Q: What are digital goods?
A: Digital goods are online purchases transmitted electronically to a consumer where they have no tangible item to show for their purchase. Unlike traditional internet purchases, digital goods are not products you can hold in your hands, they are items like:
• Songs for your MP3 player or iPod
• Apps for your tablet or smart phone
• Ringtones for your phone
• Downloading or streaming of a movie or video game
Digital services are services provided electronically to consumers where they have different rights of ownership or access to such services. These services are:
• Streaming of a movie or video game
• Alarm monitoring or inventory tracking services
• Cloud computing services
A consumer may not be able to put these digital purchases on a shelf or hang it in a closet, but the purchase may still be subject to sales taxes and possibly multiple state sales taxes without the establishment of a national framework.
Q: What is the problem with how digital goods and services are taxed?
A: Unlike making a purchase at a store of a tangible item – when you purchase a digital good – you are potentially subject to paying sales tax more than once. For example, if you live in Colorado and you make an online purchase of an app in Virginia, and the company from whom you bought the app has their servers located in a Texas, any and all of those states could lay claim to the right to tax your purchase.
When you make a purchase, digital or not, in most states and on many items, you have come to expect paying sales taxes. However, under the current state tax regimes because of a lack of consistency, a consumer choosing to make a purchase electronically could be paying multiple states’ sales taxes on the same transaction. A national framework will guide multiple jurisdictions in how they can impose taxes on digital transactions, ensuring these transactions are only taxed once like their main street counterpart.
Q: How can I be subject to paying sales tax in more than one place?
A: Simple – when you hit the send button, digital transaction typically cross several state boundaries. Because there is no uniformity in how these taxes are applied today, tax collectors in multiple states can use vastly different rules to decide how and when they will impose taxes on these transactions. As a result, you may get taxed by multiple states.
Q: Does the United States currently have a clear definition of how to tax digital goods and services?
A: No. State laws governing sales and use and other transaction taxes are outdated and not able to address the complexities that arise in today’s e-commerce economy. This can only be resolved through a national framework passed by Congress, which alone has the authority to regulate interstate commerce.
Q: Is a national framework for taxing digital goods and services the same as a “national sales tax” on digital goods and services?
A: Absolutely not. A national framework is not establishing a “national sales tax.” It is seeking to set up a rational system of how state and local taxes can be applied to digital goods and services, protecting consumers against multiple taxes being charged by multiple states and localities. Many states are already taxing digital goods, and will continue to do so. However, the national framework will also provide much needed certainty to the states seeking to tax these transactions by clearly identifying which jurisdiction has the right to tax such transactions.
Q: If Congress acts, can states still implement sales taxes on digital goods?
A: The short answer is yes. However, each state legislature should make that tax policy decision and clearly decide what the sales tax should or should not be applicable to, including whether or not digital goods and services should be included in the sales tax base.