Yesterday, the House Judiciary Committee took an important first step towards ensuring consumers aren’t hit with confusing new taxes on digital downloads. By passing the Digital Goods and Services Tax Fairness Act, the Committee started the process of putting in place a rational tax framework for the digital economy. We urge Congress to help secure our digital future by adopting this important piece of legislation before year’s end.
Tens of millions of consumers participate in the digital economy every day by downloading apps or content, streaming content or accessing mobile broadband for business or entertainment. Unlike physical goods, which may only be taxed by the state or city in which they are purchased, digital goods are not protected from duplicative taxes. In other words, state and local governments can get a second or even third bite of the apple. For example, a 99-cent app purchased from an app store could potentially trigger taxes in multiple states and municipalities. Say the app developer is based in Colorado, its server is based in Missouri, and the consumer buys it while in Minnesota but resides in Virginia. Each of those states could seek to collect its tax on that app, and each with a different tax rate. And we haven’t even considered the cities that might want to assess their own taxes. That means a small business could face thousands of dollars in duplicative taxes to equip its employees with the latest health care, education, or business productivity apps. This kind of byzantine tax system would create confusion, harm consumers and hinder growth in the digital marketplace.
Fortunately, the Judiciary Committee’s bill would ensure that only one jurisdiction (where the customer resides) would have the right to tax digital transactions if it chooses to do so. And it can only tax digital transactions at the same rate as the taxes imposed on physical goods. Chairman Bob Goodlatte (R-VA) and members of his committee, including Representatives Smith and Cohen, rightly understand that app and digital goods industry are important to the future of the U.S. economy. The mobile app market alone is expected to generate $77 billion in revenues by 2017. Coupled with Congress’s recent passage of PITFA, yesterday’s action is another positive step toward avoiding a digital “Taxmageddon” and establishing a sound tax policy for the 21st-century economy. We urge Congress to pass this legislation as soon as possible.