States must exempt internet access fees starting July 1, 2020

Updated 6.9.2020

Internet access fees are currently subject to state and local sales tax in Hawaii, New Mexico, Ohio, South Dakota, Texas, and Wisconsin. As of July 1, 2020, those fees will be exempt.

The exemption is mandated by the Internet Tax Freedom Act (ITFA), which was first enacted in 1998 to encourage growth of the fledgling internet. At the time, no one knew what the internet could become. Amazon.com had been in business only a few years and was just starting to sell more than books. Only about 41% of American adults ever went online.

Uncertain of what the future held for the internet and eager to help it grow, federal lawmakers implemented a three-year moratorium on state and local internet access taxes under the ITFA. Since 13 states were already taxing internet access fees, the ITFA included a grandfather clause allowing them to continue to do so. For a time.

The temporary moratorium on internet access taxes was extended a whopping eight times before being made permanent with the passage of the Trade Facilitation and Trade Enforcement Act of 2015 (H.R. 644). At that point, the grandfather clause was given a hard stop of June 30, 2020.

Several states allowed to retain their internet access taxes under the grandfather clause have already eliminated them. The last to do so was North Dakota, as of July 1, 2017.

Hawaii, New Mexico, Ohio, South Dakota, Texas, and Wisconsin have held on to their internet access taxes, an integral part of their budgets. But now they have no choice: They must exempt internet access fees starting July 1, 2020.

The change in taxation has been announced by tax departments in South Dakota and Wisconsin. Information about the upcoming changes in Texas was published by the Texas Comptroller of Public Accounts, as well as the Texas Secretary of State.

The Ohio Department of Taxation issued guidance in early June: Transactions "currently defined as automatic data processing, electronic information services, and computer services remain subject to the Ohio sales and use tax" except for in certain instances, described in the notice.

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