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August 28, 2009

Digital Discrimination


As most states have watched their coffers dwindle over the last couple years, state revenue authorities have become increasingly creative in finding ways to drain more money from the citizens via fees and taxes.

The healthy way to generate more revenue is to grow the tax base by attracting more businesses or residents to the state.

And attracting more businesses involves having appropriate infrastructure, skilled workers and competitive educational systems, but most of all maintaining a minimal tax and regulatory burden. For some reason, this seems beyond the reach of many state governments these days. Instead, it’s easier to go on a “tax grab,” looking around for easy new sources of cash.

But some sources of new revenue have the downside of also leading to new costs. For example, if the state attracts a new shipping facility, or a server farm, then the resources of the state, such as highways or the power grid, bear more of a burden and ultimately demands resources to be maintained or upgraded.

So, for a tax collector, the ideal new source of revenue is one that doesn’t require any extra resources—and that list is fairly short. Raising tax rates or taxing goods or services not already taxed are common ploys, but in the information age the newest tax of choice is taxing digital goods or services.

Digital goods are those which can be delivered purely electronically, such as music or video files, ringtones for mobile phones, downloaded books or video games; and digital services, such as job searching or resume preparation and editing, are services which can be delivered digitally.

In need of more money, lawmakers and tax authorities in many states have rushed to make sure they can tax these digital goods and services – ignoring the discriminatory treatment they give them. These goods require no state resources and yet they are still taxed. In some cases digital services taxes are discriminatory taxes since the non-digital service is not taxed, and sometimes they are double taxes since the products that are already subject to taxation.

Ironically, in the midst of the greening of America, state tax collectors are gleefully assessing taxes on digital goods and services, the greenest way to receive things such as movies or software as there is no driving, shipping or packaging involved.

Burdening new digital markets and products with additional taxes is not exactly the creative and responsible way to solve a state’s financial problems—in the long run it just exacerbates the problem.

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Today's TechByte was written by Bartlett D. Cleland, director of IPI Center for Technology Freedom.


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