New Framework for Digital Goods Taxes Introduced in US Senate

Published July 29, 2013

As technology advances, more products are becoming available online in a digital format. Politicians are eyeing these digital goods — applications, music, videos, ebooks and the like – as sources for more tax revenue.

Most states impose sales tax only on transactions that involve tangible personal property such as cars or computers. Many states do not impose sales taxes on services or intangible property. Digital goods, which fall in between many of the older definitions of taxable or not taxable, have created disagreement over whether they are tangible personal property or intangible property. Most states have declared most software to be a tangible product and therefore subject to sales tax. States are now classifying digital products and are moving in many different directions.

Different States, Different Approaches

Each state has taken its own approach to digital goods taxes. Double taxation has emerged as a problem. When a digital transaction involves multiple states, buyers can find themselves paying multiple sales taxes.

In an effort to create uniformity in digital sales taxes, Senators Ron Wyden (D-OR) and John Thune (R-SD), and Representatives Lamar Smith (R-TX) and Steve Cohen (D- TN), recently introduced a the Digital Goods and Services Tax Fairness Act.

The primary goal of the Act is to create a national framework that will prevent consumers of digital goods from being hit with multiple and discriminatory taxes, according to Thune.

‘Regs Have Not Kept Up’

“Federal regulations have not kept up with the fast-growing and ever-changing digital marketplace, resulting in outdated rules that could allow a single transaction to be taxed by multiple jurisdictions,” said Thune in a statement. “Our bill would prevent duplicative and discriminatory taxes on everything from downloaded music, to literature, to movies, helping to ensure that the digital economy remains a source of innovation and economic vitality. I look forward to working with my colleagues in the Senate to move this legislation forward.”

Wyden said the bill would provide a valuable digital tax roadmap for states to follow and help to clearly designate which jurisdictions could tax digital transactions.

‘Critical to Innovation’

“Creating clear, national disciplines that govern the taxation of the digital economy is critical to innovation and the growth of this segment of the American economy,” said Wyden in a statement. “This bill, which is consistent with the principles of the Internet Tax Freedom Act that is current law, protects the digital economy from the unfair application of taxes that would stifle the innovative digital goods and services that are transforming the economy.”

The Act would also help prevent taxes that are being imposed on wireless and other communications services from being imposed on digital goods and services.

Jot Carpenter, Vice President of Government Affairs of CTIA-The Wireless Association, commended the bill’s sponsors, agreeing that a national framework is needed.

“Senators Wyden and Thune continue to demonstrate their leadership by introducing this bill to preserve affordable digital goods and services. From apps to e-books, consumers rely on and benefit from digital goods and services,” said Carpenter in a statement. “Establishing a consistent national framework for how state and local taxes are imposed will protect consumers from multiple and discriminatory taxes on digital purchases.”