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Taxing Digital Downloads: A Few Coins for State and Local Coffers

Lots of states and localities that are struggling to pay for public services won’t collect any revenue from this year’s many holiday-related sales of digital goods and services — movies, books, games, software, and so on.  Although every state with a sales tax levies it on these products when they’re sold in physical form in stores, about half of them haven’t updated their laws to tax these same products when they’re downloaded over the Internet.  There are several reasons why they should do so, as my new paper explains:

  • It’s not fair to require the many people who watch DVDs or read paper books to pay a sales tax that people with the wherewithal to stream these products to their tablet computers can avoid.
  • It’s not fair to place local stores that sell those physical products at a 6-10 percent price disadvantage compared to sellers of digital products.
  • Finally, although the lost revenue is not enormous yet — I estimate it at about $300 million a year for all of the states not taxing digital goods — it will likely become a serious drain on state and local governments’ ability to pay for schools, libraries, parks, and health care as more consumption of entertainment and information products shifts to online downloads.

Why do those taxes matter?  Well, keep in mind that the holiday packages you receive traveled to your door on roads built and maintained with state and local taxes.  And if your daughter is able to read Harry Potter on her new Kindle, chances are that a public school teacher taught her how.  So let’s not deprive state and local services like roads and schools the few added dollars per purchase that taxing digital downloads would give them.