Bipartisan bill would ban special taxes on downloads, software, other digital goods and services

Purchases of digital goods and services--including movie streaming, cloud-computing, e-books and IT applications--would no longer be subject to special state and local taxes and other discriminatory levies, under bipartisan-supported legislation advancing on Capitol Hill.

Intended to provide uniformity and certainty across states, the legislation takes aim at the hodgepodge of sometimes irrational state and local tax regimes that critics say unfairly target connected consumers and foster market uncertainty in the burgeoning digital economy.

On Thursday, the Republican-led House Judiciary Committee unanimously approved H.R. 1860, introduced by Committee Chairman Lamar Smith (R-Texas).

The proposed Digital Goods and Services Tax Fairness Act would prohibit states and localities from imposing taxes or fees on most digital goods and services if comparable, tangible personal property is not similarly taxed in the jurisdiction.

"The fact that consumers increasingly prefer to consume goods and services in digital rather than tangible form should not prompt states to impose unfair taxes," Smith said at the June 28 full committee markup of H.R. 1860. "State and local sales taxes should apply equally to goods or services regardless of the form in which they are consumed." 

Prohibited under the statute also would be so-called "discriminatory taxes" on purchases transferred or delivered electronically, including software, music downloads, mobile applications and e-books.

The digital-services tax prohibition would not, however, apply to telecommunications services, Internet services, or audio or video programming services, except for interactive on-demand video services.

Additionally, the measure would limit taxes on digital goods to sales levies only in the tax-address jurisdiction of either the buyer or seller. For bundled services, if charges for digital services are aggregated--and not listed separately--then those charges may be taxed at the same rate as other services.

H.R. 1860's companion bill in the Senate is S.971, introduced by Sen. Ron Wyden (D-Ore.), co-author of the 2004 Internet Tax Nondiscrimination Act (Pub.L. 108-435) that bans Internet taxes in the United States.

Intended to "promote neutrality, simplicity and fairness" in e-commerce and other digital purchasing, S.971, pending before the Senate Committee on Finance, is co-sponsored by Sens. John McCain (R-Ariz.), Olympia Snowe (R-Maine) and John Thune (R-S.D.).

Support for the tax-fairness measure has come from varied interests and has been widely a bipartisan effort on Capitol Hill.

H.R. 1860 and S.971 are supported by a coalition of the U.S. Chamber of Commerce and 10 mostly taxpayer-advocacy groups such as Americans for Tax Reform and the Taxpayers Protection Alliance.

"Internet and digital commerce is a highly dynamic and rapidly growing sector of the American economy," the group wrote in an April 25 letter to the Senate Finance Committee. "The Digital Goods and Services Tax Fairness Act will help to eliminate tax-related burdens on interstate commerce that could stifle the vital online market."

Championing the legislation is the Download Fairness Coalition, which counts as members technology companies (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Comcast (Nasdaq: CMCSA), Cox Enterprises, Time Warner Cable (NYSE: TWC) and the National Cable & Telecommunications Association (NCTA), in addition to wireless carriers and a handful of public-interest groups, including the American Association of People with Disabilities.

The Download Fairness Coalition, a Washington-based 501(c)(4) organization, argues H.R. 1860 and S.971 would help spur business innovation in the digital marketplace and foster broader U.S. economic growth.  

"The national framework created by this act will provide much-needed parameters to states seeking to tax digital purchases by clearly identifying which jurisdiction has the right to implement such a tax," DFC Executive Director Sam Whitehorn said in a statement.

Among groups opposed to the digital tax-fairness legislation is the National Conference of State Legislatures, a Denver-based bipartisan policy and research NGO serving state lawmakers and their staffs. 

NCSL argued in a June 28 letter to the House Judiciary Committee that, as currently drafted, H.R. 1860 "fails to adequately establish clear rules for the sourcing of transactions and fails to sufficiently define the types of taxes subject to the measure."

Additionally, NCSL said it's concerned that, if enacted, the bill would preempt existing state tax statues and "negatively impact state revenues during a time when state budgets are only now recovering from the recent recession."

For enactment of Digital Goods and Services Tax Fairness Act, Congress would rely on its enumerated powers under the Commerce Clause--U.S. Const. art. I, § VIII, cl. III--to ensure states and local governments do not impose "multiple, excessive and discriminatory taxes and other burdens" on consumers and digital-service providers, the legislation's congressional finding indicates.

H.R. 1860 is an amended version of a similar proposal Smith introduced in 2010. Under the current bill, legal challenges to the law would be litigated in state courts rather than the federal judiciary. Also, to afford tax officials ample time to implement the law, the statute's effective date would be further out than the sought in the earlier proposal,  H.R. 5649, 111th Cong., 2d Sess., June 30, 2010.

For more:
 - read the texts of H.R. 1860 and S.971
 - see the Judiciary Committee statement
 - see the Download Fairness Coalition statement
 - read the taxpayer advocates' support letter
 - see the NCSL opposition letter

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