On February 24, 2016, President Barack Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) which makes permanent the moratorium on Internet access taxes and multiple or discriminatory taxes on electronic commerce established by the Internet Tax Freedom Act. Additionally, under the TFTEA, the ability of grandfathered states to tax Internet access will be completely phased out by June 30, 2020.

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State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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President Obama Signs Legislation Making Internet Tax Freedom
Act Permanent
On February 24, 2016, President Barack Obama signed the Trade Facilitation and Trade
Enforcement Act of 2015 (TFTEA)1 which makes permanent the moratorium on Internet
access taxes and multiple or discriminatory taxes on electronic commerce established by
the Internet Tax Freedom Act. Additionally, under the TFTEA, the ability of
grandfathered states to tax Internet access will be completely phased out by June 30, 2020.
Background
The Internet Tax Freedom Act (ITFA) was originally enacted in 1998, and prohibited any
state or political subdivision from imposing (1) taxes on Internet access, unless the tax
was imposed and enforced prior to October 1, 1998; and (2) multiple or discriminatory
taxes on electronic commerce.2 The ITFA contained a grandfather provision that
provided an exclusion from the moratorium for states that imposed and enforced a tax on
Internet access prior to October 1, 1998. Originally, the grandfather clause was designed
to allow states time to revise their tax provisions.3 Thirteen states originally were protected
from the moratorium4 but over time, the number of grandfathered states has decreased to
seven (Hawaii, New Mexico, North Dakota,5 Ohio, South Dakota, Texas, and
Wisconsin),6 due to several states voluntarily eliminating such taxes.7
1 H.R. 644.
2 Pub. L. No. 105-277.
3 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE
REPORT, Oct. 5, 2015 citing to a report by the House Committee on the Judiciary in the 113th
Congress.
4 Id., citing to U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts
Will Vary by State, GAO-06-273, Jan. 2006.
5 Wisconsin Legislative Fiscal Bureau, Letter to Representative Dale Kooyenga - Estimated State and Local
Sales and Use Tax Collections on Internet Access Fees, Jan. 7, 2016. See also Mark Wolski, Dalrymple Signs
Bill Repealing North Dakota’s Sales Tax on Internet Access, BLOOMBERG BNA WEEKLY STATE TAX
REPORT, April 10, 2015. “North Dakota Gov. Jack Dalrymple (R) signed legislation that will
exempt Internet access service from the state's 5 percent sales tax.” S.B. 2096 is effective for taxable
events occurring after June 30, 2017.
6 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE
REPORT, Oct. 5, 2015, citing to Henry Reske, Ending Internet Law’s Grandfather Clause Could Cost States
$500 Million, TAX ANALYSTS, June 24, 2014.
7 Id., citing to U.S. Government Accountability Office, Internet Access Tax Moratorium: Revenue Impacts
Will Vary by State, GAO-06-273, Jan. 2006.
Release date
March 2, 2016
States
All
Issue/Topic
Sales and Use Tax
Contact details
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Washington, DC
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Chicago
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Cincinnati
T 513.345.4540
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Washington, DC
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The ITFA has been extended several times throughout the years.8 In the face of the
impending expiration of the moratorium and grandfather clause, on September 30, 2015,
the ITFA was extended through December 11, 2015 as part of the Continuing
Appropriations Act of 2016,9 and on December 18, 2015, it was extended through
October 1, 2016 as part of the Consolidated Appropriations Act of 2016.10
Permanent Ban and Marketplace Fairness Act
The enactment of the permanent ban was made possible by a deal struck between two
senators.11 Including the permanent ban in the TFTEA was a move criticized by many
who felt that the more popular permanent ban provision should be tied to the Marketplace
Fairness Act (MFA), a bill intended to regulate the sales and use tax collection and
remittance responsibilities of remote sellers.12 Senate Minority Whip Richard J. Durbin
threatened to “bring a point of order against the tax provision unless it was stripped from
the measure” which would have “stalled a vote on the conference report.”13 Under a deal
with Senate Majority Leader Mitch McConnell, Durbin agreed to “allow a vote on the bill
in exchange for McConnell's promise to hold a Senate vote on . . . the Marketplace
Fairness Act, later this year.”14
Contrasting Views of ITFA and Permanent Ban
The decision to permanently extend the ITFA may be good news for those who have been
required to pay taxes on access in the grandfathered states, as well as those required to
collect and remit those taxes to state governments, but is not uniformly viewed as a
positive development. Some have criticized taking the choice of whether to tax Internet
access out of the hands of state and local governments.15 Originally, the goal of the ITFA
was to “foster the then fledging Internet in 1998 by temporarily suspending new taxes on
Internet access.”16 The temporary extensions were seen as a way for Congress to “revisit
whether the benefit of providing preferential treatment to one particular industry
outweighed the cost of preempting state and local government authority.”17 Many feel that
8 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE
REPORT, Oct. 5, 2015. According to this, the Internet Tax Nondiscrimination Act (Pub. L. No.
107-75) extended the moratorium and grandfather clause through November 1, 2003; the Internet
Tax Nondiscrimination Act (Pub. L. No. 108-435) extended the moratorium and grandfather clause
through November 1, 2007 and also made certain changes to the law; the Internet Tax Freedom
Act Amendments Act of 2007 (Pub. L. No. 110-108) extended the moratorium and grandfather
clause through November 1, 2014 and made certain changes to the law; the continuing
appropriations resolution (Pub. L. No. 113-164) extended the moratorium and grandfather clause
through December 11, 2014; and the Consolidated and Further Continuing Appropriations Act of
2015 (Pub. L. No. 113-235) extended the moratorium and grandfather clause through October 1,
2015.
9 Pub. L. No. 114-53.
10 Pub. L. No. 114-113.
11 Casey Wooten, Senators Strike Internet Tax Deal, BLOOMBERG BNA DAILY TAX REPORT, Feb. 10,
2016.
12 Id.
13 Casey Wooten, Senate Sends Permanent Internet Tax Ban to President’s Desk, BLOOMBERG BNA DAILY
TAX REPORT, Feb. 12, 2016.
14 Id.
15 National Association of Counties, Action Alert on Permanent Internet Tax Freedom Act, Feb. 9, 2016.
16 Id.
17 Id.

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the Internet does not need the same protection now as it did in 1998,18 noting that the
“Internet has thrived” in states and counties that have taxed Internet access.19
The permanent extension of the ITFA has been called a “step backward for state tax
policy” that “narrows state sales tax bases, makes them less economically neutral, and
damages the long-run adequacy and sustainability of state revenues.”20 Furthermore, the
moratorium under the IFTA “violates the principle of horizontal equity” which “suggests
that like-situated individuals should be taxed in a similar manner.”21 “With the current
Internet tax moratorium, two firms that provide almost identical services can be subject to
different tax rates based on how the service is provided, either over the Internet or by a
brick-and-mortar business.”22
However, proponents feel that the ITFA was necessary to provide students and families
access to the Internet without having to pay “onerous taxes.”23 The ITFA protects
Internet access from being subject to “the high rates of taxation currently imposed on
traditional telecommunication services – which are often taxed at rates more than double
those imposed on other goods and services.”24 This protection becomes especially valuable
in light of “the FCC’s reclassification of broadband services as a telecommunications
service.”25
Additionally, proponents for a permanent moratorium argued that the Internet “has
become the primary driver of U.S. economic growth, innovation and productivity” and “is
indispensable for finding jobs and accessing education and healthcare resources.”26
Commentary
The revenue impact of the permanent ban is likely to hit the grandfathered states the
hardest. These states and counties are expected to lose a substantial, and much needed,
18 Id.
19 National Association of Counties, Letter to The Honorable Mitch McConnell and The Honorable Harry
Reid, Feb. 3, 2016.
20 Carl Davis, Internet Tax Ban is a Defeat for Good Tax Policy, TAX JUSTICE BLOG, accessed Feb. 19,
2015, http://www.taxjusticeblog.org/archive/2016/02/internet_tax_ban_is_a_defeat_f.php.
21 Jeffrey M. Stupak, The Internet Tax Freedom Act: In Brief, CONGRESSIONAL RESEARCH SERVICE
REPORT, Oct. 5, 2015.
22 Id.
23 Internet Tax Freedom Act Coalition, Coalition Applauds Senate for Permanently Protecting Consumers
from Internet Access Taxation, Feb. 11, 2016.
24 Id.
25 Id.
26 Robert Goodlatte, Report 113-510 to accompany H.R. 3086, Permanent Internet Tax Freedom Act,
House of Representatives, July 3, 2014.

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revenue stream27 that is used for critical services such as education.28 Revenue losses for
grandfathered states could be as high as $561 million annually and $6.5 billion for all states
and the District of Columbia.29 Given these figures, it would not be surprising to see these
states take a narrow view of what constitutes Internet access and test the boundaries of the
permanent ban in an effort to recoup some of the lost revenue.
One state that has been very aggressive in this area is Virginia. The Virginia Department of
Taxation recently issued a ruling finding that for purposes of the state’s communications
sales tax, charges related to Internet connectivity did not fall under the protection of the
ITFA.30 The ruling is consistent with others issued by the Department that reflect a view
that any charge or fee not solely related to Internet access charges is subject to the
communications sales tax, absent an explicit exemption.31 With the ban being made
permanent, states may see an increase in court challenges by taxpayers as the fear of
compromising additional extensions of the ITFA with litigation disappears.32
The federal government’s restriction on states’ right to tax Internet access is unique, and
the only other current instance of a federal restriction of this specific type relates to the
state taxation of interstate airline and bus transportation industries.33 In addition, it is
noteworthy that the restriction is one that does not impact the federal government because
it is not “foregoing federal corporate income tax” from Internet service providers.34
Finally, including the permanent ban in the TFTEA may have proved timely for its
supporters as the uncertainty surrounding movement this year on the MFA increased just
days after the TFTEA passed Congress with the death of U.S. Supreme Court Justice
Antonin Scalia. As noted above, the permanent ban was enacted as part of a deal in which
the Senate would vote on the MFA. With Justice Scalia’s death, the Senate now faces the
possibility of a contentious and lengthy process to confirm a new justice. In an election
year in which the amount of time that the Senate actually will be in session is already
27 Congressional Budget Office, Letter to Honorable Bernie Sanders Re: Mandates analysis of section 922 of
the conference report for H.R. 644, Jan. 29, 2016. “Beginning in July 2020, the grandfathered states could
lose their ability to collect such taxes, and CBO estimates that the cost of the mandate (falling
primarily on those states) would then increase significantly and probably would total more than
$100 million in the final three months of fiscal year 2020 (July through September). The cost of the
mandate would total more than several hundred million dollars annually thereafter, CBO
estimates.” See also Wisconsin Legislative Fiscal Bureau, Letter to Representative Dale Kooyenga -
Estimated State and Local Sales and Use Tax Collections on Internet Access Fees, Jan. 7, 2016.
28 National Association of Counties, Letter to the Honorable Mitch McConnell and the Honorable Harry
Reid, Feb. 3, 2016.
29 Jennifer DePaul, Effort Afoot to Remove PITFA From Trade Package, TAX ANALYSTS STATE TAX
TODAY, Jan. 11, 2016. “Michael Mazerov of the Center on Budget and Policy Priorities said there
are seven states currently taxing Internet services under the ITFA grandfather clause -- Hawaii,
New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. Should Congress approve
PITFA and remove the grandfather provision, those states stand to lose $561 million annually,
Mazerov said. All 50 states, plus the District of Columbia, could potentially lose $6.5 billion
annually in forgone revenue, he said.”
30 See Ruling of Commissioner, P.D. 15-218, Virginia Department of Taxation, Dec. 8, 2015.
31 Id.
32 Michael Mazerov, State Implications of a Permanent Internet Tax Freedom Act, Center on Budget and
Policy Priorities, Jan. 8, 2016.
33 Id.
34 Id.

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limited, the potential need to conduct Senate confirmation hearings will make it even more
difficult to secure enough time for the Senate to consider and vote on the MFA this year.
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