By Larry Jones
May 30, 2011

Russ Brubaker, a Washington state tax policy advisor, appeared at a May 23 hearing on behalf of the Federation of Tax Administrators (an association of the tax administration agencies in each of the 50 states, New York City and the District of Columbia). He told members of the House Subcommittee on Courts, Commercial and Administrative Law that state and local tax agencies strongly oppose the Digital Goods and Services Tax Fairness Act (H.R. 1860/S. 971) because it “…would create a permanently privileged category of sellers who sell goods and services delivered, transferred, or provided through electronic means.” The bill would do this, he said, by prohibiting or preempting state and local taxing authority.

Brubaker pointed out that the bill preempts the imposition of taxes on broadly defined digital goods and services that are imposed on “anyone other than a seller or a customer.” This would exempt intermediaries that provide digital goods and services. For example, he explained that Online Travel Companies such as Expedia, Priceline and Hotels.com may act as intermediaries in providing reservation services for traditional hotels like Marriott, Hyatt and the Hilton. While this reservation service would be considered a digital service, it would not be taxable since the OTC is not considered a seller or customer under the bills definition.

The bill would also give remote sellers or companies not physically located in a state (such as those that do their business primarily over the Internet) an unfair tax advantage over traditional local retail stores. Brubaker explained that Internet companies that deliver digital goods and services from a remote location would be under no obligation to collect state and local taxes while local retail stores that sell digital goods would be obligated.

To demonstrate the seriousness of this problem, according to recent reports, 94 of the top 100 most popular websites are online-only companies. Most are websites for search, social networking and entertainment. These Internet only companies are under no obligation to collect state and local taxes when customers download music, video games, books, magazines, movies and other digital goods and services.

The key sponsors of the legislation, Senators Ron Wyden (OR) and John Thune (SC) and Representatives Lamar Smith (TX) and Steve Cohen (TN), along with major cable, computer and cell phone companies claim the legislation is needed to establish a national framework for fairly taxing digital goods and services. They further claim it will to protect consumers from discriminatory and multiple taxes.

In response, Brubaker said about half the states do not impose a tax on digital goods. In recent years, he said some have expanded their tax rules to apply to digital goods and services in the same manner that they apply to traditionally delivered goods and services, and have so established parity. He warns, however, that the proponents of the bill have raised no genuine threat of discrimination or multiple taxation that would require this type of legislative response. “In short, this bill is a solution looking for a problem,” he said.