Those who to continue to avoid paying sales taxes on online purchases and those who want online businesses to maintain a competitive advantage over bricks-and-mortar businesses have long held to the argument that the nation’s founding fathers handed interstate commerce an advantage in the Commerce Clause that protects internet sales from sales tax collection.
The debate over “taxing the internet” has gotten hopelessly intertwined with the distinct issue of the collection of state sales taxes on internet sales. The Internet Tax Freedom Act (ITFA) was enacted in 1998 to address the issue of taxing access to the internet.
The 1998 moratorium was a reaction to state and local government attaching the same kinds of fees and taxes that now accompany monthly telephone bills. Under the original moratorium, states that already collected Internet access fees were allowed to continue to collect them, but no new government jurisdictions could levy the fees.
The Congressional Budget Office reports that governmental jurisdictions in seven states – Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin – tax access to the Internet and that those entities collect about $500 million annually from the fees. The U.S. House has voted to lift the protection of the moratorium; the seven “grandfathered” states would no longer be able to collect the fees.
The measure now faces Senate action. While the bill does purport to ban any form of Internet-only taxes, it does not ban the collection of Internet sales taxes. The 1998 moratorium expires on Nov. 1.
Internet access taxes in the seven states have produced significant revenues. Texas, for example, collects a sales tax of 6.25 percent on Internet access, with local sales taxes of up to an additional 2 percent. The Texas Comptroller’s Office reports annual state revenue of $280 million on internet access taxes with another $78 million to local jurisdictions.
State legislators in those states have argued that the issue of whether or not states are able to collect internet access taxes is a “states’ rights” issue. Further, they argue that the internet is no longer a fledgling industry that needs federal protection, but one that has already had a significant impact in changing the flow of government revenues through changes in customer behavior that impact traditional sales tax collections.
Enter the backers of the Marketplace Fairness Act, who argue that the authors of the “commerce clause” never contemplated the borderless impact of online sales. The Marketplace Fairness Act, which would allow states to collect sales tax on large Internet sellers that have no presence within their borders, has been passed by the U.S. Senate but has languished in the House.
There is a clear and fundamental difference in “taxing the internet” and “taxing internet sales” – but the confusion of that issue has been a political weapon that players on both sides of both arguments have used to their advantage.
From a purely political standpoint, the House and Senate will both use the threat of the Marketplace Fairness Act’s passage as a weapon to impede the move to allow the Internet Tax Freedom Act to expire. Congress faces pressure to extend the internet access tax ban and pair it with the controversial online sales tax legislation.
Expect partisan warfare over the political linkage on the issue of just what internet “freedom” really is.
(Daily Corinthian columnist Sid Salter is syndicated across the state. Contact him at 601-507-8004 or firstname.lastname@example.org.)