Internet Sales Tax Bill Would Tax Digital Goods

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The Marketplace Fairness Act, which the Senate passed last week, would require e-commerce vendors to collect sales taxes not only on physical items, but also on digital goods such as ebooks and music downloads.

Even if the online merchants are not based in states that impose sales taxes, they would still be required to collect sales taxes from customers who live in states and localities that do levy sales taxes on their residents, assuming they meet the $1 million threshold in sales (see Senate Passes Internet Sales Tax Legislation).

Some states, such as New York, California, Massachusetts, Illinois and Maryland, don’t normally tax digital goods, but if the House follows the lead of the Senate and passes the same legislation, those merchants would then need to collect sales taxes from any customer who buys an ebook or pays to download a song if they live in any of the 24 states or hundreds of local jurisdictions that do impose such taxes, according to CNET.

Many online vendors and their customers are concerned about the new tax regime, especially as digital downloads become an increasingly popular way for people to consume music, books, movies, games and other forms of entertainment. While the bill does have the goal of leveling the playing field and giving brick-and-mortar retailers a better chance at survival against their online competitors, few stores have attempted to sell digital goods to their customers, except as gift cards to sites like iTunes or Amazon.

Carving out an exemption for digital goods might also help win passage of the bill in the House, where it is certain to face opposition from anti-tax lawmakers. It would also make consumers of digital goods rest a little easier the next time they decide to go ahead and click on their shopping carts, especially if they’re like the many people who have shifted their purchasing habits to ebooks and music downloads to save space in their cluttered homes.

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