The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Clarity Needed in Taxation of Digital Goods

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


With technology changing the way consumers listen and view music and videos, state and local governments are now looking toward taxation of digital goods and services to increase their tax revenues. Currently, 17 states require by statute that taxes be paid on digital goods and services, and another eight states plus the District of Columbia draw this authority from their departments of revenue regulations or case law.

According to an August 20, 2015 article in The Wall Street Journal, because sales of music CDs and video CDs and DVD are declining, states and local governments are looking to counter the loss of sales tax revenues by taxing digital goods and services. The article notes that many states are either trying to make existing laws work for taxation purposes or rewriting tax rules, resulting in “a patchwork of tax policies – and some new laws – for fast-growing slices of consumer and business sales.”

Unfortunately, because many of these laws are unclear on where the digital good should be taxed, consumers are often faced with multiple and discriminatory taxes for the exact same digital purchase. Purchasing a digital good, such as music, videos, books, games, and other applications could lead to up to four separate jurisdictions imposing a sales tax based on where the transaction took place; where the company manufacturing the digital good is located; where the digital good is stored; and, where the consumer lives.

Legislation has been introduced in Congress to resolve the jurisdictional issues on taxing digital goods and services based on the home location of the purchaser, rather than subjecting consumers to multiple state taxes on the same purchase. The Digital Goods and Services Tax Fairness Act (H.R. 1643/S. 851) would end the imposition of multiple and duplicative taxes from various jurisdictions on a single digital download. The legislation also prohibits the imposition of taxes on digital goods at a higher rate than their tangible counterparts.

Consumers of digital goods and services need certainty that they will not be subjected to discriminatory, multiple, or duplicative taxes on their purchases, regardless of where, how, and when they purchase and download these products. This would keep more money in their pockets, giving them greater purchasing power, and equally important, keeping their hard-earned money out of the hands of government.

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