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Unfortunately, solving Maryland's budget deficit isn't that easy. In fact, one proposal set forth this week by Gov.Martin O'Malleyto tax digital goods could impact states and consumers well beyond Maryland's borders. While Maryland has the right to address the taxation of goods, Congress must fix the potential for duplicative state taxation first.
Over the last 10 years, the sale of digital goods has grown at lightning speed. According to the CTIA (a trade group representing the wireless telecommunications industry), Americans downloaded more than 509 million apps the week after Christmas. Many states are looking to these products as a source of revenue.
Under the Maryland proposal, the state would levy taxes against digital products such as songs, movies and online games. The so-called "digital products" tax would mean that Annapolis would apply a 6 percent state sales tax on digital transactions.
Today, there are no clear rules governing the taxation of interstate digital transactions, including which state has the legal authority to impose a tax on digital goods. For example, if a woman waiting for a flight at BWI-Marshall Airport downloads a movie to watch on her tablet computer, she could be charged taxes in Maryland, but could also face additional taxes in Virginia, where she lives — and Texas, where the movie distributor's online servers are located. Clearly, this is unfair to the purchaser. It is also unfair to the states seeking to tax this form of commerce, as other states could be seeking to claim that same source of revenue.
States have the right to address taxable goods, but because of the potential for duplicative taxes, it is critical that a national framework provide the clarity needed to determine which state has the right to tax which consumers and which products. Thankfully, Congress has a solution in the works. The Digital Goods and Services Tax Fairness Act, a bipartisan bill introduced in both the House and Senate, would establish a national framework to protect consumers against multiple taxes on their digital downloads and give clarity to the businesses required to collect these taxes.
By assigning the state where the consumer resides the sole authority to tax digital purchases, the Digital Goods and Services Tax Fairness Act would give consumers the certainty they need to continue to be active in the digital economy while providing businesses with an understanding of where taxes need to be remitted. This is similar to how Congress addressed the taxation of mobile phones, which are obviously used by consumers in multiple jurisdictions. This framework also provides much-needed certainty to the states that continue to look for stable sources of revenue in a changing economy.
To protect its consumers and businesses, Maryland should support a federal framework, urging its representatives and senators to act swiftly to provide the state the appropriate roadmap before it acts. This would protect its citizens from potential duplicative taxes by clearly identifying which state has the right to tax these goods and services and to ensure it is done in an equitable manner, allowing this form of commerce to continue to thrive.
Sam Whitehorn, a former staff member of the Senate Commerce Committee, is the executive director of the Download Fairness Coalition. His email is sam@downloadfairness.com.