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Congress Should Take Action to Stop Unfair Taxation of the Digital Economy

Whether they’re streaming a movie on Netflix or buying a music album on iTunes, consumers are at risk of paying multiple taxes on the digital goods and services they buy. That’s simply unfair, and Congress should do something about it. 

Suppose a resident of Nevada purchases a smartphone app while vacationing in Maine. The vendor’s server happens to be located in Virginia. Currently, as a result of outdated laws written with brick and mortar stores in mind, there is nothing to prevent any and all of those states from levying a tax on that transaction, tripling the tax burden on the consumer.

These duplicative taxes threaten one of the most dynamic and fastest-growing sectors of our economy. In 2016, the Bureau of Economic Analysis estimated that the digital economy supported 5.9 million jobsand made up 6.5 percent of U.S. GDP.

For more than a decade, the digital sector has grown more than three times faster than the overall U.S. economy, and it shows no signs of letting up. Every year, the number of e-books, movies, games, apps, software packages, music downloads, and other digital goods sold to American consumers grows. Since 2012, the number of Netflix subscribers in the U.S. has more than doubled. Sales of digital audiobooks grew 32.1 percent in the first quarter of 2018 alone, while 30 million Americans pay for digital music services that account for 62 percent of the music industry. Next year, mobile apps are expected to generate $189 billion in sales

The booming digital economy has not gone unnoticed by state policymakers looking to boost revenue. The majority of states already impose taxes on some digital products, and many more are expected to follow suit. Without a reasonable framework to govern how digital transactions are taxed, American consumers could be subject to significant tax liabilities. As the internet continues to develop and innovations like 5G networks and Internet of Things (IoT) technology make digital products even more central to how we live, our laws must catch up to this ever-changing landscape.

Last Wednesday, bipartisan lawmakers in the House and Senate re-introduced the Digital Goods and Services Tax Fairness Act — including S. 765, sponsored by Senators John Thune (R-S.D.) and Ron Wyden (D-Ore.), and H.R. 1725, sponsored by Congressmen Steve Cohen (D-Tenn.) and John Ratcliffe (R-Texas) — which recognizes that the internet inherently crosses state lines and requires new regulatory approaches. The bill prevents states from imposing multiple taxes on digital goods as they move from one state to another and specifies that the consumer’s state of residence is the only jurisdiction with the authority to levy taxes on digital goods and services.

The Digital Goods and Services Tax Fairness Act also prohibits discriminatory state and local taxes that single out digital goods and services merely because they are transmitted over the Internet. Right now, states can choose to impose higher tax rates on an online newspaper subscription, for example, than on the paper version of the same newspaper. This unfairly penalizes consumers for participating in the digital economy. If a particular product is subject to a tax, it shouldn’t matter whether it comes digitally or not.

By creating basic rules of the road for taxing digital transactions, the Digital Goods and Services Tax Fairness Act ensures that consumers are treated in a fair and neutral way, regardless of where and how they purchase digital goods and services. Preventing duplicative and discriminatory taxes means more money in their pockets and more freedom to shop as they choose.

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.

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