The Hidden Taxes on Internet and Cable Services

The imposition of state and local taxes on accessing and using the internet was supposed to be resolved, yet local governments continue to attempt to subvert this prohibition.

The effort to prevent these taxes from being adopted began when the Internet Tax Freedom Act of 1998 (ITFA) established a moratorium on state and local internet access taxes, "bit taxes" levied on the amount of data streamed, and taxes on specific services such as email or messaging. ITFA also prohibited discriminatory transaction taxes on e-commerce vendors and their customers which would have discouraged many Americans from participating in the burgeoning e-commerce marketplace. The moratorium became permanent law in the Permanent Internet Tax Freedom Act (PITFA), which was included the Trade Facilitation and Trade Enforcement Act of 2015, which was signed into law on February 24, 2016.

Since then, however, local and state government attempts to skirt the law have spread throughout the country. In May 2016, the Oregon Supreme Court ruled that the city of Eugene's 7 percent "broadband service fee" did not violate the law. In 2021, Florida began levying a "communications services tax" (CST) of 7.44 percent of providers' revenues. A February 10, 2021, Miami New Timesarticle noted, "cities and local governments add on their own rate, which often results in a total CST that exceeds 13 percent. That's twice the run-of-the-mill sales tax on a product purchased at a local store." Effective January 1, 2025, Maine will levy a 6 percent tax on cable and satellite television, radio, rentals of audiovisual media and equipment, and the installation, maintenance or repair of telecommunications equipment.

Circumventing PITFA also includes taxing online streaming content. Since 2015, for example, Chicago has levied an "amusement tax" on online entertainment streaming equal to 9 percent of revenues. More such fees on streaming platforms in major urban markets may force popular free-to-watch streaming platforms that rely on advertising revenue to implement subscription-only paywalls to offset the additional costs.

According to a September 19, 2024, Tax Foundation report, "Taxes, fees, and government surcharges on wireless services increased to their highest level ever," rising between 2023 and 2024 "from 13.7 percent to 14.0 percent" on average. "Since 2012 … wireless taxes, fees, and government surcharges increased from 17.2 percent to 26.8 percent of the average bill."

PITFA's protections for affordable internet access have been critical to American economic growth and global leadership in telecommunications and technology in the 21st century. The incoming 119th Congress should clarify the law to preempt the various creative fees and surcharges state and local officials are concocting to tax the internet.

• Internet Sales Tax