Federal Update – Bill Extends Sales Tax to Internet Sales, Moratorium on Taxing Internet Access

A new bipartisan bill, the Marketplace and Internet Tax Freedom Act (MITFA)(S.2609), was recently introduced in the U.S. Senate addressing two issues of interest for county governments. From the National Association of Counties (NACo) Legislative Update:

  • It includes the Marketplace Fairness Act (MFA) as passed by the Senate in 2013 with a few minor technical corrections. MFA allows state and local governments to enforce existing sales taxes on remote sellers.
  • Provides a ten-year extension of the Internet Tax Freedom Act (ITFA). ITFA prohibits counties from collecting a tax on Internet access (typically a subscription service) until November 1, 2014. While a 10-year extension is not the best case scenario for counties, it is better than the House proposal (H.R. 3086) for a permanent extension.

According to the Update,

The Marketplace Fairness Act, which was passsed by the U.S. Senate in May, 2013 with broad bipartisan support (69 Yeas – 27 Nays), would grant authority to state and local governments to enforce existing sales and use tax laws on remote sellers. The bill would not create a new tax, but would create a level playing field for retailers regardless of their choice of venue and would grant collection authority only after states have simplified their sales tax laws.

As previously reported on Conduit Street, for Marylanders, this federal legislative change will result in the gas tax, which passed during the 2013 session, increasing at a lower rate.  As reported by the Baltimore Sun:

In Maryland, the General Assembly just approved legislation that is expected to increase the state’s 23.5-cents-a-gallon gas tax by about 20 cents by mid-2016. But if the federal government allows the state to apply its sales tax to Internet retailers, motorists could be spared about 7 cents of the gas tax increase, General Assembly officials have said.

The motor fuel tax legislation that passed phases in a 5-cent sales tax on gasoline with the final two percent increase taking effect only if federal legislation fails to extend the sales tax to remote sellers.

The  Internet Tax Freedom Act established a moratorium that has been extended three times to prohibit state and local governments from collecting a tax on internet access. The MITFA would extend this moratorium for another 10 years. Other efforts, the Permanent Internet Tax Freedom Act (H.R. 3086), would permanently prohibit state and local governments from taxing internet access.

NACo opposes this bill because the Congressional Budget Office (CBO) has reported that removing the grandfathered states would deprive those states and local governments of several hundred million dollars annually and thus would be an unfunded mandate. Additionally, permanently extending ITFA would preempt an entire, fast-developing industry from taxation. Many services including cable and telecommunications services will transition to broadband, resulting in a significant expansion of the scope of services that ITFA will shield from state and local taxation.