The taxing problem of digital goods

Currently, states can tax downloaded products – such as software, music and movies – in a variety of ways, and there are no rules in place for determining what the tax jurisdiction should be for these “digital” goods and services.  As a result, it is possible that a consumer who downloads a ringtone could be taxed based on the location of the seller, or the buyer, or the computer server that stored the product, or the Internet service provider. This means that the same good could be subject to taxes from multiple jurisdictions and by multiple government entities, or what is sometimes referred to as pyramid taxes.

Last December, a bill known as The Digital Goods and Services Tax Fairness Act was introduced into the House by Reps. Lamar Smith (R-Tex.) and Steve Cohen (D-Tenn). The bill, which is nearly identical to one introduced into the Senate earlier this year by Sens. John Thune (R-S.D.) and Ron Wyden (D-Ore.), attempts to put in place a national framework for how digital goods and services should be treated. Both bills are reintroductions of bills entered during Congress’ last session, where both bills languished before dying with the end of the session.

An entirely new economy has sprung up around digital goods and services, an economy that barely existed 15 years ago. This new economy is a marketplace for things like apps, tickets, games, music, videos, ebooks, and other virtual or non-physical items that can be purchased and downloaded over the Internet. Helped in part by the growth of smartphones and high-speed Internet connections, this new economy has helped to create thousands of jobs and contributed billions to the economy. Preventing duplicative and discriminatory taxes is paramount to keeping this new economy thriving. 

Earlier this year, Apple announced they had sold their 25 billionth song and over 40 billion apps in their iTunes store, bringing in $3.9 billion in sales in the 3rd quarter of this year alone. In fact, according to one study, there are over 100 billion apps currently installed on Apple’s iOS and Google’s Android devices.

This proliferation of apps has had a huge impact on the economy.  According to another study, the app economy alone has created over 450,000 jobs. Netflix now has 40 million worldwide subscribers, of which all but 7.5 million are digital subscribers (rather than DVD).  Amazon has claimed for several years that ebooks now outpace the sales of printed books.

The bills introduced into the House and Senate would go a long way in giving some stability to this growing economy. As of now, the tax status of these goods and services is unknown—currently, you could be taxed in 2 or 3 different jurisdictions for doing something as simple as renting a movie online. This bill would put rules in place for how these items can be taxed, and which entity is allowed to tax them.

It goes without saying that this type of taxation would be terrible for consumers, who would be stuck holding the bill. It would also be a burden on burgeoning entrepreneurs, who could find their business stymied by burdensome taxation across several different jurisdictions. Without a solid footing in place, and restrictions on taxes that are allowed to be collected, we could find ourselves in similar situation to that of wireless tax bills, where consumers face a tax approaching 17 percent of their bill, on average.

If Congress is serious about protecting both entrepreneurs and consumers, they should consider some sort of protection from the potentially onerous tax burdens that could be placed on them by tax happy legislatures.

Christenson writes on digital tech issues for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.  For more information, visit

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