Federal Digital Goods Act Would Keep States at Bay

 

You should know, however, that many states may have what's called a "use tax," which is a lot like a sales tax, and usually it's at the same rate. In those states, you're required to report on what you bought outside the state that you didn't pay a sales tax on and pay a tax to your state. And that's where the Constitution comes in. The courts have decided that the Commerce Clause of the Constitution means that you don't have to pay taxes to states where you didn't buy something.

So why should music, video or ebooks be any different? The bottom line is because they're digital. They're not tangible, physical property. Right now, there are a lot of different interpretations of how to tax digital property. If the state of Washington decides that the sale takes place in Washington because that's where you ordered the music from, then they may decide to tax it.

Complicating all of this even more is that legally you don't really buy music any more than you buy movies or ebooks. What you're actually buying is a license to use the music or movie or ebook. The law where the sale of licenses is concerned is, to put it politely, a mess. Many people think licenses are actually a service rather than a product, and if that's the case, then they should be taxed as services.

But most states don't tax services, which is why your doctor doesn't charge you a sales tax when you get your allergies checked. But you do pay a sales tax on the nasal spray when you go to the drug store (at least in most states).

So if licenses are a service, how can states tax those? Some argue that they can tax specific types of services in the place where the service is performed. But is the service performed where the money is taken? Is it performed where you exercise the rights granted by the license when you listen to the music? Nobody really knows the answer to that, but everybody wants a cut of the sales just in case.

To make matters worse, the proposed law is still in committee in the House Judiciary Committee, and has yet to be reported out for a vote. There are a lot of folks who think the law has some problems with unintended consequences. Then there's the effort by 44 states to agree to use the Streamlined Sales Tax system in which merchants who sell over the Internet or by mail order would collect taxes for your state. The Digital Goods law is in conflict with the streamlined sales tax effort.

This lack of clarity in legal authority and interpretation probably doesn't let you off the hook. I've never seen a state fail to charge a tax where it thinks it can get away with it. So be prepared for multiple levels of tax on your online purchases. That is, unless Amazon moves to Bermuda to avoid those taxes altogether.