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Opinion

The Digital Economy is Thriving, But Tax Uncertainty Threatens Its Future

As the new legislative session begins, old habits are hard to break. Policymakers are struggling to adapt to the complexities of the digital economy, and, unfortunately, consumers will pay the price.

We live in a digital world of apps, eBooks, music streams, and on-demand video entertainment. We get weather updates with our voice and lock our doors from our phones.

In 2016, economists estimated that the digital economy was supporting 5.9 million jobs and represented 6.5 percent of gross domestic product. Since the early 2000s, the digital economy has grown at an average annual pace of 5.6 percent — nearly four times the rate of the overall economy — and it shows no signs of letting up as we moving into 2019.

More than 30 million Americans pay for a subscription music streaming service, which accounted for $2.5 billion in revenue in the first half of 2017. Digital streaming now makes up 62 percent of the music business across the country. Revenues from over-the-top video streaming services like Netflix and Hulu are surging as well, growing by 41 percent in 2017. And by 2020, mobile apps alone are projected to generate $189 billion in sales.

For all its benefits, the nature of the digital economy poses unique challenges for policymakers trying to tax digital transactions without squashing this flourishing economic sector. Because digital goods and services are exchanged intangibly over the internet, it’s possible for multiple states to claim the right to impose taxes on the same digital transaction, leaving consumers at risk of paying duplicative taxes.

Suppose you live in Alabama and download a song from an online store while traveling in Ohio. The vendor is based in Kentucky, but the digital file is stored on a server in Illinois. Which state has jurisdiction to tax this transaction? All four states of these has some connection to the sale, so should they all be allowed to tax it? Doing so would lead to duplication taxation on the same transaction.

Current federal and state laws governing interstate commerce are outdated and cannot adequately answer the complex questions that arise in digital commerce. The Download Fairness Coalition — a group of businesses, taxpayer advocates, and tech companies — has spoken out in favor of legislation in Congress, the Digital Goods and Services Tax Fairness Act of 2018, that provides a clear roadmap for states to follow if they choose to impose taxes on digital sales.

Under the Digital Goods and Services Tax Fairness Act of 2018, the state you reside in would determine the tax status of a digital sale, as is common practice for brick-and-mortar transactions. The bill would also prohibit the imposition of tax structures on digital goods that are different from taxes imposed on brick-and-mortar stores. For example, digital songs or online newspaper subscriptions would be taxed at the same rates that apply to music CDs and physical newspapers. This creates a level playing field and avoids penalizing or favoring consumers and businesses that engage in digital commerce.

The bill doesn’t mandate any state to tax digital goods or services, nor does it create any national sales tax on the digital economy. It merely establishes a clear, transparent legal framework for deciding how state and local jurisdictions can fairly levy taxes on digital commerce, if they choose to do so at all. Congress has taken similar action in the past to settle a dispute over which state has the right to tax wireless services.

For too long, a slanted tax code and uncertainty about the tax status of digital sales has hurt consumers and businesses engaged in digital commerce. By passing the Digital Goods and Services Tax Fairness Act of 2018, Congress would bring fairness to one of the most innovative and vibrant sectors of our economy. This is good consumer policy.

 

Steve Pociask is president and CEO for the American Consumer Institute, a nonprofit educational and research organization.

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