On July 1, 2020, federal law prohibited six states from imposing an internet access sales tax at the state and local level. The six states include Hawaii, New Mexico, Ohio, South Dakota, Texas, and Wisconsin. This change marks the end of a 20-year federal effort to eliminate sales tax on internet access.
The 1998 Internet Tax Freedom Act promoted and protected e-commerce. E-commerce now represents over 10% of all domestic retail spending. Global e-commerce sales topped $3 trillion in 2019. But back in 1998, most online consumers were still using dial-up modems, and Amazon had just made the bold decision to sell more than books.
The 1998 legislation eliminated federal, state, and local taxation of internet access. But it granted legacy status to states that were already collecting an internet access sales tax. The original law called for an elimination of taxes for 10 years. But the timeline was extended multiple times before the Trade Facilitation and Trade Enforcement Act of 2015 made it permanent. The new law gave states with a legacy status until July 1, 2020, to comply.
Since then, several impacted states have released guidance to help taxpayers understand the changes. South Dakota’s Department of Revenue announced the change in its spring 2020 newsletter. The Texas comptroller made a similar announcement in May 2020 regarding the change and how to treat bundled transactions. The Wisconsin Department of Revenue provided guidance in January 2019 with a definition for exempt “internet access services.”
A representative from the Hawaii Department of Taxation told Intuit that, effective July 1, internet access charges would not be taxable. The Ohio Department of Taxation acknowledged the 2020 deadline in 2016. But the department affirmed that Ohio’s tax on internet access and online services would not be subject to the federal moratorium.
In a June 2020 release, Ohio’s Department of Taxation clarified their interpretation of the law. Charges for internet access would be exempt, while charges for automatic data processing, electronic information services, and computer services would remain taxable. Taxpayers in these states should monitor their internet access charges to confirm service providers apply the new exemptions.
On July 1, 2020, QuickBooks automatically updated its internet access tax category to reflect tax changes in Hawaii, New Mexico, Ohio, South Dakota, Texas, and Wisconsin.
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