Congressional Insanity: Holding ITFA Hostage to MFA

When members of Congress impede the passage of popular legislation in order to attach something totally unrelated, the results are usually harmful to the American people.  The ongoing effort to tie together a permanent ban on Internet access taxes with an online sales tax scheme is just the latest example of this unfortunate practice. 

The Internet Tax Freedom Act (ITFA), which was first enacted in 1998, imposed a temporary ban on taxes on Internet access as well as duplicative or discriminatory taxes on the Internet.  The ban, which has been extended seven times, has contributed to the tremendous growth of the Internet, and enabled new technologies to arise, bolstering the economy.  The deadline for expiration of the current ban is October 1, 2016.

In order to both bring more certainty to the marketplace and avoid the ongoing drama over whether or when the ban would be extended, Congress has been trying for several years to enact a permanent ban on Internet access taxes.  The House of Representatives passed the Permanent Internet Tax Freedom Act (PITFA) in both July 2014 (H.R. 3086) and June 2015 (H.R. 235).  The language H.R. 235 was included in H.R. 644, The Trade Facilitation and Trade Enforcement Act of 2015, which passed the House on December 11, 2015. 

Unfortunately, every time the House has approved PITFA, including as part of H.R. 644, the Senate has attempted to add unrelated legislation that would purportedly allow states to collect taxes on goods sold on the Internet.  The misnamed Marketplace Fairness Act (MFA), currently S. 698, and the equally misleading Remote Transaction Parity Act (RTPA), H.R. 2775, purport to bring “equity” between the taxation of tangible goods sold in brick-and-mortar stores and items sold online.  Currently, when individuals purchase an item in a brick-and-mortar establishment, they pay the state and local sales tax rates where the business is physically located.  This process was upheld by the Supreme Court in Quill v. North Dakota in 1992.  The Court held that under the Commerce Clause, a taxpayer must have a physical presence, such as an office, branch, warehouse, or employees in a state in order to require the collection of sales or use tax for purchases made by in-state customers.    

In order to collect sales taxes on remote transactions, including purchases made through mail order, telephone, and online, 45 states have implemented a “use tax,” a rarely followed requirement that individuals must remit to the state office of taxation and revenue the amount that the taxes they should have been charged to purchase items online.  In other words, there is already a solution to the perceived “problem” of the “unfairness” between brick-and-mortar and online or remote purchases:  States should enforce their existing laws. 

On December 15, 2015, on behalf of a small group of Senators pushing for passage of MFA, Sen. Dick Durbin (D-Ill.) stated, “we will oppose any long-term extension of legislation that would take away a State’s right to collect taxes on accessing the Internet unless we give States the ability to collect taxes on Internet sales that are already owed.”

Aside from the already established fact that states can already collect such taxes, both MFA and RTPA would force retailers to either understand or purchase software that would calculate sales tax codes for nearly 10,000 separate state and local jurisdictions in order to collect the appropriate sales tax amounts from purchasers in those jurisdictions.  Both proposals would also require states to create an additional central tax collecting authority for these remote sales in order to channel the collected taxes to the appropriate states. 

Resolving the issue of collecting sales taxes on remote cross-state purchases is complicated, and a great deal of thought must be made to address how individual states would be affected must be considered before a final solution can be made.  This includes addressing purchases made from states that currently do not impose a sales tax on any purchases, such as Alaska, Delaware, Montana, New Hampshire, and Oregon.  It is clear, however, that taxes on remote sales has absolutely nothing to do with the imposition taxes on Internet access.

Holding up passage of PITFA in order to force through MFA is clearly a case of comparing apples to oranges.  Keeping ITFA hostage to the capricious wheeling and dealing of a few senators and only passing short temporary extensions creates uncertainty for the future growth of the Internet.  The practice is unfair to taxpayers.

A May 7, 2014 article in the Wall Street Journal estimated that average households could pay an additional $50 to $70 per year if their state or local government decided to apply either their sales or telecommunications tax rates to Internet access should the ban on these taxes be allowed to expire.  A September 30, 2015 report by the American Action Forum found that lifting the ban on Internet access taxes could cost consumers up to $16.4 billion annually.  The best solution to resolve this uncertainty is to make ITFA permanent.

Even Sen. Durbin agrees that PITFA is a good idea, stating, “The Internet Tax Freedom Act is a law which is going to expire with the continuing resolution – which I would support – and it says that States and localities cannot impose a tax on access to the Internet.  I think that is sound policy.”  But he also said, “… what we are asking in return is to allow those who use the Internet to make retail purchases to pay the sales taxes they already owe for their purchases.” 

Unless H.R. 644 is passed by the Senate, consumers and taxpayers will once again be watching the clock tick toward the eighth potential extension of ITFA in October, 2016.  It is no wonder that the American people have lost so much faith in their elected officials, when they botch something as popular and simple as permanently banning taxes on Internet access.