While Texas continues to grapple with the logistics of reopening during the COVID-19 outbreak, we can momentarily turn our attention to national matters. As you may know, July 1, 2020, will end state and local sales tax on Internet access fees. At present just six states, Hawaii, New Mexico, Ohio, South Dakota, Texas, and Wisconsin, are still allowed to charge sales tax until next month.
In 1998, to encourage growth in the use of the Internet, Congress passed the Internet Tax Freedom Act (ITFA) exempting Internet access fees from sales tax. The problem at the time was that a dozen or so states had already enacted sales taxes on Internet access. As a result, the ITFA temporarily grandfathered those states from the exemption. The grandfather clause for those states was extended almost every year until the passage of the Trade Facilitation and Trade Enforcement Act (TFTEA) in 2016. At this point, the TFTEA removed the exemption for the 6 remaining states, and set June 30, 2020, as the date that state and local sales taxes would halt for Internet access fees nationally.
Interestingly, the current definition of “Internet access” was not added until the ITFA was amended in 2007 and again in 2016. It was then defined to mean “a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers.”
Naturally, this change will have an effect on state tax revenue. In 2014, a tax analysis estimated that the then seven states that collected the tax, collected a combined $563 million per year on Internet access sales taxes. In Texas, the state had charged a 6.25 percent sales tax on Internet access fees above $25. And, like other sales taxes in Texas, local jurisdictions could add a further 2 percent charge.
The most recent numbers for Texas can be found in the State Comptroller’s Biennial Revenue Estimate, prepared for the last legislature in January 2019, shows that Texas will lose an eye-popping $500 million per year! In anticipation of the changes, the budget writers zeroed out the funds for the current 2020-2021 budget.
This change will have little effect on TTA member companies. Given the expected budget shortfalls for the state, it is wise to keep an eye on what legislators may do to make up for this revenue loss. The total economic effects of the COVID-19 outbreak are still being tallied. But with increased portions of the Rainy-Day Fund now dedicated to public education and transportation, coupled with the record decline in oil and gas prices, legislators will be looking everywhere and anywhere to find new sources of income. As a result, this is an issue to keep on our radar. After all, as the old saying goes, “If you’re not at the table, you might be dinner!”