The Federal Mandates of the Personal Injury Tort Fairness Act

Congress originally enacted the Internet Tax Freedom Act in 1998 as a temporary suspension that prohibited local, state, and federal authorities from imposing discriminatory or multiple taxes and internet access taxes on e-commerce. Congress renewed the act eight times before making the act permanent in 2015 under the 2015 Trade Facilitation and Trade Enforcement Act (Stupak, 2016). Congress also repealed the grandfather clause of the Internet Tax Freedom Act effective June 30, 2020. The PITFA forbids states from imposing internet access taxes (Stupak, 2016). The grandfather clause previously allowed States to impose sales taxes on internet access (Stupak, 2016). Full implementation of the Permanent Internet Tax Freedom Act across the country began on July 1, 2020, in which the grandfathering states such as Wisconsin, Texas, South Dakota, Ohio, New Mexico, and Hawaii will stop levying internet access taxes (Stupak, 2016). The Act has two main restrictions on state taxing powers. It bans discriminatory taxation of e-commerce (Stupak, 2016). States could, for example, implement multiple taxations of sales occurring between two states in which a seller from one state sales a product online to a consumer in another state. Both the seller and the consumer were taxed. Discriminatory taxation also involved applying a sales tax to a product bought online even though the same tax would not be required if a consumer purchased the same product in a physical store. The Act also imposes a permanent suspension of new state taxes on internet access services, which means that new state authorities cannot levy normal telecommunications or sales taxes on the typical monthly charges that businesses and households pay telecommunication companies for mobile or fixed-location internet access. The Act also widely defines internet access services as services including all telecommunication services that focus on providing internet access like high-speed lines that ISPs lease to access the internet and the digital subscriber lines that homes use to access the internet in places where fiber-optic or high-speed cables lines are unavailable (Stupak, 2016). The Act, however, narrowed the definition to exclude online content such as internet-based television and telephone services and downloadable music (Stupak, 2016). States can levy these contents. There are several impacts of the PITFA on North Carolina. First, the state would continue losing billions of dollars in unavoidable taxes annually. Permanent prohibition of internet access taxation will indefinitely deny North Carolina over $200,000,000 in potential sales tax income annually (Bologna, 2020). Given people’s increasing use of internet services today and the inclination of consumers to fast and costly monthly internet subscriptions, the forgone income would grow significantly over time. As State authorities must ensure a balanced budget each fiscal year, the forgone income leads to other effects such as high property, sales, income taxes, and low services. If the Act allowed the state to collect internet access-related taxes, it would be able to decrease taxes or enhance infrastructure and other services such as health care, education, and roads. Besides, permanently prohibiting internet access taxes compounds North Carolina’s revenue loss from the growth of e-commerce. The state is already incurring significant sales taxes income due to the absence of regulations that require online retailers not to be present physically in the state to collect and pay the taxes. Moreover, a majority of consumers are shifting from music CDs, landline phones, and taxable cable TV services to cheap or free alternatives available online such as getting music through Spotify and making phone calls using Skype. For example, many states including North Carolina levy taxes on traditional cable TV including pay-per-view films and premium channels. Users can, nevertheless, get movies using high-speed internet that they can supplement with Amazon Prime, Hulu, or Netflix subscriptions. While the state can tax online movie content, the Act forbids the state from levying the access fee. Consequently, internet subscribers only pay taxes on part of their monthly cost while subscribers to cable TV must pay taxes on the entire monthly cost, which leads to unfair treatment. Banning taxation of internet access subscriptions compounds these issues since consumers mostly use the subscriptions as a gateway to all other online services. The ban also affects franchise fees, which are a vital source of revenue for counties in the State. Local authorities are entitled to obtain a franchise fee from the gross revenue of cable operators (Maguire & Noto, 2007). Franchise fees in counties can be compared to rental fees charged for using public rights of way. Since local authorities cannot assess the fees for online services, the counties face challenges as service shift to broadband services. An example is an Internet-protocol TV that appears like a conventional cable TV but its delivery method is online. In turn, this exempts it from taxation because of the internet delivery method. The TV is also exempt from being included in the calculation of the gross revenue of cable operators from which local governments obtain their franchise fees. Even though the Act prohibition of discriminatory taxes seems positive, the technological advancements currently being experienced increase the complexity of the issue concerning State tax structures. Digital content sellers today can easily avoid state taxation of their content because they can use the internet to deliver it. Additionally, most businesses and consumers today prefer data-based communications such as streaming and other Internet of Things innovations instead of voice. States acquire more revenues through Voice due to heavy taxation. These changes will make it challenging for the North Carolina tax agencies to accept the Act in the long term. A permanent ban on internet access taxes, therefore, makes it challenging for North Carolina to fund critical services such as education and health care. The ban will also encourage people to subscribe to online services as more services shift to the internet. Forbidding states from levying internet access subscriptions also creates unfair tax treatment for users of non-internet-centered technologies. North Carolina acted adequately earlier before the expiration of the grandfather clause by delivering rulings that complied with the provisions of the Act. The State does not impose sales and uses taxes on receipts obtained from offering internet access services. The State also exempts the gross receipts obtained from offering telecommunications services to ISPs to provide internet access from use and sales tax. While North Carolina has responded by complying with the provisions, the effect of the act has likely emerged as a challenging issue, particularly concerning State revenue. Additionally, North Carolina started taxing specific digital properties such as photographs, books, greeting cards, audiovisual works, and audio works among others in October 2019. The regulation that extended use and sales tax to these contents specified that the tax applied to digital content that is accessed or delivered online, and is not tangible personal property (Hise et al., 2019). The regulation complies with the PITFA. The North Carolina General Assembly has the authority to decide. The assembly has the power to enact or make laws, and develop regulations and rules that govern people’s conduct, their duties, rights, and other procedures. The assembly also has the powers to prescribe the outcomes of specific activities and repeal or amend existing laws affecting all citizens of the state and laws that affect the local communities. The PITFA is a federal tax policy that preempts states from taxing internet access activities, which makes it an unfunded mandate. The fiscal effect of preempting any state income source is unavoidable and is costly (Dilger & Beth, 2020). The mandate is unfunded because the federal government does not fully meet the projected direct expenses of the mandate by either offering a new budget authority or allowing appropriations (Dilger & Beth, 2020). Even if the federal government authorizes appropriations, the mandate remains unfunded until the policy ensures that in any fiscal year either Congress makes a new law to sustain the unfunded nature of the mandate, the federal government abolishes the mandate, the federal government revises the mandate terms to ensure it is implemented with the appropriated funds, or the federal government estimates the real expenses of the mandate as not exceeding the actual appropriations provided (Dilger & Beth, 2020). Failure to fund the mandate leads to high taxes in other areas. 

Conclusion 

Congress is lawfully allowed to prevent discriminatory state internet access taxation and e-commerce. While permanently banning internet access taxation may lead to numerous litigations due to unintended effects, the ban has denied North Carolina a significant source of potential revenues. Banning discriminatory or multiple taxes is necessary because it prevents states from levying high tax rates on internet access activities than the applicable interstate consumer purchases or communications. The ITFA emerged when e-commerce was still developing and high-speed internet was not widespread in individual homes. Today, however, most households in the United States have internet subscriptions at home while a majority of others possess smartphones with mobile internet data plans. Additionally, e-commerce is today dominant in people’s lives. Exempting the internet from state taxes may seem positive, but it denies states billions of dollars worth of revenues each year. 

References 

Bologna, M. J. (2020, April 14).  $1 Billion in Taxes on Internet Access Set to Vanish in July. News.Bloombergtax.Com. https://news.bloombergtax.com/daily-tax-report-state/1- billion-in-taxes-on-internet-access-set-to-vanish-in-july 

Dilger, R. J., & Beth, R. S. (2020).  Unfunded Mandates Reform Act: History, Impact, and Issues. https://fas.org/sgp/crs/misc/R40957.pdf 

Hise, R. E., Moore, T., & Cooper, R. (2019).  General Assembly of North Carolina Session 2019 

Session Law 2019-169 SENATE BILL 523. The General Assembly of North Carolina. https://www.ncleg.gov/Sessions/2019/Bills/Senate/PDF/S523v7.pdf 

Maguire, S., & Noto, N. A. (2007). Internet Taxation: Issues And.  Taxation and Tax Policy Issues, 175. 

Stupak, J. (2016).  The Internet Tax Freedom Act: In Brief. Congressional Research Service. https://fas.org/sgp/crs/misc/R43772.pdf