act, currently the first $25 of Internet access fees is taxable. If the Act is not extended, the entire charge would be taxable.

Although the states would have the ability to impose sales taxes on Internet access without the extension, it is unlikely any would rush to do so. First, most legislative sessions are either ended or winding down. It is doubtful any state would call a special session to address this issue. Although a state could decide to tax Internet access by regulation by defining access under an already taxable item, they may be hesitant because of the second scenario – retroactive Congressional action. We have all seen that Congress does pass laws that apply taxing provisions retroactively, especially if it favors the taxpayer.

The greater concern is most likely the linking of the two Acts in some manner. This is the farthest that the Marketplace Fairness Act and its related pieces of legislation have gone in Congress and, in order to extend or make permanent the Internet Tax Freedom Act, the House may agree to some form of the Marketplace Fairness Act. We will hopefully find out now that Congress has returned from recess.

If you have any questions regarding this topic, please contact your local UHY Advisors professional.