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Permanent Internet Tax Freedom Act Moves One Step Closer to Final Law

author photo of Sylvia F. Dion

The Permanent Internet Tax Freedom Act, H.R. 3086, made big news yesterday - July 15th! This significant piece of legislation was approved via voice vote by the U.S. House of Representatives, moving the proposal one step further to becoming final law!

Yesterday's passage of the Permanent Internet Tax Freedom Act (PITFA) came less than one month after the proposal was voted on favorably by an overwhelmingly majority of the House Judiciary Committee to which it had been assigned. And while many media stories will be reporting on fact that the PITFA was passed by House, there is much to know about its impact - in particular on sales tax laws!

What Exactly is the Permanent Internet Tax Freedom Act and What Will It Do?

If enacted, H.R. 3086, would make permanent, a 16 year moratorium prohibiting federal, state and local governments from imposing taxes on internet access, discriminatory ‘internet only’ taxes, and multiple taxes on electronic commerce. This moratorium has prohibited the ‘taxation of the internet’ ever since the Internet Tax Freedom Act of 1997 (ITFA) was first signed into law by former President Clinton in October of 1998. Originally intended to be a three year temporary measure, the moratorium was extended in 2001, 2004 and again in 2007. The final extension was signed into law on the same date it was sent to expire - November 1, 2007 – and granted a 7 year extension of the moratorium until November 1, 2014. If the PITFA does not become final law, the moratorium will expire as scheduled on November 1st, allowing states and individual local taxing jurisdictions to impose taxes on internet access.

Wait a Minute, Don’t Some States Already Tax Internet Access?

Some of you may be wondering why it is that internet access is taxable in some states if the ITFA has prohibited federal, state and local governments from taxing internet access for the last sixteen years.

Here's what happened. In the early 1990s, the internet was considered a fragile, infant industry with the potential to be a great catalyst for economic growth. But by the mid-1990s, states began to realize the revenue potential of "taxing the internet," and therefore, some states did indeed enact laws that imposed some form of taxation on internet access, including extending their sales tax to internet service.

When the ITFA was originally passed, the law grandfathered taxes that had already been enacted by states such as Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin. So while internet access is currently taxable in those states whose laws were grandfathered, in addition to making the ITFA permanent, H.R. 3086 would lift this grandfather clause which would mean these specific states would no longer be allowed to tax internet access. According to a new study by the Center on Budget Policy and Priorities (CPP), this would translate to a loss of approximately $500 million in annual sales tax revenues. So yes, while some states currently do tax internet access, they would no longer be able to do so if the PITFA becomes final law.

Will Final Enactment of the Permanent Internet Tax Freedom Act be Contingent on the Marketplace Fairness Act?

One roadblock the PITFA is likely to meet on its journey to becoming final law is the Marketplace Fairness Act (S. 743/H.R 684). Remember that the Marketplace Fairness Act (MFA) was passed by an overwhelming majority of the Senate more than one year ago. Following its passage, the proposal was sent to the House Judiciary Committee (the same Committee that approved the PITFA) where the legislation has effectively stalled. Incidentally, a recurring theme voiced by Judiciary Committee members during the PITFA Hearing on June 18th was the urging that House members also give equal consideration to the MFA.

Given the overwhelmingly support of the PITFA by the House Judiciary Committee, it was not surprising that the entire House voted to approve the proposal on July 15th. But this doesn't mean the proposal's speedy journey will continue as it is expected to meet more resistance now that it has moved to the Senate for consideration. Therefore, tired of waiting for the House to advance the MFA, members of the Senate may attempt to tack on an amendment to the PITFA, take other action that would ensure the passage of the MFA or a similar remote seller collection bill, modify the PITFA or defeat it altogether.*

Will the Permanent Internet Tax Freedom Act Have Any Impact on States with “Click-Through” Nexus Law?

Now’s here’s a question that isn’t really being talked about much – but should be!!

You see if the PITFA is enacted, this could very well open the door to “click-through” nexus laws being challenged on violation of PITFA grounds. Such a challenge has already successfully occurred!

Last October, the Illinois Supreme Court agreed with a lower Circuit Court’s decision that the Illinois “click-through” nexus law was preempted by the ITFA in accordance with Constitution’s Supremacy Clause. This decision rendered Illinois’ click-through law void and unenforceable.

What’s important to note here is that in finding that federal preemption applied, the Illinois Supreme Court focused on two key elements of the ITFA; whether the requirement to collect the Illinois use tax met the ITFA’s definition of a “tax” and whether the “tax” was a prohibited “discriminatory tax on electronic commerce.”

On the first point, the Illinois Supreme Court held that the “click-through” nexus provision, which expanded the definition of a retailer or serviceman required to collect the Illinois use tax, met the ITFA’s definition of a “tax” which the ITFA does not limit to “revenue raising” measures, but extends to “the imposition on 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 Illinois law. Here 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 such as with print publishers (catalogs, magazines, newspapers) and over-the-air (radio, TV) broadcasters even though both operate similarly. (You can read more about the Illinois Supreme Court decision in my December 2013 article, “US Supreme Court May Rule on ‘Click-Through’ Nexus”, published on e-Commerce Law & Policy, and also available as a download in the SalesTaxSupport articles section.)

And while some media reports erroneously reported that the Illinois Supreme Court had held the state’s 'click-through' nexus law to be unconstitutional, the Illinois Supreme Court didn’t even address the law’s constitutionality. This was a great disapointment to the Court’s one dissenting member, Justice Karmeier, noted that once the ITFA expired, “Illinois’ click-through law would once again be valid and the Commerce Clause challenge would again present itself.” The opposite is also the case - if the PITFA is enacted, Illinois' click-through law will remain void and enforceable.

You see, the PITFA does not change the provisions of the ITFA dealing with the prohibition of discriminatory internet taxes - H.R. 3086 just makes the law permanent and lifts the grandfather clause. Thus, other states with "click-through" nexus provisions may find their laws could face the same challenge.


The Permanent Internet Freedom Act (H.R. 3086), was approved via voice vote by the U.S. House on July 15th and will continue its journey in Congress to potentially becoming final law. This proposal would permanently prohibit federal, state and local governments from imposing taxes on internet access, discriminatory ‘internet only’ taxes, and multiple taxes on electronic commerce. The proposal would also lift a grandfather clause that permitted those states that had already enacted internet access taxes at the time the Internet Tax Freedom Act was enacted to impose their taxes. For these states, making the moratorium permanent would result in a significant loss of existing tax revenues.

Although the proposal has more than 220 co-sponsors, bi-partisan support and has advanced quickly in the last month, the proposal will likely meet resistance in the Senate where legislators may attempt to use its passage as a bargaining chip to ensure the passage of the Marketplace Fairness Act or a similar remote seller collection law.*

But more importantly, enacting the PITFA may open the door to Supremacy Clause challenges in states with "click-through" nexus laws. However, with less than four months before the November 1st expiration, Congress’ one month summer recess commencing soon, and the possibility that the Senate will delay taking action - the PITFA may be one step closer to becoming final law but the proposal's fate is still uncertain.


*JULY 16th UPDATE: Almost as soon as the "yeas" and "nays" of the voice vote been tallied up, a new proposal, S. 2609, was introduced by the backers of the MFA. The new proposal, introduced on 7/16, combines both the MFA and the PITFA. Look for my new post on this latest development soon.

About the Author: Sylvia Dion is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a SALT advisory firm which provides SALT services to businesses in the U.S. and throughout Europe, Canada, Latin American and Australia. Since 2011 Sylvia has served as a contributor to the SalesTaxSupport blogs and currently blogs on Internet Sales Tax, U.S. Sales Tax for Foreign Sellers, and Massachusetts Sales Tax. Sylvia has written articles for State Tax Notes, Bloomberg BNA and other premier tax journals. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.


2 Responses to Permanent Internet Tax Freedom Act Moves One Step Closer to Final Law

  • Posted by Antonio on October 21, 2014 6:19am:

    Hi Sylvia, i'm about to form a new LLC company in Delaware (E-commerce) but the thing is that i'm not an US citizen, i live out of the US.
    I want to know if i must deal with tax collection, state withholding and gross receipts taxes, etc.
    I hope you can clarify this

  • Posted by Senators on July 16, 2014 11:36pm:

    [...] There are a handful of states that were already charging sales tax on internet access when IFTA was first presented, and these states have been allowed to continue taxing internet access since 1998. However, PITFA revokes that grandfather clause, cutting off tax revenue from internet access collected by states such as Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin. For more background on the bill, I recommend reading Sylvia Dion’s blog post on PITFA. [...]

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