From Steve Pociask, President
The American Consumer Institute Center for Citizen Research
Published in the HILL — February 8, 2011
While the two-year tax extension passed by lawmakers should help the struggling economy, most consumers are completely unaware that another tax increase could soon be threatening their pocketbooks. This time, however, it is not the threat of income, estate or capital gains taxes; it is taxes on the purchase of online goods and services — including downloaded digital goods.
Today, there are more than 300 million cellular and wireless broadband subscribers, 81 million fixed broadband subscribers, and millions more who have access to online goods through dial-up Internet access or electronic devices, such as iPods, iPads, Nooks and Kindles. Besides the buying of physical goods and services — gifts and gadgets — from eBay, big-box stores and other e-retailers, these consumers use their digital access to download games, software, books and periodicals, Web applications, ringtones, pictures and videos from servers stored in “the cloud.”
All of this e-commerce has not gone unnoticed by state and local officials looking for a new source of taxation. However, taxation of online shoppers could go far beyond putting online shopping websites on par with brick-and-mortar retailers. The tax increases could get out of hand for one major reason — because it is not always clear who has the jurisdiction to tax, several states might try to tax the same digital transaction, leading to multiple and discriminatory taxes.
Imagine a Nebraska resident who decides to download a wireless app for her phone while waiting for a flight out of Newark airport in New Jersey. If there is a tax to be paid, who has jurisdiction to levy the tax? Would it be imposed based on the buyer’s current location, the buyer’s home state, the state where the seller’s server has stored the app, the seller’s home state, or the location of the Internet service provider? It’s not clear, but what is clear is that this ambiguity will not stop states from trying to collect taxes on downloaded goods and services. 
And, it is beginning to happen now. The major risk is that consumers may soon be facing discriminatory, multiple and pyramid taxes imposed by different jurisdictions for the same transaction. That could be enough to the end the surge of online spending and chill economic growth in this sector.
Last June, the Digital Goods and Services Tax Fairness Act of 2010 (H.R. 5649) was introduced to establish a national framework for settling jurisdictional tax issues on digital goods and services, thereby preventing multiple and discriminatory taxes. As Congress gets to work this year, it needs to address this important consumer issue. As policymakers contemplate encouraging broadband deployment and consumer adoption of new technologies, they should be careful not to tax the very things they wish to encourage.

Washington, DC