Bill Protects Digital Goods from Taxation

The Digital Goods and Services Tax Fairness Act was reintroduced by Sen. John Thune (R-SD) and Sen. Ron Wyden (R-OR). First offered during the 112^th Congress, and then introduced as a protective amendment to the Marketplace Fairness Act (which promotes taxing Internet sales, even across state boundaries), the new Digital Goods bill aims to create a national framework to stop multi-state, discriminatory taxation of some digital goods and services. Hopefully the third time will be the charm for this indispensable legislation.

According to Sen. Thune’s website, the bill, based off of the initial proposed amendment, would “prevent discriminatory and duplicative taxes on digital goods and services, including online downloads of music, literature, and movies.” It would prevent digital goods from being taxed outside of a consumer’s state, and leaves it up to each state to determine whether or not the tax is even imposed.

Overall, the bill is posed to clarify not only to whom the tax is paid, but also on what. There has long been dispute over the definition of “digital goods,” with many believing that products like software are indeed tangible and, thus, taxable. Still, many others assert that even software remains intangible, intellectual property. We don’t tax regular Internet usage across multiple states, so why should the download of digital goods be treated any differently? With the Digital Goods and Services Tax Fairness Act, the line is drawn to protect intellectual property, preventing the exploitation of digital goods at the cost of taxpayers.

How does this even happen? Well, say you were from New York, but you decided to take a vacation in Hawaii. From your hotel in Hawaii, you purchase an app for your smartphone. Without the protective Digital Goods bill, both Hawaii and New York would be able to tax your purchase. On top of that, if the app store’s servers were located in Colorado, they have the power to tax you, too. That’s triple taxation!

Those who killed the bill in committee last Congress must keep in mind that the purpose of the Digital Goods and Services Tax Fairness Act is not to completely strip away taxation on digital goods. This misconception can be seen in the CBO report in 2012 that seemed to initially drive legislators away from the first bill. The report stated that it would cost state and local governments over $3 billion in the first year. However, this is not the case. States will still be able to tax digital goods and gain revenue (if they so choose)—they just cannot impose multiple taxation on consumers outside their jurisdictions.

Digital Liberty urges Congress to support this oncoming bill, which is set to be introduced within the next few days. It will protect taxpayers and help fix the massive economic hindrance that is duplicative taxes, the last thing our nation needs during this economic downturn.