Taxing Digital Goods: We Need a National Framework

by Ava L. Parker on March 20, 2011

The move is on by state lawmakers across the country to balance their budgets, and the task is proving formidable. In state after state, tax revenues continue to drain away, and after several years of cuts, all of the easy decisions are long gone. The temptation is strong to find new sources of revenue.

High on the list with some lawmakers are digital goods — the movies, the e-books, the iTunes and other pieces of entertainment and information we download routinely but seldom, if ever, pay taxes on. Slap a tax on these transactions, the argument goes, and the budget-balancing problem, or at least a small part of it, is solved.

The problem state legislatures face is real — but they need to resist this easy temptation. Before they create new taxes, states and local governments need to work with Congress to construct a rational, national framework for taxing digital goods.

Every state, every city

A national framework is needed, and soon, or we will end up with 50 different tax schemes in play, all putting a strain on emerging broadband industries and, potentially, taxing them to death, or at least out of the market in some states.

And that’s just at the state level. Municipalities have taxing power, too, and some cities and counties already have dipped their toes in the digital stream. If every local government jumps in, the result could be tens of thousands of different taxes on digital goods, some piled on one another. What industry can grow and prosper under that kind of financial assault and accounting confusion?

There is also the concern that a flood of taxes on digital goods will handicap the push, by the One Economy Campaign and others, to expand broadband into every household. With the cost of broadband already keeping millions of families off the Web, increased costs through a mishmash of taxes could make the problem worse. If the price goes up, some families could disconnect — widening the digital divide.

And then there is the issue of tax equity — how taxes on digital goods and services disproportionately hurt low-income Americans. Studies show that these individuals rely heavily on their cell phones for Internet access. They are already paying high taxes for this access; the taxes and fees on wireless service is more than double (16.3 percent vs. 7.4 percent) the average general sales tax.

That’s a strongly regressive tax policy. It hurts the disadvantaged and it slows the growth of broadband access, which is in the best interest of everyone. If states and municipalities create more taxes on digital goods, they will make these taxes even more regressive.

A system that guards against excess

We need a digital tax strategy that is not regressive. We need to balance our state budgets, and we need to be consistent in our tax policy. Finally, we need to allow broadband and our technology sector to grow strong and create jobs.

That’s where a national framework can help. Congress can establish a system that allows fair and equitable taxes but guards against excesses. We don’t want to see more regressive taxation. We don’t want to see taxes used to promote one competitor against another. And we don’t want to see multiple taxes from different states applied to the same digital transaction. A national framework can prevent such mistakes.

It is important to note that digital goods should not enjoy a tax-exempt status. That’s not an option, given the financial pressures of state governments, and that’s not fair to other industries that do pay taxes. But any taxes should be applied lightly, and uniformly.

In short, we need a tax system for digital goods that makes sense. We need a national framework.

  • Ava L. Parker of Jacksonville, Florida, is the president of Linking Solutions Inc., a business-development and community-outreach firm, and a partner in the law firm of Lawrence & Parker, PA., and the voice of The AvaView, a blog on digital action and consumer protection.

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  • Bill Edmonds

    Cell phones are already being viewed in a manner similar to cigarettes — a luxury to be taxed. If every tax-starved body starts sparking off new taxes, this could easily grow into a mess.

    National framework — good idea.

  • RBStevens

    I think digital goods should be taxed. Why not?

    But it should be done fairly and in as clean and simple a manner as possible.

  • FussAndHoller

    I’ve heard different arguments on this — a don’t tax at all argument, a tax ’em like sin argument.

    This one is a good middle ground. And definitely, a consistent approach makes sense.

  • Knothetruth

    I don’t believe in a digital tax at this time. There are too many fledgling businesses as well as residents who it will impact greatly. I also don’t believe in balancing budgets by adding new taxes and not fixing what’s broken. I do think a tax on digital goods may be inevitable, but its too easy of a solution to just tax digital goods when states and the government are desperate for funds. I just don’t think easy fixes result in long term solutions. Let’s fix what’s broken, trim what we can and revisit this in a more “stable” economy.

  • DianneG

    I agree that a national tax, evenly applied would work well. I don’t want to have to think about what state I’m buying which item from when I am online shopping. My question is how with this impact foreign relations though seeing that people often purchase goods and services from abroad. What are the foreign relations impacts? Do other countries have similar national tax programs for purchases made online?

  • Guest

    I wholeheartedly agree that we need a framework for telecom/digital goods taxation. Broadband and digital services are too vital to our individual and community progress to be hampered by regressive taxes.

  • John_Q_Public

    Amen! The disparity in tax rates is ridiculous. With the world moving to one dominated by broadband and e-commerce, it’s time for a change. Thank you for writing about this!

  • It is possible

    I absolutely concur with Ms. Parker. Taxes on mobile devices are totally ridiculous. As a resident of NY, the taxes on my mobile phone is different from what other states charges. I once spoke to a customer service agent. I was told they couldn’t do anything about it because taxes are not charged by the company but by the state. Although sympathetic to my situation, the only solution she offered was a choice to either stay in NY and pay the outrageous charges, or move to another state with low taxes.

    I agree- we need a national framework- a uniform tax system for digital goods will truly make sense!!!

  • JCraigDC

    You and Parker make excellent points. My $69 cell phone plan is invariably more like $90 after various taxes and fees are added. Not what I bargained or budgeted for, and with so much of our media delivered online, we need a stable tax structure that CONSUMERS understand as we go further into the digital age. Though consumers often point the finger at providers (wireless, broadband, phone, cable, etc.) when it comes to making charges easy for consumer to understand, the time has come for govt transparency in taxes and fees as well.

  • Winston

    It’s sickening how these politicians find it acceptable to rectify their mismanagement of funds by taxing their constituents. Soon we will have nothing for ourselves…. this place is turning into an Orwellian disaster. Big Brother is there with his hand in our pockets!

  • S. Witter

    I agree with Ms. Parker that there needs to a national framework re: taxing digital goods. The nature of a digital product is that it does not belong to or arise out of one state, city, or entity. It belongs solely to the creator (who could move from state to state at any time) requiring a federal patent and is generally sold or transferred nationwide. For these reasons, it is a federal issue requiring a national standard. I don’t see how anyone could argue any differently.

  • Chalk

    I just hope the national framework doesn’t end up giving “digital goods” a free ride.

    My state is in love with “tax-free holidays,” all the while they are laying off school teachers.

    Digital goods are, after all, GOODS. Tax them.

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