If you download music, watch Netflix, or read eBooks, you engage in digital commerce.
The goods and services exchanged in the digital economy, which may also include games, apps, software packages, streaming services, cloud storage, data analytics services and many other e-material products, are as varied as many of the products found in brick-and-mortar stores.
In 2016, the Bureau of Economic Analysis estimated that the digital economy supported 5.9 million jobs and made up 6.5 percent of U.S. GDP.{mosads}
Virtually every aspect of the digital economy has grown substantially in the last few years. Since 2012, the number of Netflix subscribers in the U.S. has more than doubled. Digital audiobook sales rose 32.1percent in the first quarter of 2018 alone. And digital music streaming now makes up 62 percent of the domestic music business, serving more than 30 million Americans. By 2020, mobile apps are projected to generate $189 billion in sales.
For more than a decade, the digital economy has grown at an average annual rate of 5.6 percent, nearly four times the rate of the overall economy. And as artificial intelligence, Internet of Things technology, and 5G wireless networks become accessible to more Americans, our dependence on digital goods and services will only deepen.
This growth has not gone unnoticed by state and local policymakers in search of sustainable tax revenue. In the last decade, states around the country have moved to capitalize on the success of the digital sector. More than half of states already tax some form of the digital economy, and many others are planning to follow suit. However, because of a lack of consistency in state tax laws and the absence of national guidelines, consumers purchasing digital goods and services are at risk of paying multiple sales taxes on the same transaction.
Existing state laws related to interstate commerce are outdated and fail to adequately address the complexities of the digital economy. Suppose a resident of Maryland purchases an eBook while staying in Virginia from a vendor based in New York. The eBook is downloaded from a server located in Oregon. It’s easy to see how several states could make a case for taxing that transaction, each imposing their own sales taxes on the end consumer.
Recently, a bipartisan group of lawmakers in Congress introduced the Digital Goods and Services Tax Fairness Act of 2018 to establish a national framework for taxing the digital economy and to protect consumers from duplicative taxation. It’s pretty simple: the consumer’s state of residence would determine the tax status of a digital transaction, and other jurisdictions would not have the right to impose their own taxes on the sale.
On top of that, the bill would prohibit states from imposing different tax rates on digital goods and services, just because they are transmitted over the internet. Under the law, software downloads, for example, would be taxed at the same rate as software CDs purchased at a local store. Similarly, online magazine subscriptions couldn’t be taxed more heavily than a magazine from a grocery store newsstand. This would level the playing field and prevent states from penalizing consumers for shopping in the digital economy.
As the new legislative session begins, Congress should act quickly to enact the Digital Goods and Services Tax Fairness Act of 2018. Consumers and businesses deserve a fair tax system that neither favors nor penalizes digital commerce.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. Follow on Twitter @ConsumerPal.