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What is the Internet Tax Freedom Act?

        Money | Taxes

Do you owe Internet taxes?
TV producer Michel Drucker (left) and President of the France Télévisions Group, Patrick de Carolis after a report on Internet taxation.
TV producer Michel Drucker (left) and President of the France Télévisions Group, Patrick de Carolis after a report on Internet taxation.
Gerard Cerles/AFP/Getty Images

The Internet Tax Freedom Act was first enacted on Oct. 1, 1998, when the U.S. Congress voted to pass the legislation. Introduced more than a year earlier in March 1997 by Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.), the law placed an initial year-long moratorium, a legally authorized period of delay, on special taxation of the Internet.

This meant that companies like Comcast or America Online, who provide Internet access to customers for a monthly fee, didn't have to tack on a state tax to their services. There was one exception, however -- the law includes what's commonly referred to as a grandfather clause. Although the term grandfather clause has historically carried several different meanings, today it's simply an exception that allows an old rule (or lack thereof) to continue to apply despite a new law. In this case, the grandfather clause in the IFTA allowed any state that already enforced taxes on Internet access before Oct. 1, 1998, to continue doing so. Ten states -- Connecticut, Iowa, New Mexico, North Dakota, South Dakota, Ohio, South Carolina, Tennessee, Texas and Wisconsin -- and the District of Columbia were the only areas that fell into that category.

The idea behind the IFTA is a simple one: Information available to the public over the Internet shouldn't be taxed. The law also emerged during an era when the Internet was experiencing tremendous growth, and officials believed that in order to foster that growth a halt on any taxes was necessary; if potential customers looking into Internet access saw taxes as a financial burden, they'd likely back away from the digital world and head back to the library. To monitor the effectiveness of the IFTA, Congress established a special committee, the Advisory Commission of Electric Commerce, to study the tax issue and report whether or not the law was worth continuing.

On top of this, a separate moratorium was placed on "multiple and discriminatory taxes on electronic commerce." This meant that several state and local governments couldn't tax a consumer specifically for purchasing something over the Internet. For example, if you bought a book online from a bookstore in the state of Washington while you were physically in the state of Georgia, the law forbids both states from taxing you.

The online tax moratorium doesn't apply to regular sales tax, however. A 1992 U.S. Supreme Court decision held that companies with no actual physical presences in a particular state -- a store at the local mall, or a regional distribution center for example -- weren't required to charge sales tax for items they ship to that state. But if you buy something online and the retailer doesn't collect sales tax, you're supposed to send it to the appropriate authorities yourself -- though many people either don't know or avoid sending in their taxes [source: Center for Budget and Policy Priorities].

­Congress has continually renewed the IFTA since 1998: In 2001, 2004 and 2007 the act was extended, with only minor adjustments applied. Most changes simply address definitions and highlight the changing landscape of the Internet. The 2004 legislation, for instance, included then-recent technologies such as Digital Subscriber Line (DSL). These ongoing extensions even led some to consider the Permanent Internet Tax Freedom Act of 2007, making a bar on Internet taxes permanent and ongoing. This met with some controversy, since others believe Internet taxation could provide substantial revenue to states -- even the possibility of an e-mail tax has surfaced occasionally, including one proposed by French President Nicolas Sarkozy to support public broadcasting [source: Bloomberg]. As of now, the IFTA won't have to be revisited until Nov. 1, 2014.


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