Anaya Nolan
As of July 1, 2020, internet access fees are no longer subject to sales and use tax in Ohio. This change was brought about by the Internet Tax Freedom Act (ITFA), which was first enacted in 1998 and made permanent in 2020. The ITFA prohibits state and local governments from taxing internet access services. Ohio was previously one of seven states exempt from the federal prohibition, but the expiration of the grandfather clause on June 30, 2020, brought an end to internet taxes in the state.
| Characteristics | Values |
|---|---|
| Date of Effect | July 1, 2020 |
| Tax Type | Sales and Use Tax |
| Tax Applicability | Internet Access Services |
| Governing Law | Internet Tax Freedom Act (ITFA) |
| Previous Exemption | Ohio was among seven states previously exempt from ITFA |
| New Exemption | Internet access charges are no longer taxable |
| Impact | Limited impact on Ohio's tax on automatic data processing and electronic information services |
| Department of Taxation Guidance | Transactions currently defined as automatic data processing, electronic information services, and computer services remain subject to Ohio sales and use tax, with some exceptions |
| Nexus Requirements | Out-of-state sellers with no physical presence in Ohio may establish sales tax nexus through affiliate, click-through, or economic nexus |
| In-State Software Nexus | Repealed effective August 1, 2019 |
| Tax Collection Responsibility | Seller acts as a de facto tax collector and must remit collected taxes to the state |
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What You'll Learn
Internet access fees exempt from sales tax
Ohio's internet tax law came into effect on July 1, 2020, when charges for internet access were no longer subject to Ohio sales and use tax. This change was the result of legislation enacted in 2016 that permanently extended the Internet Tax Freedom Act (ITFA), which was first introduced in 1998. The 2016 legislation established an end date of June 30, 2020, for seven states, including Ohio, that had previously imposed a tax on internet access.
The ITFA was enacted to encourage the growth of the internet, which was still in its early stages in 1998. At that time, Amazon.com had only been in business for a few years and was just starting to expand beyond books. Only about 41% of American adults used the internet. Federal lawmakers implemented a three-year moratorium on state and local internet access taxes under the ITFA, recognizing the potential of the internet and wanting to foster its development.
The Permanent Internet Tax Freedom Act (PITFA), which fully came into effect in all states by mid-2020, was included in the Trade Facilitation and Trade Enforcement Act of 2015. This act ensured that internet access fees would be exempt from sales tax in Ohio and other states that had previously taxed them.
It is important to note that while internet access fees are exempt from sales tax in Ohio, other fees related to internet service may still be taxed. For example, there may be government fees and taxes on internet equipment that are separate from the internet service charge. Additionally, Ohio has issued guidance regarding the taxability of automatic data processing and electronic information services provided by Internet Access Providers (IAPs) and On-line Service Providers (OSPs). If an IAP or OSP provides automatic data processing or electronic information services that are not a significant part of their internet access services, these services may be subject to Ohio sales and use tax.
In conclusion, as of July 1, 2020, internet access fees are exempt from sales tax in Ohio due to the enactment of the ITFA and its subsequent extensions and amendments. This change aligns with the act's original intention to promote the growth and development of the internet.
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The Permanent Internet Tax Freedom Act (PITFA)
In 1998, Congress temporarily banned state and local governments from taxing internet access or placing multiple or discriminatory taxes on internet commerce. This ban was extended three times, with enormous bipartisan support, with the most recent extension passing in 2007, but it expired on November 1, 2014.
PITFA did not go into full effect in all states until mid-2020, with a handful of holdouts from the 1998 ITFA law. This change correlates with legislation enacted in 2016 that permanently extended the Internet Tax Freedom Act. The legislation established an end date of June 30, 2020, for seven states that imposed a tax on internet access at the time.
In many states, bills must list the state tax as a distinct line item on the customer's bill. To minimize tax exposure, bundled services will have to be broken into components to separate out the portal from the transmission element.
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Taxation of automatic data processing
In Ohio, charges for internet access are not subject to sales and use tax. This change came into effect on July 1, 2020, and was the result of legislation enacted in 2016 that permanently extended the Internet Tax Freedom Act.
The state has issued guidance regarding the taxability of automatic data processing and electronic information services. From July 1, 2020, an Internet Access Provider (IAP) that provides its service for business use is providing an electronic information service that is exempt from sales and use tax in Ohio.
On the other hand, an On-line Service Provider (OSP) that provides automatic data processing or electronic information services that are not a significant part of their internet access services, will be subject to sales and use tax. OSPs that provide certain services over the internet but not internet access itself will be evaluated to determine whether the activity is a multiple or discriminatory tax on e-commerce.
Automatic data processing services are those that use a computer to enter, store, manipulate, or retrieve a customer's data. This includes accounts payable, accounts receivable billing, check preparation, data conversion, editing client data, and entering client data. Twenty percent of the charge for data processing services is typically exempt from tax.
In Texas, taxable data processing services include using a computer for word processing, data entry, production, compilation, storage, or manipulation. However, merely using a computer as a tool to help perform a professional service, such as bookkeeping or accounting, is not considered a taxable data processing service.
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Electronic information services
Ohio's internet tax law changes, effective July 1, 2020, have impacted the taxation of electronic information services. This date marked the end of sales and use tax on charges for internet access in Ohio, correlating with the 2016 legislation that permanently extended the Internet Tax Freedom Act.
Prior to this change, Ohio was one of seven states that imposed a tax on internet access. The state's taxation practices regarding electronic information services were complex. Ohio imposed a 5.5% sales tax on business users of telecommunications and electronic information services, with an average supplementary 1% tax for local jurisdictions. The state also provided a 25% sales tax credit for electronic information service providers, offering a tax credit for equipment purchases used primarily to provide internet access.
However, with the new law in effect, Internet Access Providers (IAPs) are now exempt from sales and use tax when providing their services to consumers for business use. This means that IAPs are considered to be providing an electronic information service that is not taxable. On the other hand, On-line Service Providers (OSPs) who offer automatic data processing or electronic information services that accompany internet access services are still subject to sales and use tax if these services are a significant part of their offering.
OSPs that provide certain proprietary services over the internet but not internet access will be evaluated differently. If the end result of their service is not legally taxable in a similar transaction accomplished through other means, then it will not be subject to Ohio sales and use tax. This evaluation considers whether the activity constitutes a multiple or discriminatory tax on e-commerce.
It is important to note that servers, modems, and routers provided to customers may still be subject to sales and use tax. If the server is used primarily for email services, it is taxable, whereas business use may qualify for a credit for electronic information service providers.
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Sales tax nexus for out-of-state sellers
Ohio sales tax is levied on the sale of tangible goods and certain services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto tax collector. Out-of-state sellers with no physical presence in Ohio may establish sales tax nexus in the following ways:
- Affiliate nexus: Having ties to businesses or affiliates in Ohio. This includes, but isn't limited to, the design and development of property sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
- Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and the cumulative gross receipts from sales from such referrals exceed $10,000 within the preceding 12 months.
- Economic nexus: Having a certain amount of economic activity in the state. Effective August 1, 2019, a remote seller that makes retail sales in Ohio must register with the state and collect and remit Ohio sales tax if, in the current or previous calendar year, the remote seller meets either of the following criteria (the economic thresholds):
- Exceeds $100,000 of gross receipts into Ohio in the current or preceding calendar year.
- Has $150,000 of gross receipts into Ohio in the preceding calendar year.
- In-state software nexus: Repealed effective August 1, 2019.
- Network nexus: Providing a content distribution network in Ohio to accelerate or enhance the delivery of the seller's website to consumers, and the gross receipts from the sale of services or tangible personal property for storage, use, or consumption in Ohio exceed $500,000 in the current or preceding calendar year.
- Trade shows: Attending conventions or trade shows in Ohio. You may be liable for collecting and remitting Ohio use tax on orders taken or sales made during Ohio conventions or trade shows. However, you generally would not have nexus if all the following are true:
- You’re in the state solely to engage in convention or trade show activities.
- You have no more than seven instances of nexus-creating activities in Ohio in a calendar year.
- Your gross sales in Ohio in that same calendar year do not exceed $25,000 (unless you have click-through nexus, in which case your gross sales into the state cannot exceed $10,000).
Out-of-state sellers are not required to collect and remit sales tax on taxable sales made through a marketplace, so long as the marketplace facilitator is collecting and remitting sales tax on their behalf.
There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Ohio and sales tax should be directed to a tax professional familiar with Ohio tax laws.
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Frequently asked questions
The Internet Tax Freedom Act (ITFA) came into effect in Ohio on July 1, 2020.
The ITFA is a federal law that prohibits state sales tax on internet access services.
Ohio was one of seven states that imposed a tax on internet access.
Yes, Ohio will continue to impose sales tax on automatic data processing and electronic information services provided to businesses.
For specific questions about Ohio's tax laws, please consult a tax professional familiar with the state's tax regulations.
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