With The Marketplace Fairness Act (MFA) being stuck in the House of Representatives, it has not gone unnoticed by either side of Congress that another Internet related provision is coming to an end soon unless legislation is passed. The moratorium on the Internet Tax Freedom Act (ITFA) has been extended multiple times for the past 16 years. The buzz is that after 16 years the ITFA needs to be made permanent, and because there is a sense of urgency to do so the time may be perfect to push through the MFA or some version of it as a contingency.
What does PITFA mean?
The Permanent Internet Tax Freedom Act (PITFA) would permanently prohibit federal, state and local governments from imposing taxes on Internet access and discriminatory ‘internet only’ taxes. This is and has been the status quo since 1997 (except for certain grandfathered states).
The grandfathered states (Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin) are currently allowed to tax Internet access, but if the ITFA were made permanent these states would no longer be allowed to do so. According to recent studies, this could mean a loss of as much as $500 million in annual sales tax revenues. So despite the general consensus that the ITFA should be made permanent, these states are likely to strongly oppose its passage unless they are compensated in another way, such as passing the MFA.
What does PITFA have to do with Ecommerce Retailers?
At first glance, this measure may seem like it wouldn’t have much effect on how ecommerce retailers currently operate. The Internet isn’t taxed now and if made permanent, it never would be.
But PITFA could make a world of difference for ecommerce in two ways: If PITFA is enacted, it could open the door to “click-through” nexus laws being challenged as a violation on PITFA grounds. This sounds extreme for such a minor change, but such a challenge has already successfully occurred!
Last October, the Illinois Supreme Court addressed the state’s “click-through” nexus law and their decision rendered the law void and unenforceable.
The Court focused on two elements of the ITFA; one was whether the requirement to collect the Illinois use tax met ITFA’s definition of a “tax” and the other was whether that “tax” was considered to be a prohibited “discriminatory tax on electronic commerce.”
The Illinois Supreme Court agreed that the provision establishing “click-through” nexus rules did in fact meet ITFA’s definition of a “tax” which the ITFA does not limit to “revenue raising” measures, but also extends to the responsibility of “a seller to collect and to remit to a governmental unit any sales or use tax imposed on a buyer by a governmental unit.” The Illinois Supreme Court then focused on the “discriminatory” nature of the “click-through” provisions. The Court noted that the “click-through” law specifically targeted out-of-state Internet retailers with “on-line” marketing affiliate contracts, but did not apply to out-of-state retailers who engage in “off-line” marketing affiliate campaigns even though they are very similar, therefore, because ITFA prohibits any sort of discriminatory tax to be levied on the Internet, click-through nexus could not stand. Based on this successful argument, other states with “click-through” nexus may find their laws will be facing the same challenge.
The other way ecommerce could be affected is the forced passage of MFA or some form of it. PITFA will potentially have a (perceived) devastating effect on revenue for those six-grandfathered states. It is speculated they will lobby for something to replace that lost revenue, but at this point it is hard to guess which direction that fight would go.
With the August recess over and Congress back in session, the stage is set for things to heat up quickly. PITFA passed quickly in the House, whereas, the MFA has stalled there. The MFA passed the Senate, but PITFA may face opposition there until the House can agree to give fair consideration to the MFA. As always, we will wait and see, watching and of course blogging about any developments critical for ecommerce retailers to be aware of.