Beginning July 1, 2020, federal law will permanently prohibit state sales tax on internet access services under the Internet Tax Freedom Act (ITFA). Although Ohio was amongst seven states previously exempt from the federal prohibition, these states cannot tax internet access charges starting July 1, 2020. Ohio will continue to impose sales tax on automatic data processing and electronic information services provided to businesses, but only to the extent that the tax is not imposed on internet access services.
There is sure to be disputes over the scope of what constitutes internet access, which is defined generally under the ITFA (47 U.S.C. 151 statutory note) as a service that enables users to connect to the internet to access content, information, or other services offered over the internet and incidental services. However, the definition also includes services providing homepage, electronic mail, instant messaging, video clips, and personal electronic storage, whether provided independently or packaged with Internet access. In Ohio Tax Information Release ST 2020-01, the Department of Taxation stated that the federal law will have a limited impact on Ohio’s tax on automatic data processing and electronic information services. The Department notes the definition is not broad enough to encompass all services offered over the Internet. But exactly where that line is drawn remains to be seen, as many business services offered over the Internet arguably meet the IFTA’s definition of “Internet Access.”
The IFTA, originally enacted in 1998, temporarily banned state and local governments from taxing internet access services and prohibited discriminatory taxes on electronic commerce. However, states who were taxing internet access prior to the ITFA’s enactment were permitted to continue to do so under a grandfather clause. Ohio had been taxing internet access services provided to businesses under the State’s definition of “electronic information services” and continued to do so. However, when the ITFA was made permanent, Congress set the grandfather clause to expires on June 30, 2020, requiring all states to stop charging taxes on internet access.
Ohio businesses providing or purchasing internet-related services should review their invoices and agreements to ensure taxes are no being collected after June 30, 2020.