Scheduled to be voted on May 6 in the Senate, the Marketplace Fairness Act, would mark the beginning of the end of tax-free shopping for clothing and electronics. Supporters say it will help put an end to “showrooming” — where people visit physical stores to shop for items they later purchase online — while critics contend it will hurt e-commerce and small Internet companies.
The legislation would put the onus on vendors — instead of consumers — to pay tax on online purchases made on sites like Amazon.com AMZN -7.24% , eBay EBAY +0.34% and smaller e-commerce companies. The Marketplace Fairness Act doesn’t specifically mention digital content, but leaves interpretation up to state law. “It does not change what digital goods are subject to state sales tax,” says Rachelle Bernstein, vice president of tax for the National Retail Federation, “but it does require companies to collect that tax.”
By some counts, nearly half of U.S. states already tax some digital content. Washington state introduced a specific tax on digital goods in 2009 for music, movies and e-books, as did Kentucky, Vermont and Wisconsin. Texas, Arizona and Maine rely on existing laws by defining digital goods as “tangible personal property,” even though it’s transmitted electronically. Most states don’t include magazines, newspapers or digital services like online dating in those laws. And in some states, such as Florida, e-books are tax-exempt, but not TV shows and movies.
Given the potential revenue on everything from e-books to apps, more taxing of digital content may be inevitable. “There’s no question more states will see it as a source of more tax,” says Brian Kelleher, tax director with accounting and consulting giant Deloitte. U.S. e-book content revenue is expected to reach $3.19 billion by 2015, according to Deloitte. Consumers will download 56 billion apps in 2013, ABI Research estimates. “We’re seeing a movement of states to tax digital content,” says Ferdinand S. Hogroian, legislative counsel at the Council on State Taxation, a nonprofit trade group.
Congress wants you to pay tax on online purchases
John McKinnon has details of a bill in Congress that would call for sales tax assessment on nearly all online purchases, but eBay is putting up a fight.
Some retailers say the law will level the playing field. “Government should not pick winners and losers with the tax code,” says Jason Brewer, a vice president at the Retail Industry Leaders Association. “Retailers should be treated equally.” Amazon.com has an increasing number of factories in states across the country to make same-day deliveries and, analysts say, would have to tax sales in those states anyway. Amazon supports the bill, Paul Misener, vice president of global public policy for Amazon, told a Senate Commerce Committee in August.
But e-books shouldn’t be taxed along with a pair of skis or garden furniture from Amazon.com, says Steve DelBianco, executive director of NetChoice, a coalition of e-commerce firms like Yahoo YHOO -2.06% and News Corp. NWSA -0.16% , owner of The Wall Street Journal and MarketWatch. “Downloads can’t be resold, gifted or traded, and they’re often of lower quality than physical copies.” Some states are already grappling with such complexities. New Jersey introduced a sales tax on e-books, music and even ringtones in 2006, but apps and other custom-made software for business use was excluded.
The Marketplace Fairness Act only applies to online retailers with “remote” sales exceeding $1 million a year but some companies selling digital goods fear the costs of collecting such a tax would make business untenable or discourage them from growing. “Does anyone believe that $1 million in sales is a big retailer?” DelBianco says. Smaller companies say it would force them to sell their wares through the websites of giants like Amazon.com and Wal-Mart WMT +0.50% . “Online retailing is already a razor-thin margin business,” says Mark Coker, founder of Smashwords.com, a publisher of self-published e-books.
To be sure, some states have been slow to pass legislation that would impose tax on digitally content. But that trend seems to be changing as seven states have considered bills this year. Digital content remains exempt from sales tax in major states including New York, Florida and California, but taxes have been proposed in Ohio, Minnesota, Massachusetts, and Louisiana. Lawmakers in California — the home state of Facebook, Apple and Google — introduced similar bills to introduce a digital tax in recent years. “More states are guarding the tax base against erosion,” Hogroian says.