For several months now, Congress has been studying the Marketplace Fairness Act, a bill that would impose a duty on retailers to collect sales tax on certain internet sales of goods. In its current form, the legislation would apply to retailers that generate at least $1 million of gross sales in 45 states and D.C. Although the legislation has passed the House of Representatives, the feeling in D.C. is that it has little chance of passing the Senate during this session.
Additionally, both houses of Congress are considering the Digital Goods and Services Fairness Act of 2011, which would regulate state and local taxation of downloaded music and movies, as well as online services such as photo storage and payroll processing. This legislation focuses more on creating a uniform rule to identify which state can tax the downloaded item when the transaction crosses state borders.
For many years, traditional bricks and mortar retailers that maintain physical presence in each state have complained of the advantage enjoyed by on-line retailer who can offer consumers a lower overall price for the same goods. In addition, the online retailers generally do not maintain places of business in high rent locations and are able to lower their overhead accordingly, making them even more profitable.
Even without passage of the Marketplace Fairness Act and the Digital Goods and Service Fairness Act of 2011, many states have begun to enact legislation allowing them to tax digital products from whatever source.