Lawmakers should get with the program and stop taxing digital goods

Justin Haskins Heartland Institute
Published September 9, 2016

Last month, consumers in Pennsylvania got a nasty surprise when they opened their bills for streaming-media services, such as Netflix, thanks to Keystone State lawmakers’ obsession with tax-and-spend policies.

Digital streaming-media services are now subject to the state’s 6 percent sales tax, a move lawmakers made to help fill the $1.6 billion gap between the cost of goodies on which lawmakers want to spend taxpayer money and the amount of tax revenue actually available.

The new tax is also being applied to almost all e-books, software, and digital music downloads purchased by Pennsylvania consumers.

Although wringing more money out of people may be popular with politicians, hiking taxes on digital consumer goods and services is abusing taxpayers and makes for bad tax policy. Generally speaking, taxes are payments made to the government to pay for the privilege of benefitting from a government resource. Typically, a fair tax structure would only tax the people using the services that are being paid for. In the physical world, this makes sense, but applying physical thinking to digital concepts, such as music downloads and streaming services, makes for bad policy.

Economists call this idea of taxing people at rates approximating the value of services or resources they consume the “benefit principle.” For example, each time a person uses a road by driving on it, the road is slightly damaged. Thus, drivers on government roads should be taxed slightly to pay for the repair and replacement of the resource.

Watching an episode of Stranger Things on Netflix does not wear down wires laid in the ground or cause the satellite dish on your roof to degrade—because it’s literally all subatomic particles in motion. Unlike how car traffic wears down a road over time, beaming electrons to your television doesn’t wear anything down. In other words, consumption of the good or service should not be offset with a tax, because there’s nothing requiring the tax to offset.

In addition to being a needless cash grab, digital sales taxes may be illegal, too.

In 1992, the Supreme Court of the United States ruled North Dakota could not force a business to pay a use tax just because consumers in the state were using the business’ products. In the case, Quill Corporation v. North Dakota, the company did not have any physical presence in the state, but it did sell digital goods to consumers in the state.

Just as local and state governments are arguing today digital goods and services are “existing” within their government borders and using their government-provided resources, North Dakota argued in 1992 the Quill Corporation’s software was inside the state government’s jurisdiction, and therefore subject to taxation.

The Supreme Court rejected the state government’s argument, ruling that a business must have a physical, real-world presence in a state before the business is required to pay for the consumption of resources.

It’s just as true today as it was in 1992 that transmitting bits of electrons to people within a jurisdiction does not consume resources and is therefore, under the law, unjustified.

Instead of skirting federal law and trying to wring taxpayers dry, lawmakers in Pennsylvania and other states should “get with the program” and stop hiking taxes on things consumers find enjoyable, such as Netflix and Hulu.

Cutting spending and eliminating government waste and fraud is a much better way for lawmakers to balance their budgets, and it’s far more popular with voters than tax hikes on services enjoyed by consumers every day.

[Originally Published at The Hill]