Regulatory Reform

Taxed Three Times: How the Digital Goods and Services Fairness Act Protects Consumers from Multiple Taxes

It is no surprise that a majority of Americans purchase tangible items like clothing, books, and even groceries online. However, a recent finding from the Pew Research Center’s Internet & American Life Project reveals that Americans are increasingly willing to purchase “intangible” goods and services as well. In fact, over 65% of adult Americans now purchase these digital products, including songs, ringtones, games, and hundreds of thousands of apps. While the Pew Research Center’s study concludes that people’s willingness to pay for online material indicates a tremendous opportunity for artistic creators and new businesses, the issue also has serious implications for tax policy.

The digital marketplace is widely celebrated as a catalyst for economic growth, but this new, innovative form of commerce is presently constrained by a conglomeration of state and local rules determining how digital goods are taxed. Today, an e-book materializes on the screen of an iPad with the tap of a finger. Americans rarely consider the actors involved in such a seemingly uncomplicated transaction. However, with every digital purchase, the location of purchase, where the number is billed, the location of the company an item is purchase from, as well as the server location of that company may all be in different states. Thus, under current law, a number of states and localities may all lawfully claim the right to tax the purchase of a single e-book. Inconsistent state and local rules surrounding digital marketplace transactions result in excessive, multiple, and discriminatory taxes that threaten the burgeoning industry and harm American consumers.

ALEC believes as a matter of policy that a federal-state framework of clear and fair taxation would streamline current law and protect consumers from multiple and discriminatory taxes on digital purchases. There are signs that on June 28 the U.S. House Judiciary Committee also recognized the need for such a national framework by adopting the Digital Goods and Services Fairness Act (HR 1860), which prohibits a “state or local jurisdiction from imposing multiple or discriminatory taxes on or with respect to the sale or use of digital goods or services delivered or transferred electronically to a customer.” Acknowledging that advancement in the tech industry has outgrown current taxation law surrounding the digital marketplace, this bill would reintroduce certainty, simplicity, and fairness to tax laws regarding digital commerce.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

+ Regulatory Reform In Depth