Federal legislation introduced last week would prohibit states and localities from collecting taxes on certain electronic transactions, but governmental officials are worried about the revenue losses and the precedent the law would set.
The identical bills, introduced in the House and Senate on Thursday, are designed to provide states, businesses, and consumers with clarity about how digital goods and services like e-books and mobile apps may be taxed by localities, according to the sponsors. The legislation would simplify sales-tax collection and remittance requirements for businesses and also prohibit discriminatory and multiple taxes on e-transactions, they said.
“Would consumers be as willing to try out a new iPhone app if they have to pay taxes for every download?” said Sen. Ron Wyden, D-Ore., who partnered with Republican Sen. John Thune of South Dakota to sponsor the legislation.
The bills would prohibit state and local governments from applying taxes to electronic products not taxed as tangible goods. A government, for example, could not tax a digital newspaper subscription if it does not tax the physical newspaper sale.
But state and local government officials worry they would have trouble collecting tax revenues on smartphone applications and other digital purchases — revenues they could use to help fill budget gaps.
“While I understand why states and local governments are looking for new opportunities to bring in revenue, the fact of the matter is that taxes discourage both product usage and innovation,” Wyden said in a release.
The bill in the House is sponsored by Reps. Lamar Smith, R-Texas, and Steven Cohen, D-Tenn.
Some state and local government officials are balking at the legislation, complaining it would dictate how they write their tax codes. Municipalities “are trying to make changes in our tax laws so we can continue to have modern tax systems,” said Larry Jones, assistant executive director for the U.S. Conference of Mayors. This is an attempt by Congress “to superimpose unfunded mandates on local governments,” he said.
“Local governments are strapped for cash all over the country,” Jones said. “The more revenue streams that dry up at the local level, the more burden that puts on us.”
The legislation would require municipal governments, in their tax codes, to specify the digital goods and services that they are taxing — preventing governments from subjecting digital transactions to a broad telecommunications tax.
The bills also would apply any tax to the buyer’s residence, which might not necessarily be where the digital transaction took place. If someone bought an e-book while traveling, the sales tax would apply to the buyer’s mailing address. That would simplify the seller’s collection and remittance of taxes.
“These are substantial safeguards that are imposed to ensure that this explosive sector of our economy has the ability to grow unimpeded by burdensome and unconstitutional taxes,” a spokesperson for Wyden said in an e-mail.
For purchases made at Apple Inc.’s App Store, Apple would be responsible for collecting the sales tax and remitting it to the state where the buyer resides, according to Harley Duncan, managing director for the state and local practice at KPMG LLP.
Though there may not be a tangible counterpart to an app, “it is software, after all, just a different flavor of it,” he said.
Duncan pointed out that some purchases will fall outside the scope of the bills. Facebook Inc., for example, sells “credits” to users for apps and games that it sells on its website. The credits are a type of online currency that do not exist in the tangible world.
“There are a lot of tax issues there and I think they are not necessarily covered by this bill,” Duncan said.
Wyden’s spokesperson said if a state or local government passes a law to tax Facebook credits, then “the onus is still on the state to show that the tax is not discriminatory.”
