Renewing the “Internet Tax Freedom Act” Could Have an Especially Adverse Impact on Kentucky, Michigan, Ohio and Texas
End Notes
[1] The four taxes are: the “Limited Liability Entity Tax” provided for under Section 141.0401 of the Kentucky Revised Statutes; the Michigan Business Tax imposed by Michigan Enrolled Senate Bill 94 of the 94th Legislature Regular Session of 2007; the Ohio Commercial Activities Tax imposed by Chapter 5751 of the Ohio Revised Code; and the Texas Franchise Tax imposed by Chapter 171, Title II, Tax Code, Texas Statutes (the new “margins tax”).
[2] The Hawaii General Excise Tax law provides: “There is hereby levied and shall be assessed and collected annually privilege taxes against persons on account of their business and other activities in the State measured by the application of rates against values of products, gross proceeds of sales, or gross income. . . .” Gross income is defined as “the gross receipts. . . of the taxpayer received as compensation for personal services and the gross receipts of the taxpayer derived from trade, business, commerce, or sales. . .” The New Mexico Gross Receipts and Compensating Tax provides: “For the privilege of engaging in business, an excise tax equal to five percent of gross receipts is imposed on any person engaging in business in New Mexico.” Gross receipts are defined as “the total amount of money . . . received from selling property located in New Mexico . . . or from performing services in New Mexico.” Clearly, under both these gross receipts taxes, the legal incidence of the tax is on the seller of the service; they are not conventional sales taxes imposed on purchasers that are collected by the retailer.
As applied to Internet access providers, these two taxes are widely conceded to be taxes on Internet access that would be banned by ITFA but for its general “grandfather clause” that preserves all taxes on Internet access in force as of 1998. For example, they are identified as grandfathered taxes in a 2003 Congressional Budget Office analysis of ITFA required by the Unfunded Mandates Reform Act. See: Congressional Budget Office, “Congressional Budget Office Cost Estimate: S. 150, Internet Tax Nondiscrimination Act,” September 9, 2003, p. 3. The Washington Business and Occupation Tax, discussed in the text box on page 2 of this report, is also identified in the CBO analysis as a grandfathered gross receipts tax on Internet access.
[3] The Kentucky and Texas taxes are written as substantial modifications of existing taxes rather than as entirely new taxes. Their application to Internet access providers therefore may be somewhat less vulnerable to legal challenge under ITFA than the completely new taxes in Michigan and Ohio.
[4] The modified gross receipts taxes in Michigan and Texas have not yet gone into effect. In the other two states, Kentucky and Ohio, it is possible that some or all Internet access providers already are not paying tax on their receipts from sales of Internet access services because they have interpreted ITFA as freeing them from an obligation to pay. The taxes in those latter two states are of such recent vintage that it is unlikely that audits of most Internet access providers have been completed. Even if audits have been completed, any disputes about non-payment of taxes by access providers would likely still be in administrative appeals processes, which are confidential vis-à-vis the public. In short, it is unlikely that policymakers or the general public will know for several years whether Internet access providers in any of these four states are taking the position that they are not legally obligated to pay the four taxes discussed in this report.