This past week, the House of Representatives passed an initiative to permanently ban any taxation of Internet access. Called the Permanent Internet Tax Freedom Act, this vote basically serves to prevent the leveraging of state or local taxes on the purchase of an Internet connection. This bill seeks to replace a temporary 1998 ban, which is set to expire in November of this year. The bill looks to stand as is, as it reportedly has garnered bipartisan support in the Senate.

So what are the ramifications of the prohibition of a state’s ability to impose a tax on Internet connections? Although 43 states have never taxed Internet access (states like Texas, Wisconsin, and Ohio were grandfathered out of the original ban), given the growth of Internet access across the country over the past several years, this bill will likely impact state government shortfalls.

The bottom line is that a permanent ban on this sort of tax translates to a significant loss in state tax revenue, especially considering that according to the Leichtman Research Group, there were a total of 85.5 million broadband Internet subscriptions in the U.S. through the first quarter of 2014. In fact, based on an analysis conducted by the Center on Budget and Policy Priorities, a permanent tax ban would cost states almost $6.5 billion in potential sales and local taxes on an annual basis.

It’s also projected that this could have a substantial impact on innovation and where the communications market is headed. Just as there has been a spike nationwide in broadband and mobile Internet access, there has been a plummet in the number of landline telephone subscribers. With the advent of tax free Internet access, Internet-based communications tools will enable users to bypass cellular networks (which states currently tax heavily) and instead use such platforms as Snapchat, Instagram, Twitter, and Skype. This presents a notable opportunity that already has many tech companies working to develop new and improved ways to communicate via the Internet.

It’s important to note that the Permanent Internet Tax Freedom Act is distinct from the concurrent ongoing debate focused on state taxation of online shopping purchases. This act focuses on state taxes on Internet connections only.

Reference:

Harpaz, Joe. “Internet Tax Ban Could Be Big Win for Skype and Snapchat, Major Loss for States.” Forbes. 7/17/14.

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