On February 11, the United States Senate approved a permanent extension of the Internet Tax Freedom Act (ITFA) contained in the Conference Report accompanying H.R. 644, the “Trade Facilitation and Trade Enforcement Act of 2015,” which previously passed the House of Representatives on December 15, 2015. ITFA prohibits state and local taxation of Internet access and “multiple” or “discriminatory” taxes on electronic commerce. President Obama is expected to sign the permanent extension into law.

Background

ITFA, originally enacted in 1998, was a three-year temporary ban on “multiple taxes” and “discriminatory taxes” on electronic commerce. The ban on “multiple taxes” prevents more than one jurisdiction from taxing the same transaction. Preempting “discriminatory taxes” prevents states and localities from imposing a higher tax rate on commerce occurring on the Internet compared to other forms of commerce. Further, ITFA prevents taxation of Internet access but provides a Grandfather Clause exception to allow states that were taxing Internet access in 1998 to continue doing so. However, the Grandfather Clause does not apply to the ban on multiple and discriminatory taxes on electronic commerce. ITFA has been extended numerous times, most recently through October 1, 2016, and the Grandfather Clause became a point of contention.

ITFA’s Grandfather Extension

This legislation to permanently extend ITFA phases out the Grandfather Clause by allowing the seven grandfathered states to continue to tax Internet access until June 30, 2020. Notably, this phase-out of the Grandfather Clause will not affect the “specified taxes” in Section 1101(10) of ITFA – the Texas franchise (taxable margin) tax; the Ohio commercial activity tax; and the Washington business and occupation tax. Thus, those specified taxes will continue to apply to Internet access after June 30, 2020.

The legislation to permanently extend ITFA will be enrolled and then the President has 10 days to sign or veto the legislation.