Legislation Permanently Bans Internet Taxes, Increases Failure-to-File Penalty

Congress passed the Trade Facilitation and Trade Enforcement Act of 2015, H.R. 644, in February, making permanent the “moratorium on states and localities taxing Internet access or placing multiple and discriminatory taxes on internet commerce” (Conference Report, p. 231). The act was signed into law by President Barack Obama on Feb. 24 (P.L. 114-125).

The existing temporary moratorium on state and local internet access taxes, enacted by the Internet Tax Freedom Act, P.L. 105-277, had been extended multiple times since 1998. Besides making the ban permanent, the legislation has a transition rule for states with internet access taxes that were grandfathered under the Internet Tax Freedom Act and have not yet been repealed. Only six states still have these taxes, and the legislation allows the states to postpone repealing them until June 30, 2020.

The act also increased the Sec. 6651(a) penalty in certain cases for failing to timely file a required return. The penalty, which applies to income, estate and gift, withholding, and certain excise tax returns, is 5% of the amount required to be shown as tax on the return for a failure to file (not due to reasonable cause or willful neglect) that lasts no more than one month from the due date (without extension), with an additional 5% for each additional month or fraction thereof in which the failure continues, up to an aggregate maximum of 25%. Sec. 6651(a)(3) further prescribes a minimum dollar amount of the penalty for failures that last more than 60 days from the due date. Under prior law, this was the lesser of $135 or the full amount of tax required to be shown on the return. Effective for returns required to be filed in calendar years after 2015, the new law increases the $135 floor to $205.