Making the “Internet Tax Freedom Act” Permanent Could Lead to a Substantial Revenue Loss For States and Localities

Publication Date: July 2007

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Michael Mazerov

Research Area: Media, telecommunications, and information

Keywords: Economic projections; Information technology; Tax code; State budgets

Type: Report

Abstract:

Eliminating ITFA’s grandfather provision could have far-reaching, unintended consequences. ITFA defines a “tax on Internet access” as “a tax on Internet access, regardless of whether such tax is imposed on a provider of Internet access or a buyer of Internet access.” Because of the inclusion in the definition of taxes on Internet access providers, state and local officials have long been concerned that Internet access providers could take the position that a wide variety of taxes to which all types of businesses are subject constitute indirect taxes on Internet access services and are therefore banned by ITFA. Acknowledging the legitimacy of such concerns, language was added to ITFA in 2004 expressly “carving-out” from the definition of a “tax on Internet access” four categories of taxes imposed on Internet access providers — taxes on “net income, capital stock, net worth, or property value.” However, this list by no means covers all of the types of taxes Internet access providers may have to pay. For example, it does not include sales taxes on computer servers purchased by such companies or state unemployment compensation taxes.