2019-4 - Opposing Digital Goods and Services Tax Fairness Act

Resolution 2019-4

Opposing Digital Goods and Services Tax Fairness Act

Background
The taxation of digital goods and services (or goods and services delivered electronically) is an important issue to many state and local governments. The latest version of the Digital Goods and Services Tax Fairness Act (H.R. 1725 and S. 765) (116^th Congress) mandates which state is permitted to tax a sale of a digital good or service based on sourcing rules set out in the bill, and would also prohibit states from taxing digital goods and services differently from or to a greater extent than “similar” non-digital goods and services. On December 16, 2015, the Congressional Budget Office evaluated an earlier version of the bill, H.R. 1643, and estimated that “the cost—in the form of foregone revenues—to state and local governments would total about $1 billion in at least one of the first five years after the mandate becomes effective and at least that amount in each subsequent year.”

The current bill preempts taxes on digital goods and services that might apply differently or to a greater extent than taxes on “similar” non-digital goods and services. In addition to the problems that such a rule is likely to cause administratively — since there is no clear indication of what the term “similar” is intended to include — this is also a provision that is completely unwarranted. First, the Internet Tax Freedom Act already provides protection for goods and services sold through the Internet versus those same goods and services sold through some other means. Second, states may have sound policy reasons to treat what might be considered “similar” goods and services differently, depending on various factors including who is the seller, who is the buyer, what the good or service will be used for, etc., and the bill does not allow states to consider these factors. Third, there is absolutely no evidence that digital goods and services have been taxed in a discriminatory manner — in fact, they are generally taxed less than other goods and services. Fourth, this provision would give sellers of digital goods and services “most-favored taxpayer” status that may provide them with unwarranted advantages over other businesses.

In addition, the current bill expands the scope of the items covered to include Voice over Internet Protocol (VoIP), which in some states is considered a telecommunication service. It also allows the seller and purchaser of covered items that are used in multiple locations simultaneously to determine the sourcing “at the time of sale or at a later date.” Moreover, the bill allows the seller to choose the location to which the sale is sourced when “the seller is without sufficient information. . . .” These provisions arguably allow a seller to source sales in a manner that result in uncollected taxes and revenue losses even greater than the 2015 version of the bill.

In general, FTA opposes action by Congress and federal agencies that would abrogate, disrupt, or otherwise restrict states from imposing taxes that are otherwise lawful under the U.S. Constitution or from effectively administering those taxes. Congress should undertake an active program of consultation with states whenever it considers measures that would preempt state tax authority. States should be allowed to actively pursue uniformity and simplification measures as are necessary and would be effective in addressing the administrative burden in complying with the tax laws of multiple states.

While federal preemption of state taxing authority is an extreme action, preemptive legislation can, at times, promote simplification, uniformity, and taxpayer compliance, albeit at some cost to state sovereignty. FTA will evaluate proposed federal legislation that preempts state taxing authority against several criteria:

Has the preferred solution of uniform state action been pursued and exhausted?
Recognizing that the benefits of federalism will impose administrative burdens on commerce, is there disinterested evidence that the administrative burden and complexity posed by current state and local practices is impeding the growth of commerce?
Does the proposed preemption address administrative issues such as simplification, uniformity, and taxpayer compliance?
Can meaningful simplifications and uniformity be achieved through state action?
Would preemption disrupt state and local revenue flows and tax systems?
Would preemption cause similarly situated taxpayers to be taxed differently -- specifically, does the proposal create advantages for multistate and multinational businesses over local business?
Does the preemption support sound tax policy?
Does the preemption create unknown or potential unintended consequences?
Have state tax authorities and taxpayer representatives together agreed to a beneficial change in federal law?
Does the proposed preemption materially narrow the scope of state laws?

Resolution

The FTA opposes The Digital Goods and Services Tax Fairness Act. The bill would limit state taxation of digital goods and services, and now VoIP services under the current version of the bill, and provide an unwarranted preference to digital goods and services vis-à-vis non-digital goods and services. Specific problems with the bill include:

The preemption extends beyond sales and use taxes;
There are few tools or protections for the states and local jurisdictions to reduce the risk of tax avoidance;
Despite its purported purpose, the bill is not limited to rate discrimination between specified digital products (e.g. digital movies, music, books) and their tangible equivalents;
There is no recognition of the general use tax credit mechanism and federal constitutional tax-crediting principles to avoid multiple taxation; and
There is no ability for state administrative agencies to issue binding regulations to implement the bill’s provisions.

Any discussions of desired uniformity or model rules or definitions should take place either through existing channels such as the Multistate Tax Commission’s uniformity projects or through cooperative and inclusive meetings of representatives of both state governments and all affected taxpayers.