Digital Taxes: What’s Fair?

The “Digital Goods and Services Tax Fairness Act of 2011” (H.R. 1860 and S. 971) would bring some certainty to an endless tangle of state tax rules and regulations.  This legislation would restrict collection of sales taxes on digital goods and services to the jurisdiction encompassing the buyer’s tax address.  It also would bar a state from imposing multiple or discriminatory taxes on the sale or use of digital goods or services, but does not cover telecommunications service, Internet access service, or audio or video programming service.

It’s important to note that this legislation does not authorize or prohibit the application of sales tax on the purchase of goods.  It just says that only the state in which the buyer lives has the authority to tax the sale.

I live in D.C., but I fly to New York, where I download an iTunes song from a service in California.  Which of these three states have a claim to any applicable sales tax?  Each of these taxing jurisdictions could conceivably assert its own claim.  I certainly don’t want to be in the middle of these state cross-claims, and I expect the seller – which would certainly be the focal point of state tax claims – would be even more impacted.

Tax compliance is difficult enough.  Provisions that add more certainty decrease compliance costs and should certainly be encouraged.