President Signs Bill Making Internet Service Tax Ban Permanent

While federal law has long blocked most states from collecting taxes on Internet service, that prohibition has to be renewed every few years. But today President Obama signed into law a new piece of legislation that makes existing bans permanent, and puts an end date on Internet taxes for the few states that still collect them.

The Internet Tax Freedom Act was first passed back in 1998 with the intention of encouraging consumers to get online by not taxing access to things like dial-up or DSL Internet access. The legislation has never addressed the issue of collecting taxes for online purchases (more on that below).

In typically shortsighted D.C. fashion, the bill was structured so that it needed to be periodically renewed — a process it’s undergone five times in the years since.

The original Tax Freedom Act also included a grandfather provision for the then dozen-or-so states that had already been collecting taxes on Internet access. Many of those states subsequently decided to cease collecting that tax.

There had been various legislative attempts to make the ban permanent over the years, but they either got bogged down by partisan politics or caught up in the controversial debate about online sales tax collection.

In order to bypass that problem, in Dec. 2015 the Senate appended the text of what had been the Permanent Internet Tax Freedom Act onto a much more pressing legislative matter — HR 644, the Trade Facilitation and Trade Enforcement Act of 2015, which, among other things, authorizes funding for Customs and Border Protection, and which was destined to eventually be signed into law.

The amendment itself is rather simple. It removes the end date on the existing tax ban, thereby making it permanent. Additionally, it establishes an end date of June 30, 2020 for those few states — Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin — that are still collecting sales tax on Internet services.

Earlier this month, that bill glided through the Senate, passing with a vote of 75 to 20.

The legislation does not resolve the hotly contested issue of taxes for online purchases.

Back in 1992, in Quill v. North Dakota, the Supreme Court ruled that in order for a state to force a business to collect sales tax, that business must also have some sort of physical presence in the state.

That case involved office supply company Quill and an effort by North Dakota to compel the company to collect sales tax on orders shipped to customers in the state, arguing that Quill’s advertising, catalogs — along with software that customers could use to track Quill inventory and place orders — effectively established enough of a presence to force Quill to collect the tax. The Supremes disagreed, ruling that the enforcement of this tax collection would be overly detrimental to interstate commerce, in violation of the Commerce Clause.

And, even though that ruling was made in a pre-Amazon world, that’s how things have stood for more than 20 years.

Facing pressure from bricks-and-mortar retailers, and seeing tax revenues sag as a growing number of people went online to buy things, some states have either rewritten their laws to redefine physical presence so that Amazon and others would have little choice but to collect taxes.

Additionally, Amazon and others have made deals with some states to collect these taxes in exchange for being able to open new distribution centers and warehouses.

But this still leaves a handful of states that don’t have the statutory authority, or anything they can point to as a “physical premise” for these online retailers. Sick of waiting for Congress to maybe hammer out a deal, they are looking to force the issue.

The Wall Street Journal reports that several of these states are getting creative.

For example, Utah is considering legislation that would include certain third-party delivery services under the “physical presence” definition. Some have dubbed this “nuisance legislation” that is only intended to force Congress’ hand to finally draft a definitive legislation that applies to all states. Then there’s Colorado, where state law now requires out-of-state retailers to provide the state a list of in-state customers. That law was upheld earlier this week by a federal appeals court.