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President Obama signed H.R. 644, the Trade Facilitation and Trade Enforcement Act of 2015, on February 24, 2016, making permanent the moratorium on state and local taxation of Internet access (or imposition of multiple and discriminatory taxes on electronic commerce). The most recent moratorium was set to expire on October 1, 2016 (P.L. 114-113, H.R. 2029).
Grandfather Provision Eliminated
H.R. 644 also eliminates the grandfather provision that allowed states that taxed Internet access services prior to the enactment of the original moratorium (P.L. 105-277 and subsequent revisions), like Ohio, to continue taxing Internet access services. The grandfather provision is not eliminated until June 30, 2020.
Impact on Ohio
Ohio currently taxes Internet access used in business as electronic information services. Clearly, H.R. 644 will prohibit Ohio from continuing to tax internet access. What remains unclear is how H.R. 644 will impact Ohio's ability to continue taxing other types of electronic information services, automatic data processing, and electronic publishing services. The Ohio Department of Taxation recently revised Information Release 1994-04, which provides guidance as to what the Department considers electronic information services. The new federal law's language is very broad and will fundamentally undermine the Department's effort to tax these services. Ohio policy makers will need to thoroughly reconsider the application of these taxes.
Tax on Goods and Services sold over the Internet
Please keep in mind that the Internet Tax Freedom Act does not prohibit states from taxing goods and services purchased over the Internet. For example, if a company buys taxable goods over the Internet and the vendor does not charge sales tax, the company will owe use tax on such purchase. While the state may impose tax on the in-state purchaser, the new federal law does not authorize states to require remote sellers to collect sales tax from such in-state purchasers.
Please contact John Trippier or any other professional at Zaino Hall & Farrin LLC if you would like to discuss this or any other state and local tax issue.