Bipartisan legislation has been introduced that would regulate state taxation of digital goods and services that are delivered electronically (i.e., not through tangible storage media). Digital goods would include, for example, downloads of software, music, and e-books. The professed goal is to prevent multiple taxation of these products and services as well as to prevent taxation that is discriminatory when compared to the sale of goods and services that are not delivered electronically.

In the House, H.R. 1860, the Digital Goods and Services Tax Fairness Act of 2011, has been introduced by (among others) Rep. Lamar Smith (R-TX), Chairman of the House Judiciary Committee, and Rep. Steve Cohen (D-TN), Ranking Member of the Judiciary Subcommittee on Courts, Commercial and Administrative Law, which is considering the bill. In the Senate, the legislation (S.971) is sponsored by Senators Ron Wyden (D-OR) and John Thune (R-SD), both members of the Finance Committee, to which the bill was referred.

The main points in the legislation are:

• Multiple taxation (defined as a situation where a state imposes a tax but does not allow a credit for a tax previously paid to another state) of the sale or use of digital goods and services would be prohibited.

• Discriminatory taxation of digital goods and services would be prohibited. This is defined as a situation where a tax is imposed that is at a higher rate than that applying to the sale or use of tangible goods or non-digital services.

• Taxes on the sale of digital goods and services could only be imposed by the state of the customer’s address. For example, for sales to non-business customers (i.e., for personal use), a seller would use the location where the goods or services are received, but if the seller does not know that, the seller could generally rely in good faith on the address supplied by the customer during consummation of the transaction.

• State tax officials would be prohibited from interpreting existing tax laws that apply to the sale or use of tangible personal property, telecommunications, Internet access, or audio/video programming so as to expand their application to digital goods or services. Moreover, state tax officials could not interpret existing taxes on sale or use of digital goods to apply to digital services. (Although the bill would generally take effect on enactment, this provision would be retroactive to past tax periods, unless the interpretation had already been approved in a court case.)

• Tax collection methods applicable to digital goods and services could not be disadvantageous as compared to collection methods for sale or use of tangible personal property.

• Taxpayers could seek to enforce the protections of the legislation in Federal court.

• The bill would not apply to net income or ad valorem taxes.

At present, many states do not even tax sales of digital goods and services because those are not tangible personal property, the traditional core subject of sales and use taxes. However, the proponents of the legislation are concerned that states, aggressively seeking revenue during the economic downturn, will not just tax digital goods and services but will impose the taxes at discriminatory high rates. Proponents cite, as an analogy, telecommunications taxes, which some states have imposed at rates substantially in excess of general sales taxes on tangible personal property. Proponents are also concerned that multiple states (e.g., the origin state, the destination state, and the states where servers used in the transmission are located) will all try to tax the same digital sale.

The bill is strongly opposed by the Federation of Tax Administrators (FTA), a group of state tax officials. The FTA testified that it does not disagree that a uniform framework for taxation of digital goods and services is desirable, but it believes that the legislation needs more work and that a dialogue between the business community and tax administrators to reach a consensus on the bill’s provisions would be beneficial.

One point that concerned the FTA was that the bill’s provision giving exclusive taxing jurisdiction at the purchaser’s address would preclude the seller’s state from imposing a tax (an “origin” tax, as opposed to the more typical “destination” tax) on the sale. Since the purchaser’s state is also not allowed to impose a sales tax unless the seller has a physical presence there (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)), which is often not the case in an Internet transaction, the sale could escape tax entirely. Legislation that would overturn the Quill result so as to permit taxation of Internet transactions by the destination state when the seller has no physical presence there has languished in Congress for several years.

The FTA was also concerned that, because of the interaction of various provisions of the legislation, certain intermediaries such as online travel companies might escape tax on services that they offered. Additionally, the FTA pointed out that the provider of a traditionally taxable service might avoid tax through the simple expedient of delivering a final report electronically via e-mail, thus fitting it within the definition of a digital service.

Unlike the stalled legislation to overrule Quill, H.R. 1860 has already had a hearing in the House and may be headed for a prompt mark-up in the Judiciary Committee.

The text of H.R. 1860 is available at The text of S. 971 is available at Written testimony and a video of the Judiciary subcommittee hearing are available at

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