House Committee Approval for Digital Goods and Services Tax Fairness

July 6, 2012

Last week, the House Judiciary Committee passed the Manager’s Amendment of H.R. 1860, the Digital Goods and Services Tax Fairness Act, by voice vote.  The bill establishes a national framework for how state and local taxes apply to digital goods and digital services so as to prevent multiple and discriminatory taxation.  CCIA welcomes committee passage of this legislation as we believe it recognizes the importance of innovation and the need to provide for the continued development of the growing digital marketplace.

The Digital Goods and Services Tax Fairness Act, sponsored by Judiciary Committee Chairman Lamar Smith (R-TX) and Rep. Steve Cohen (D-TN), would limit taxes on digital goods and services to either the buyer or seller, clarifies that the customer’s tax address is the only jurisdiction with the right to tax a digital transaction, and prohibits the taxation of digital goods and services at a higher rate than similar non-digital goods and services.

The fact that digital transactions transcend physical borders enables a far-flung marketplace unhindered by distance and geography.  However, at the same time, this extra-geographic nature makes them vulnerable to multiple tax jurisdictions seeking to use any connection (no matter how marginal) to the transaction to take their cut.  The real and potential benefits of the digital marketplace need to be shielded from such exploitation, and the clarification provided by H.R. 1860 would do that.

While it is heartening that H.R. 1860 was passed with broad support in the committee, some members made troubling comments about their willingness to link it with efforts on other bills (the Main Street Fairness Act and the Marketplace Equity Act) that would force out-of-state online retailers to collect sales and use taxes on purchases made by residents of a state, regardless of whether the retailer had any physical presence in that state.  While these bills do deal with online markets and taxes, their approach to innovation could not be more different.  H.R. 1860 seeks to prevent new digital markets from being penalized for their innovation, while online sales tax collection bills would allow states to do just that by targeting them as convenient sources (and collectors) of revenue.  Online sales tax collection is a completely separate issue and we hope that Congress will keep it that way.

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