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Consumers could be subject to unfair taxation on mobile downloads

Guest post from Sam Whitehorn, executive director of Download Fairness Coalition:

The pace of growth in the online application market is one of the highlights of the new digital economy. Just last December, for example, the Android Market topped 10 billion downloads and less than four years after its debut in 2008, consumers downloaded 25 billion apps from Apple’s App Store.

 

But this milestone hardly scratches the surface of the popularity smartphones, tablets and other portable devices are experiencing. The proliferation of these new devices has led to an explosion in the market, and as a result several consumer protection concerns have understandably arisen. Security implications are an obvious source of continued speculation, but a threat that is often ignored is the increasingly complex issue of taxation.

Given the wide array of online digital goods – from movies and music, to songs and games – coupled with the stark reality of budget shortfalls on all levels of government, we find ourselves challenged to answer the very real questions of how these taxes should be structured and where and to whom they should be paid.

 

In fact, these questions were recently the basis for a court case in Montana, where the Montana Department of Revenue argued that digital goods are different from non-digital goods such as CDs and could classified as a telecom service and subject to a different rate of taxation. Thankfully, the court stood with consumers in affirming that states should not discriminate in their tax treatment of digital compared to similar goods that can be purchased in brick-and-mortar stores.

 

This Montana court ruling is important for two reasons. First, digital goods and services are one of the key drivers of a new economy and shouldn’t be taxed differently than in-store purchases. And second, the expansion of mobile commerce means there is an imminent need for rules of the road on how digital goods and services can be taxed.

 

But while the judge in Montana got it right, one state decision alone is not sufficient to protect consumers across the country.  In fact, while this ruling stops Montana from taxing digital goods as a telecom service it does nothing to protect Montana citizens from duplicative taxation. For example, today, Illinois can tax every Montana citizen who downloads a movie while waiting for a connecting flight at O’Hare; and Texas can tax customers in Utah whenever they download a ringtone from a company that has servers outside of Austin.

This is a complicated issue, and the “borderless” nature of the digital world means that states simply cannot solve this problem on their own. Instead, Congress must act to establish a framework to prevent any one state from imposing multiple or discriminatory taxes on digital goods and services, and also clearly identify which state has the authority to tax these products, if they so choose.

 

A bipartisan group of members, Senators Ron Wyden and John Thune and Representatives Lamar Smith and Steve Cohen, are attempting to do just that. The Digital Goods and Services Tax Fairness Act – S.971 and H.R.1860 – will establish a framework that enables this expanding sector of the U.S. economy to continue to grow and thrive. Passing this legislation will ensure that every consumer is taxed once – and only once – in the same way as if they purchased a CD in their local coffee shop.

iOS users alone download just under 80 applications to their mobile devices, with the App Store currently growing at a rate of roughly 48.6 million downloads per day. Clearly, consumers are utilizing digital goods at astronomical levels. It’s time for Congress to step in to ensure consumers are protected from discriminatory and duplicative taxation rather than allowing states to over capitalize by unduly taxing these increasingly popular goods and services.

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