What’s Next for the Internet Tax Freedom Act?

by DeVan Hankerson on December 19, 2014

Internet TaxJust before Congress adjourned for winter recess, the House approved a $1.1 trillion spending bill that also included an extension of the Internet Tax Freedom Act (ITFA), which prohibits states from imposing taxes on Internet access. The ITFA had been previously given a temporary extension to December 11, 2014, but last week it was extended further as part of the omnibus appropriations package to fund the federal government through fiscal year 2015. This is good news because consumers will continue reaping the benefits of “tax-free” Internet access.

The not so good news is that the ITFA moratorium is only temporary, and seven states – Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin – are currently exempted from the prohibition. Texas, for example, collects taxes on all monthly Internet access charges over $25.

Three of the seven states in this bucket have African American or Hispanic populations at or above the national average: 12 percent of Ohio is African American; 12 percent of Texas is African American and 40 percent is Hispanic; and nearly 50 percent of New Mexico is Hispanic. We know that minority communities are also not using the Internet at the same rate as non-minorities – when it comes to home broadband access, 55 percent of African Americans and 56 percent of Hispanic Americans are online, compared to 72 percent of whites.

Broadband adoption remains a major national priority, and we need to move toward permanently banning Internet access taxes and including the seven states mentioned above.  Taxing Internet access, data consumption, email, and other online activities as simple as pulling up a Web page is the Internet tax equivalent of ‘nickel-and-diming’ the consumer.

Research conducted by the Pew Research Center and others on broadband adoption and non-adoption, focusing on people who have unsubscribed to broadband services, finds that most who opt to cut the cord do so due to the cost of service and a lack of awareness of the benefits associated with home Internet access. The reason most cited for non-adoption is a perceived lack of relevance, and nearly 40 percent of households with home computers who did not have home Internet access said the reason was due to the expense.

It is also absolutely critical that Internet access taxes do not go the way of wireless services taxes, which on average are two times higher than the average sales tax rates that apply to most other taxable goods and services. In the seven states where Internet access taxes are still in place, wireless services taxes are at about 15 percent, with the highest combined federal, state, and local wireless rates in South Dakota at 19 percent and the lowest in New Mexico at 11 percent.

Wireless Wireless Service Tax Disparity Between Wireless Service Tax and State Sales Tax Rates in Seven States

The Internet Tax Freedom Act is one of many pieces in the national puzzle to address low home broadband adoption rates among vulnerable populations. With the digital culture driving Internet usage, U.S. adults are now online for an average of 159 minutes daily, and data from Cisco suggests that by the year 2018, consumer Internet traffic in North America will increase by more than 100 percent.

Last week, in a statement supporting the passage of the ITFA, Senate Finance Chairman Ron Wyden, who also co-wrote the bill in the late 1990s, stated, “By extending this bill, the Congress has, for the short term, ensured that this longstanding policy keeps Internet access tax-free.”

When Congress returns to session in January 2015, the push for a stable solution that prohibits Internet access taxes will continue. Perhaps by then, Congress will advise upon a clean and permanent extension of the ITFA. This would be step in the right direction toward wide-spread digital access and closing the digital divide.

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