At Least One More Year of Tax-Free Internet Access

Last night, the US House of Representatives passed a measure to avoid a government shutdown. The $1 trillion spending authorization bill, or continuing resolution (CR), is expected to pass this week in the Senate and fund government operations through next September in most cases. Regardless of the varying views about the bill in general, the comprehensive bill includes at least one piece of good news for taxpayers in the version of the measure now being considered by the Senate.

The good news is that the Internet Tax Moratorium, or Internet Tax Freedom Act (ITFA), is going to be extended at least through September of next year. Although it would be best if this measure were made permanent, it ensures that states and localities cannot tax Internet access. It was originally passed 1998 to make sure that the new industry was not suffocated by taxation. Assuming that the continuing resolution passes the Senate as it is currently written, which is almost certain, this means that taxpayers will not have to worry about paying more for Internet access due to taxes until this extension sunsets next year.

This is especially important for taxpayers when viewed in the context of telecommunications taxes at the state and local level. States and localities routinely attach discriminatory tax burdens to telecommunications. For example, the average federal, state and local combined tax rate for wireless services is 17.05 percent—much higher than typical sales tax rates. The state with the highest taxes on wireless services is Washington, where state and local taxes reach 18.6 percent. With the extension of the Internet Tax Freedom Act, taxpayers will catch a break and will most likely avoid that kind of punitive taxation at least until next September.

Earlier proposals that included extending ITFA had attempted to couple that extension with the passage of the so-called Marketplace Fairness Act (MFA). This would allow states to force out of state online retailers to collect and remit sales taxes for online purchases. We have discussed the problems with MFA in a previous post. However, despite these earlier efforts, Speaker Boehner had said that MFA was not an issue he was interested in taking up during the lame duck session and its notable absence from the continuing resolution confirms this position. Although, MFA didn’t make it into the continuing resolution, it is very likely to reappear as an issue to be discussed next year.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth