The subject of digital goods and services taxation will likely resurface in the Congress as soon as the debt ceiling is handled.  Digital goods include music, videos, games, ringtones, electronic books and others.  Digital services would include tax prep, stock trades, streaming content, and more.  A bill that would handle this (The Digital Goods and Services Tax Fairness Act of 2010) died in committee last year.  Renewed pressure for the Congress to address online taxation will come from two factions; cash-hungry state & local governments and bricks and mortar merchants on one side, and online merchants on the other side. 


Today, online merchants don’t need to collect sales tax on “out of state” sales so they have a price and cost advantage over bricks & mortar-based merchants.  Online merchants point to the 8,000 state and local taxing authorities’ tax rules and they note that conforming to 8,000 sets of unique sales tax procedures is prohibitively expensive, especially for small online merchants. 


Much of the tax jurisdictions’ arguments are cloaked in language that emphasizes fairness to all merchants and understates their need for revenues.  In reality their bigger nightmare is being locked out of Internet revenues for years to come.  Standing firm on this issue already cost South Carolina 1,200 Amazon jobs in April 2011, and cost Texas and cost Illinois too.  


Many consumers are already aware of the issues.  Some of their thoughts were documented in ACI’s Consumer Pulse survey.  Asked whether digital goods should be taxed they responded; 28% YES and 61% NO.   With their usual emphasis on fairness most consumers said if digital goods are to be taxed then the rates should be the same for online and bricks & mortar merchants. 


Consumers are not eager to pay more sales tax nor to pay higher goods and services prices – inflated by administrative costs of tax compliance.  But they are realists, and if sales taxes on Internet services are inevitable, they would prefer low tax rates combined with a small and simple burden for all merchants.  Any attempt at imposing the thousands of tax rates and procedures is unreasonable and it will harm consumers


Alan Daley is a retired businessman living in Florida.  He follows information technology from the consumer’s perspective