What is the Internet Tax Freedom Act?

U.S. President George W. Bush signs the Internet Tax Freedom Act Amendments Act of 2007 in the Oval Office of the White House in Washington, D.C. See more tax pictures.
Mandel Ngan/AFP/Getty Images

­When you go to the mall to shop for some new clothes or pick out a new book to read at the bookstore, you probably glance at the price tag before making any purchases. Although you might have a general idea of what the price will be, it's always good to check before rushing off to the cash register. You also might perform some quick, approximate calculations in your head: Although the price tag says the retail for your book is $14.99, the final transaction before you leave the store will typically include a sales tax. If the state tax on goods is 7 percent, for example you're actually paying about $16.04 for that book instead of $14.99.

The same goes for cable and telephone subscriptions -- subscription fees you see advertised often have taxes added on after you sign up. Sales taxes are put into place by state and local governments to gain some sort of revenue. It's similar to paying a toll for using a certain highway -- the money to fix and maintain these roads has to come from someone, and the idea is that collecting a small share from the people that use the roadway should help.

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But have you ever noticed that in the United States there's no tax on the money companies charge you for Internet access? It's true; the only extra fees you'll likely receive on your bill will be installation or service fees the service provider charges. Why is this? Are telecom companies breaking the law by not collecting taxes for the state?

In fact, it's the other way around: They're following orders, thanks to the Internet Tax Freedom Act(IFTA). Sounds like a great deal, right? While the IFTA follows the age-old rallying cry of "no new taxes," there's still some confusion over it. Does it create a completely tax-free zone on the Internet? What happens when you buy a product from a Web site? Do you just have to pay for shipping and handling, or are there taxes on goods? To learn the ins and outs of the Internet Tax Freedom Act and save yourself from hosting a digital Boston Tea Party, read on.

 

 

 

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.

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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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Sources

  • Broache, Anne. "Ban on Net access taxes extended to 2014." CNET News. Oct. 30, 2007. (July 28, 2008) http://news.cnet.com/8301-10784_3-9807418-7.html?part=rss&subj=news&tag=2547-1_3-0-20
  • Cybertelecom."Taxation: Internet Tax Freedom Act reference." (July 28, 2008) http://www.cybertelecom.org/ecom/taxref.htm
  • Jones, K.C. "President Bush signs Internet Tax Freedom Act." Information Week. Nov. 1, 2007. (July 28, 2008) http://www.informationweek.com/news/internet/showArticle.jhtml?articleID=202801131
  • Mazerov, Michael. "Making the 'Internet Tax Freedom Act" permanent could lead to substantial revenue loss for states and localities." Center on Budget and Policy Priorities. July 7, 2007. (July 28, 2008) http://www.cbpp.org/7-11-07sfp.htm
  • Rastello, Sandrine and Francois de Beaupuy. "France to tax Internet, mobile sales to fund ad-free public TV." Bloomberg. June 25, 2008. (July 28, 2008) http://www.bloomberg.com/apps/news?pid=20601085&sid=aZd69BHMTaNs&refer=europe
  • UCLA Online Institute for Cyberspace Law and Policy. "The Internet Tax Freedom Act." Oct. 1, 1998. (July 28, 2008) http://www.gseis.ucla.edu/iclp/itfa.htm