As technology advances, more products are becoming available online in digital formats. As digital goods such as applications, music, videos, and e-books have become more prevalent, state and local governments are looking for ways to raise new revenue by taxing these purchases.
Most states impose sales tax only on transactions that involve tangible property, such as a car or computer; many do not impose sales taxes on services or intangible property. Digital goods, which fall between many of the older definitions, have been the subject of much disagreement over whether such transactions involve tangible personal property or intangible information. Most states have declared most prewritten software a tangible product and therefore subject to sales taxes, and many are discussing reclassifying other digital goods as tangible products.
Each state has taken its own approach to digital goods taxes, which has created situations of double taxation: When a digital transaction involves multiple states, a consumer can end up paying multiple sales taxes. To create uniformity in digital sales taxes among states, Sens. Ron Wyden (D-OR) and John Thune (R-SD) and Reps. Lamar Smith (R-TX) and Steve Cohen (D- TN) introduced the Digital Goods and Services Tax Fairness Act.
The bill would establish a national framework with the goal of preventing consumers of digital goods from being hit with multiple and discriminatory taxes. It would provide a valuable roadmap for states imposing these taxes and designate clearly which jurisdictions have the right to tax digital transactions. The act also would work to prevent the multiple or discriminatory taxes currently being imposed on other services delivered over communications networks from being levied on digital goods and services.
Continued uncertainty over the taxation of digital goods will further slow the development of digital technology. State legislators should avoid placing new, burdensome taxes on digital goods and abide by the physical presence (“nexus”) standard.
Several states are considering imposing discriminatory new taxes on downloaded products. To ensure consumers are not charged multiple taxes for a single transaction, Congress should mandate that taxes on digital goods are charged only by the state where the consumer lives, a principle known as origin-based taxation.
The following documents provide additional information on digital goods taxes from a variety of perspectives.
Ten Principles of Telecom Policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reform in Indiana, the advances made by other innovation leaders in the telecom market, and how other states can follow their lead to reap the rewards of new investment in telecommunications services.
Eight Principles of Telecommunications Policy
The Washington Policy Center lays out a basic framework for how legislators and citizens can incorporate many of the basic free-market principles used in discussions of budgets and taxes, education, health care, and the environment and apply them to debates over technology and telecommunications policy.
Digital Goods and Services Tax Fairness Resolution
This resolution from the American Legislative Exchange Council supports congressional efforts to “regulate commerce among the several states” through passage of a federal-state framework that ensures consumers this new, innovative form of commerce is not subjected to multiple, discriminatory, and inconsistent state and local tax laws and the authority of states is clarified to enable states to establish their own sustainable sources of revenue.
Internet Tax Bill Targets All Digital Downloads
Writing for CNet, Declan McCullagh examines digital download taxes and how the Marketplace Fairness Act may affect taxes on digital goods. The story includes a chart, compiled by the Download Fairness Coalition, showing which states in 2012 taxed e-books, music, movies, software, and other digital downloads.
The Digital Goods and Tax Fairness Act is a bipartisan bill introduced in Congress as an attempt to simplify state and local Internet taxes. MyWireless.org—a nonprofit consumer advocacy group—identifies the complex tax issues and the threats to high-tech jobs and investment such legislation is supposed to remedy.
The iTunes Tax
Several states have implemented a download tax. This brief essay identifies 11 states that have adopted the so-called “iTunes” tax, although other sources claim 24 other states and Washington, DC have some form of Internet download tax.
Unfair Download Taxes
Introducing download taxes harms state businesses by putting them at an economic disadvantage with neighboring states without the tax, according to this blog post from an informal group of companies, trade associations, and consumer organizations united to protect the online marketplace from excessive and discriminatory taxes.
Digital Downloads Should Be Protected from Discriminatory and Duplicate Taxes
Free State Foundation Research Fellow Seth Cooper argues the sourcing rules, nondiscriminatory provision, and requirement for clear statements of tax policy by state legislatures in the proposed Digital Goods and Services Tax Fairness Act would create a framework in which states can equitably collect revenues without burying digital goods and services under multiple state taxes.
Five Reasons Why the ‘iTunes’ Tax Is a Bad Idea
James G. Lakely of The Heartland Institute gives five reasons why imposition of a sales tax on Internet purchases will cause more harm than good, in an op-ed published in The New York Post.
The Internet Tax Solution: Tax Competition, Not Tax Collusion
Cato Institute’s Adam D. Thierer and Veronique de Rugy explain why Congress should resist calls to allow states to require online retailers to collect taxes on the sale of goods over the Internet.
Sales Tax Levies on Digital Downloads Facing Headwinds for Now
Anne Rosivach, writing on the AccountingWeb.com site, observes, “[B]usinesses that sell in multiple states are left to cope with complex compliance issues” because of download taxes. “South Dakota, for example, taxes all products transferred electronically. New York law imposes a sales and use tax on tangible personal property (including prewritten software) and certain information (and other) services.”
Research & Commentary: Taxing Cloud Computing
Cloud computing has fundamentally changed how consumers purchase and use software and computing services, by moving many of the functions online. Matthew Glans of The Heartland Institute argues state legislators should avoid placing new, burdensome taxes on cloud computing and abide by the physical presence standard. Otherwise, cloud service providers will be discouraged from setting up shop in-state or providing these services there.
Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit InfoTech & Telecom News Web site at http://news.heartland.org/tech, The Heartland Institute’s Web site at www.heartland.org, or PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or the Heartland Web site, contact Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].