Didn’t the Internet Tax Freedom Act (ITFA) ban taxes on sales over the Internet?
No. The Internet Tax Freedom Act prohibited new taxes on Internet access fees and discrimination of electronic commerce. Most states do not tax Internet access fees. The Act did not prohibit states from imposing taxes on transactions conducted over the Internet.
If a purchase is made on-line, it is generally taxed the same as if it was purchased off-line. The real question is whether a retailer is required to collect the tax, which is known as nexus. If an Internet retailer does not collect sales tax on a taxable sale, the purchaser has the obligation to pay the use tax due on the purchase to the state where the property is used. Use tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is complimentary to the sales tax and does not apply if sales tax was charged.
Use tax applies to purchases made outside the taxing jurisdiction but used within the state. Use tax also applies to items purchased exempt from tax which are subsequently used in a taxable manner.
The use tax is not a discriminatory tax since it applies to all vendors (mail order, Internet, out-of-state, home shopping) and taxes goods purchased outside the state in the same manner as goods purchased in the state. So regardless of not being charged tax on an item purchased over the Internet, you are still held personally liable for the use tax.
For those of you that can remember back this far, the Internet Tax Freedom Act was signed into law in 1998. At that time, the Internet was a “start-up” and the thought was that there needed to be a way to encourage people to use the Internet. Back then, we used it predominately for email! Since no one really knew what would happen to it, the original Act was not a permanent exemption but rather a 10-year moratorium on taxing internet access. There were a few states that taxed internet access at this time. They were grandfathered and allowed to retain their tax.
On October 31, 2007, President George W. Bush signed into law a seven-year extension of the Act. The new act, the Internet Tax Freedom Act Amendments Act of 2007, included a new definition of “internet access” which means a service that enables users to connect to the Internet to access content, information, or other services. The grandfather clause that permits Internet access taxes that were generally imposed and actually enforced before October 1, 1998, was also extended until November 1, 2014.
The Act expired on November 1, 2014 at which point President Barack Obama signed federal legislation extending the Act through December 11, 2014. You might wonder why such a short extension? Remember what was going on with the federal budget? This was all tied into it. Also, progress was being made to pass the Marketplace Fairness Act which would expand the definition of nexus. There was hope that these two measures could be tied together.
On December 16, 2014, President Barack Obama signed legislation that included a provision that extended the Internet Tax Freedom Act until October 1, 2015 with all provisions unchanged.
On September 30, 2015, President Obama signed legislation that included a provision that extended the Internet Tax Freedom Act through December 11, 2015.
On December 18, 2015, President Obama signed legislation extending the Internet Tax Freedom Act through October 1, 2016. Prior provisions that grandfathered taxes that existed prior to October 1, 1998 were also extended through October 1, 2016.
On December 15, 2015, the House of Representatives passed H.R. 235, the Permanent Internet Tax Freedom Act.
Although there was still hope that one of the nexus expansion provisions would be included with the Permanent Internet Tax Freedom Act, that didn’t happen. On February 11, 2016, the U.S. Senate approved a permanent extension of the Internet Tax Freedom Act that was included in H.R. 644, the Trade Facilitation and Trade Enforcement Act of 2015. The bill also establishes an end date of June 30, 2020 for the seven states that currently impose a tax on internet access: Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. On February 24, 2016, President Obama signed into law the permanent extension of the Internet Tax Freedom Act. As part of the negotiation, agreement was reached for hearings to be held on the nexus bills before the end of 2016.
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