Taxing the Digital Age

Imagine someone sitting at the airport terminal in Seattle, Washington, waiting for a flight home to Ohio.  Boredom has set in, as she waits for her flight to board, and she wants something to do.  So she scans through the app store on her mobile device, finds a game that happens to be located on a server in Utah and purchases it.  When she is back in Ohio and opens up her mobile billing statement, she could find a sales tax remittance for not just her home state of Ohio, but also from Utah and Washington.  In fact, if the company that developed the app was based in yet another state that taxes digital goods, she could potentially be subject to up to four separate taxes on a single purchase.   

There is an oddity within the taxation of digital goods and services that sets up the potential for multiple taxes being applied to a single transaction from different states.  Since there is no defined physical nexus for a digital good or service, it can be taxed based on several personal and commercial connections to the sale.

Consumers purchasing digital items such as music, videos, and software through their app store or online marketplace should therefore be more aware and concerned about the chances that they can be subjected to multiple and duplicative taxes for a single transaction.  In addition, some state laws and regulations also impose a higher tax rate on digital goods and services than on their physical counterparts.  For example, a downloaded digital music album could be taxed at a higher rate than a physical CD.  

There are currently 17 states that require by statute that taxes be paid on digital goods and services and another eight states plus the District of Columbia that draw such authority from their departments of revenue regulations or case law. 

Congress is currently working on a solution to provide a national framework for the purchase of digital goods by creating a standard nexus for the taxation of digital goods and services based on the home location of the purchaser, rather than subjecting her 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. 

According to Pew Research Center, 87 percent of American adults used the Internet as of January 2014.  In February 2015, Cisco released its Cisco Visual Networking Index (VNI) Global Mobile Data Traffic Forecast for 2014 – 2019.  The report projects that there will be 5.2 billion mobile users around the world by 2019, with 11.5 billion mobile-ready devices and connections, and the average mobile connection speed will increase 2.4-fold, from 1.7 Mbps in 2014 to 4.0 Mbps by 2019.  As the use of mobile-ready devices increases, so too will the growth of the digital economy.  According to an October 2014 study by

ACT | The App Association, revenue from the top 650 apps rose from under $2 billion after the first release of the iPhone in 2007 to $87 billion in 2014.  The association estimated that revenues would exceed $150 billion by 2017.

Growing numbers of mobile device users and apps will lead to increased purchases of digital goods and services.  States and local governments are always seeking new revenue streams, and the “Wild West” system of digital goods taxation is a perfect opportunity to increase their coffers.  These government have no qualms about imposing taxes on transactions that others are also taxing. 

On June 2, 2015, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing to discuss nexus issues regarding digital goods and services; i.e., there should be a specific connection to such sales and they should not be subject to multiple taxes.  House Judiciary Chairman Bob Goodlatte (R-Va.), in discussing H.R. 1643, stated that the bill “sets sourcing rules for the purchase of digital goods and services. These rules will help implement the Permanent Internet Tax Freedom Act’s ban on multiple taxes of Internet commerce. This ban expires October 1, 2015, and the Committee will soon move to renew it.”  On June 9, 2015, the House of Representatives passed H.R. 235, the Permanent Internet Tax Freedom Act of 2015 by voice vote.

The Digital Goods and Services Tax Fairness Act will provide certainty to consumers that they will not be subject to discriminatory, multiple, or duplicative taxes, regardless of where, how, and when they purchase and download digital goods and services, such as music, movies, and gaming applications.  That would keep more money in their pockets, allowing them to purchase more digital goods and services, and of equal importance, out of the hands of various levels of government.