Par Mark L. Nachbar
The Digital Goods and Services Fairness Act of 2019 (hereinafter Act), S. 765, was reintroduced to the U.S. Senate on March 13, 2019, by Senators John Thune and Ron Wyden in an effort to prevent potentially duplicative taxes on digital goods and services. A companion version of the Act was introduced to the U.S. House of Representatives by Representatives Steve Cohen and John Ratcliffe. Not surprisingly, the Act has been introduced on multiple occasions in the past few years, with the most recent reintroduction in 2018. As demonstrated by the decades-old sales tax nexus saga, recently addressed in South Dakota v. Wayfair,1 issues impacting states’ taxing authority are not easily resolved.2
As digital goods have become more prevalent, items such as online downloads or streaming of music, literature, movies, mobile apps, and cloud computing can create questions when it comes to what jurisdiction is entitled to tax the sale of such items. The purpose of the Act is to modernize existing laws and prevent multiple instances of taxation on digital goods. The Act, as introduced, would also ensure that digital goods are not taxed at a higher rate than similar items provided in tangible format.
The Act prescribes that when a consumer makes a purchase of a digital product, the consumer’s address is used to determine which jurisdiction can tax the purchase. Thus, because digital goods are effectively mobile, the place where the consumer was when the purchase or download was made is irrelevant; the important factor for taxation purposes is a consumer’s residential or business address. The Act also prevents state and local jurisdictions from imposing a higher tax rate on digital goods compared to tangible goods.
While sellers would need to maintain consumers’ addresses and remit taxes for state and local jurisdictions that apply tax to sales of digital products, under the Act, they would have certainty knowing which jurisdiction’s tax is applicable. A seller that relies in good faith on information provided by a consumer and remits tax to that jurisdiction will not be held liable for any additional tax based on a different determination of that consumer’s address. Sellers would also have rules on how to treat bundled transactions that include both taxable and nontaxable digital goods.
As a general observation from a state sales tax perspective, most states currently have a hierarchy of sourcing rules to consider when applying sales/transaction tax to a sale. With respect to digital goods that can be purchased with the tap of an icon or click of a mouse, sellers typically have customer billing information on file (at the very least through credit card/payment method confirmation), and the majority of such transactions for personal use are already likely sourced to a customer’s billing address. It would seem unlikely that state departments of revenue would attempt to determine whether a song or e-book was downloaded by a purchaser while on vacation in California instead of relying on billing information pointing to a customer’s residence in Pennsylvania for purposes of applying sales/transaction tax. Commercial purchases of digital goods may present additional concerns, but there is also generally a billing address available to sellers, as well as means by which to demonstrate the location or multiple locations of commercial use for purposes of properly applying state and local sales tax.
If enacted, this Act will take effect 60 days after its enactment. State and local jurisdictions will have two years from the date the Act is enacted to modify state and local tax rules to conform with sections 4 and 5 of the Act.
1 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
2 Although the Act does not specifically reference “sales tax or similar taxes” sales/transaction taxes are the focus.
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Mark L. Nachbar