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On June 30th, 2020, the Internet Tax Freedom Act’s grandfather clause will expire. ITFA prohibits states and political subdivisions from imposing taxes on Internet access. But the grandfather clause has permitted such taxes if they were generally imposed and actually enforced prior to October 1, 1998. In particular, Ohio and Texas have imposed their sales taxes on Internet access under the grandfather clause. They both recently issued guidance on the grandfather clause expiration.
Texas confirmed that, beginning July 1st, it will no longer impose sales tax on separately stated Internet access charges. If the Internet access provider bundles the Internet access service with a taxable service, the full amount will be taxable. But the service provider should not collect tax on the Internet access portion if it can establish through its books and records “a reasonable allocation” for the services.
Ohio also explained the impact of the grandfather clause expiration. The state has imposed sales tax on Internet access services as “electronic information services,” if used in business. Beginning July 1st, the Internet access charge will no longer be subject to the sales tax. Also, any automatic data processing or electronic information services that are accompanying but not a significant part of the Internet access will no longer be subject to sales tax. If an online service provider provides certain proprietary services over the Internet, but not Internet access itself, ITFA will prohibit their taxation only if “the activity is a multiple or discriminatory tax on electronic commerce.”
No. ST 2020-01: Internet Tax Freedom Act Summary, Ohio Dep’t of Taxation (June 2020); Tex. Tax Policy News, No. 202005016L (May 2020).