The Digital Goods and Services Tax Fairness Act of 2013

The Digital Goods and Services Tax Fairness Act of 2013

In July, Senators Ron Wyden of Oregon (D) and John Thune of South Dakota (R) introduced The Digital Goods and Services Tax Fairness Act of 2013 (S.B. 1364). The Act would prohibit states or local jurisdictions from imposing multiple or discriminatory taxes on the sale or use of digital good or digital services. The Act would permit a state or local jurisdiction to impose taxes on the sale of a digital good or a digital service only if the state or local jurisdiction’s territorial limits encompass the customer’s tax address. [2013 S. 1364].

A summary of the Act available on Senator Wyden’s website states that the act “would establish a national framework for when and how local governments can tax digital goods and services in a manner consistent with current law, which includes the Internet Tax Freedom Act and the Supreme Court’s Quill decision.” [See http://www.wyden.senate.gov/download/summary-digital-goods-and-services-tax-fairness-act-of-2013]. 

Section 2 of the Act prohibits states or local jurisdictions from imposing multiple or discriminatory taxes on the sale or use of digital goods or digital services. [2013 S. 1364].

Section 3 of the Act provides a sourcing limitation on the taxation of sales of digital goods and digital services that is based upon the concept of a “customer tax address.” [2013 S. 1364]. Section 3 states that “taxes on the sale of a digital good or a digital service may only be imposed by a State or local jurisdiction whose territorial limits encompass the customer tax address.” [2013 S. 1364].

Section 4 of the Act requires a seller to obtain the “customer tax address” information and states that:

“… [a] seller shall be responsible for obtaining and maintaining in the ordinary course of business the customer tax address with respect to the sale of a digital good or a digital service, and shall be responsible for collecting and remitting the correct amount of tax for the State and local jurisdictions whose territorial limits encompass the customer tax address if the State has the authority to require such collection and remittance by the seller.” [2013 S. 1364].

Section 7 defines a “customer” for purposes of the Act as “a person that purchases a digital good, digital service, or digital code.” [2013 S. 1364].

Section 7 defines the "customer tax address" as:

“(i) with respect to the sale of a digital good or digital service that is received by the customer at a business location of the seller, such business location;

“(ii) if clause (i) does not apply and the primary use location of the digital good or digital service is known by the seller, such location;

“(iii) if neither clause (i) nor clause (ii) applies, and if the location where the digital good or digital service is received by the customer, or by a donee of the customer that is identified by such customer, is known to the seller and maintained in the ordinary course of the seller's business, such location;

“(iv) if none of clauses (i) through (iii) applies, the location indicated by an address for the customer that is available from the business records of the seller that are maintained in the ordinary course of the seller's business, when use of the address does not constitute bad faith;

“(v) if none of clauses (i) through (iv) applies, the location indicated by an address for the customer obtained during the consummation of the sale, including the address of a customer's payment instrument, when use of this address does not constitute bad faith; or

“(vi) if none of clauses (i) through (v) applies, including the circumstance in which the seller is without sufficient information to apply such paragraphs, the location from which the digital good was first available for transmission by the seller (disregarding for these purposes any location that merely provides for the digital transfer of the product sold), or from which the digital service was provided by the seller.” [2013 S. 1364].

The summary on Senator Wyden’s site states that: “The Digital Goods and Services Tax Fairness Act of 2013 is structured to provide discipline, but also certainty to states and local governments that wish to tax digital commerce and to the businesses and consumers that are engaged in this marketplace.” [See http://www.wyden.senate.gov/download/summary-digital-goods-and-services-tax-fairness-act-of-2013]. 

The Digital Goods and Services Tax Fairness Act of 2013 is currently before the Senate Finance Committee, and it will be interesting to see how the bill, along with the other internet tax-related bill, The Marketplace Fairness Act of 2013, fares in Congress in 2014. [See commentary on this site: "For Now, Passage of Marketplace Fairness Act of 2013 Unlikely," (Sept 7, 2013)].

For the complete text of the Senate bill on Lexis.com, see 2013 S. 1364.

For more information on the state taxation of online sales by out-of-state retailers, with a focus on the state taxation of digital content and cloud services, explore the Lexis® State Tax Guide on Digital Content & Cloud Services, authored by Carolynn Iafrate Kranz.

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