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ITFA and MFA, A Shared Fate?


 Are the fates of ITFA and MFA linked together?

Update, 12.18.2015: ITFA has been extended through December 22, 2015.

Attempts to make the Internet Tax Freedom Act (ITFA) permanent are, as always, extremely divisive.

When it was first introduced before the turn of the century, ITFA was permanent and prohibited states from taxing Internet access. However, a healthy handful of states already taxed Internet access at that time. They eventually convinced Congress to make the ban on Internet access taxes temporary and to allow them to maintain their taxes through the grandfather clause. Today, only seven states still tax Internet access: Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin.

Since its inception, the ITFA has been extended for years, months, and even days at a time. Most recently, it was extended from December 11 through midnight December 16, 2015. Now, a new resolution is needed. Emotions are running high on the Capitol Hill. As always, when ITFA is close to expiration, legislation to make it permanent and to repeal the grandfather clause is introduced. These two questions form the core of the issue:

  1. Should the Act expire or be made permanent?
  2. Should the grandfather clause continue or be repealed?

A permanent extension of the ITFA with a repeal of the grandfather clause would require the seven states listed above to eliminate their tax on Internet access by 2020. That’s a big deal. States must have balanced budgets, and these seven depend on taxing Internet access to make their budgets work. South Dakota stands to lose $11 million at the state level and $4 million at the local level annually. Texas would lose $400 million a year.

There has been talk of making ITFA permanent for years. Some thought it might happen last Friday, but it didn’t. Now it has been added to the customs bill. Supporters of a permanent ban have indicated “the customs enforcement bill was their best chance to lock down the policy.” Opponents, including Senator Dick Durbin of Illinois (D), “have threatened to use a procedural move to remove the provision." Sen. Durbin told The Hill that he has the votes needed to do so. If that happens, the bill will have to go back to the House and enactment could be delayed until 2016.

Meanwhile, the communications industry is striving to make a permanent ban stick. If that fails, it will push for an extension through October 1, 2016.

South Dakota

The debate in South Dakota mirrors the mood at the national level. Senator John Thune (R) supports the ITFA. Senator Mike Rounds, also Republican, opposes it. Sen. Thune argues that eliminating existing taxes on the Internet would be a boon for both businesses and consumers. Sen. Rounds is more concerned about the loss of revenue South Dakota would face if the existing Internet taxes were eliminated. And so it goes.

Compromise

There is a way Sen. Rounds would support the loss of South Dakota’s Internet tax revenue: “It’s a bill I said I would support only if the Main Street Fairness Act was married to it.” In other words, he’ll support a permanent extension of ITFA if Congress establishes “a framework for state and local governments to collect sales taxes from businesses outside of their borders.” Senator Rounds doesn’t think remote sales tax legislation can pass unless it’s tied to the ITFA.

Follow the fate of the Customs Reauthorization Act, H.R. 644.


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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.