What the Internet Tax Freedom Act means for e-commerce businesses
by January 11, 2021
One question we received from Day One here at TaxJar is “Doesn’t the Internet Tax Freedom Act ban charging sales tax on internet purchases?”
Short answer: Unfortunately, it does not.
But we’re all about long detailed answers here at TaxJar, so here’s why the Internet Tax Freedom Act, sadly, is not a “get out of sales tax free” card for e-commerce businesses.
What is the Internet Tax Freedom Act?
To explain the Internet Tax Freedom Act (ITFA), we need to get in our time machine and travel all the way back to 1998. Do you remember the internet in 1998? Chances are you had an AOL or CompuServe email address and were still getting kicked off your dial up connection every time a telemarketer called your landline.
Offline, Bill Clinton was president of the United States and songs like “The Boy is Mine” and “Truly Madly Deeply” topped the Billboard Charts and Good Will Hunting won the Best Picture Oscar.
But it was also increasingly clear by the late 1990’s that the Internet was here to stay and would come to dominate the way we spend our time, learn, and especially how we do business.
However, states also caught on to this and prepared to tax internet-related transactions such as accessing the internet. There was even talk of taxing emails sent. (Can you imagine?)
But, foreseeing how taxing internet access and other digital activities could stall the growth of the Internet, Congress passed the Internet Tax Freedom Act.
But remember, the ITFA only prevents states from taxing things like internet access (such as a cable or DSL subscription) and not items purchased via the internet, such as a set of new patio furniture you buy on the Restoration Hardware website. (More on that below.)
Why do I sometimes see the Internet Tax Freedom Act in the news?
One reason we get questions about the ITFA here at TaxJar is that this law periodically pops up in the news.
This happens because the original 1998 ITFA was designed so that it either expired or had to be renewed after ten years. So, every time this law is set to be renewed, there’s a rush of interest in it, which inevitably leads to some eCommerce businesses wondering if this means that they no longer have to collect sales tax via their online stores.
However, as of June 2020, we will probably hear less about the ITFA, because the new law of the land: the Permanent Internet Tax Freedom Act (PIFTA).
PIFTA, now in effect, states that no states or local areas can tax internet access. Because PIFTA is permanent, it does not need to be periodically renewed, and we’ll probably hear less about “internet tax freedom” from here on out.
Can I stop collecting sales tax on my e-commerce sales?
Sadly, no.
While the Internet Tax Freedom Act (ITFA) and it’s permanent counterpart, PIFTA, prevents states from imposing taxes on things like actually accessing the internet, they do not have anything to do with e-commerce sales.
Online sellers are still required to collect sales tax when selling items to buyers in states where you have sales tax nexus.
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