Digital Goods and Services Tax Fairness Update

One version or another of the Digital Goods and Services Tax Fairness Act has been kicked around Capitol Hill for years. The newest version, H.R. 1643, was introduced in March 2015 in the House, where it is under the consideration of several committees and subcommittees. It seeks to prohibit state and local jurisdictions from “imposing multiple or discriminatory taxes on the sale or use of a digital good or service delivered or transferred electronically to a customer.”

Last month, a report ordered by the House Committee on Judiciary was released by the Congressional Budget Office (CBO). It predicts that state and local governments would lose approximately $1 billion (nationwide) in revenue “in at least one of the first five years after the mandate becomes effective and at least that amount in each subsequent year.” Individual states would lose approximately 15% of sales tax revenue on digital goods and services.

As explained in the report, the legislation would prohibit state and local governments from imposing taxes on the sales of digital goods and services under any of the following conditions:

• The customer’s tax address is not within the state or locality.
• The taxing jurisdiction does not reduce the tax owed by the amount of taxes paid to other jurisdictions or include an exemption for resale and component parts.
• The tax rate applied to the digital good or service is higher than the rate that would apply to a similar good or service that is not delivered electronically.

In addition, H.R. 1643 “would prevent state and local governments from imposing taxes on revenues generated by businesses that provide billing services for or deliver digital goods and services on behalf of sellers of digital products or services.”

Digital goods and services, defined

According to the CBO, the legislation lacks “clear definitions” of “digital services” and “digital products.” As a result, CBO assumed the following:

• Digital services include services “that are provided to the consumer electronically, such as data processing and storage, database, online marketplace, and website services.”
• Digital products include items “that are downloaded by consumers, such as software and software updates, books, games, apps, and pay-per-view movies.

On the other hand, tangible personal property purchased over the Internet is not a digital product, nor are items purchased over the Internet and received in person, such as tickets to a concert.

Read the CBO report for more details.

Learn more about the taxability of digital goods and services.