Congress should pass bill to prevent stacked taxation of digital purchases

Who has the authority to tax digital purchases such as downloads of music, literature, movies, mobile apps and software? That seemingly simple question has yet to be resolved, and consumers are increasingly at risk of paying multiple taxes to different jurisdictions for the same digital transaction.

A new proposal in Congress would change that.

A bipartisan duo, Senators John Thune (R-S.D.) and Ron Wyden (D-Ore.), recently re-introduced a bill – the Digital Goods and Services Tax Fairness Act of 2018 – originally proposed in 2011 to set national standards for taxing digital purchases and protect consumers from stacked taxation. A companion version was also introduced in the House. The bill specifies that only one jurisdiction has the right to tax the sale of digital products and clearly delineates which state has such taxing rights.{mosads}

Digital commerce introduces unprecedented complexity into questions of tax jurisdiction. Take, for instance, a Texas resident who rents a movie online while traveling in Ohio from a company located in California. The film is transmitted from a server in Pennsylvania. At least four states have a plausible justification for levying a tax on the transaction, and revenue-hungry policymakers have every incentive to do so.

Several states have already moved to include digital goods and services in their sales tax base, and many more are poised to follow suit. It is not hard to understand why states are pursuing this source of revenue as our economy continues to evolve from a tangible-based economy to a service-based economy.

The result, sharply higher costs for digital consumers, could chill the growing popularity of the digital economy and harm a sector of our economy that accounts for 6.5 percent of GDP and $1.2 trillion in annual spending.

The Digital Goods and Services Tax Fairness Act would establish uniform standards for taxing digital goods and services and resolve the jurisdictional disputes that open the door to stacked taxes. According to Senator Thune, “for a typical purchase of a digital product from a website, this legislation would use the address of the consumer to determine which jurisdiction has the authority to tax a digital purchase.”

The bill also addresses discriminatory taxation of digital transactions that could create an uneven playing field between digital and tangible goods and services. Currently, states can choose to impose a tax on digital magazine subscriptions, for example, even if it does not levy the same tax on physical magazines. The legislation would prevent that and help ensure that any taxes imposed on digital goods and services are the same as the taxes imposed on similar tangible products.

Policymakers in the U.S. and abroad have struggled to formulate a coherent approach to taxing digital transactions. The goal, to create a level playing field for businesses and consumers, is elusive. The Digital Goods and Services Tax Fairness Act of 2018 strikes the right balance in respecting states’ rights while protecting consumers and businesses from unfair treatment.

As the digital realm grows ever larger, congressional leadership on this issue is critical.

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. Follow on Twitter @ConsumerPal.