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Congress Debates Bill on Digital Goods State Taxation

By: Laura Lieberman

On Monday, May 23, the U.S. House Committee on the Judiciary, Subcommittee on Courts, Commercial, and Administrative Law heard testimony on H.R. 1860, the Digital Goods and Services TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Fairness Act of 2011. The bill would restrict states from levying discriminatory taxes on digital goods and services.

Robert D. Atkinson, President of the Information Technology and Innovation Foundation, testified that because Internet purchases often occur between purchasers and sellers in different states, there is a risk that that each state will tax the purchase. The states may also try to discriminate against out-of-state parties by increasing taxes for digital goods and services relative to other online purchases. Atkinson also argued that a uniform tax rate for digital goods also needs to be equal to the tax rates for the sale of physical goods.

Russ Brubaker, National Tax Policy Advisor for the Washington Department of Revenue, testified against the bill on behalf of the Federation of Tax Administrators, arguing that there is no evidence that current state tax laws discriminate against interstate commerce. The bill then, he asserted, is “a solution looking for a problem.” Brubaker also characterized the bill’s definitions as vague, saying it would produce inconsistent results and uncertainty, and that differences between taxable and non-taxable goods and services are not adequately distinguished.

After the witnesses had given their testimony, the congressmen asked questions. Rep. Steve Cohen (D-TN) asked Atkinson if he could list any discriminatory state taxes. Atkinson offered the example of wireless data services, which are often higher than those states’ other sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es. [See our report on discriminatory cell phone taxes here.] Towards the conclusion of the hearing, Rep. Hank Johnson (D-GA) noted that markup for H.R. 1860 is scheduled for two weeks from now.