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Marketplace Fairness Act: Are Digital Downloads Fair Game?

If online retailers are required to adhere to state sales tax rules, how will sellers of downloadable products deal?
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When the Senate passed the Marketplace Fairness Act Monday, advocates of the bill hailed a victory in fairness, saying the legislation will level the playing field between brick and mortar and online retailers.

But what about online retailers who don't sell physical products? A recent Cnet article pointed out that some states treat digital goods as non-taxable, so companies with offices in only those states don't need to worry about collecting sales tax. But if the MFA becomes law, the article went on to say, "any business of a reasonable size selling digital goods to the 24 states that have decided to tax them must collect sales taxes."

A spokesperson for the bill's sponsor, Senator Mike Enzi, R-Wyoming, says this isn't so. The legislation will not affect companies producing downloadable software or web services, he told Inc. via e-mail:

Under the Marketplace Fairness Act, states would be able to apply the same sales tax collected locally to the same product sold online, out-of-state, or through a catalogue. A hammer sold online would be charged the same sales tax as it would be in-store. Since there is no digital good that can be purchased locally, the sales tax would not apply. The Marketplace Fairness Act does not affect the taxability of goods, digital or otherwise. It deals with collection of sales tax already owed under state law.

This explanation of the bill doesn't quite address some digital goods, such as books and music, that are available in digital, downloadable form but can also be purchased at the local book or cd store.

That said, we spoke to two companies in game and book-downloading businesses to get their interpretation.

"From my understanding, it's Apple and Google doing the sale," Chris Chuter, co-founder and CEO of the Retired Astronaut Collective, told Inc. via e-mail. His company develops and publishes mobile apps and games, which it then sells through iTunes and Google Play.

"They already charge the tax, and so we don't deal with it," he said. "For example, if an app cost $.99, Apple charges $1.08 for Texas residents, then takes their 30 percent cut of $.99 and gives us the rest. I assume they pay Uncle Sam and state governments whatever for the tax they charged."

Joe Regal, CEO of Zola Books, has a different strategy. Unsure of what would happen on the online sales tax front when Zola launched this year, he decided to play it safe and collect state sales tax from the beginning.

"There wasn't any obligation at the time, and from what I've heard, it's possible there won't be in this new bill for ebooks," he told Inc. "But since we always intended to partner with independent booksellers around the country, that meant we would have nexus in individual states, and nexus meant paying sales taxes.  As a big believer in the importance of buying local, I'm totally fine with that. Taxes keep communities vital, and we want to be part of the community and support it in every way we can."

Last updated: May 8, 2013

JULIE STRICKLAND | Staff Writer

Julie Strickland covers start-ups, small businesses, and entrepreneurial endeavors of all kinds for Inc. Her work has been published in Brooklyn Based and City Limits in New York, the Free Times in Columbia, SC, Real Travel Magazine in London, and Daegu Pockets in South Korea. She lives in New York City.




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