UMD Business Expert: Maryland's Proposed Digital Goods Sales Tax Would be Difficult to Execute

COLLEGE PARK, MD - If Maryland Gov. Martin O'Malley convinces lawmakers to pass his proposed digital goods sales tax in the 2013 fiscal year budget, the policy would be difficult to execute, says Joseph Bailey, professor of information management with the Robert H. Smith School of Business at the University of Maryland.

A research associate professor, Bailey also is executive director of QUEST (Quality Enhancement Systems and Teams), a multidisciplinary, reality-centered program for University of Maryland undergraduates. Contact him at 301-405-2174 or jpbailey@rhsmith.umd.edu. The Smith School has an in-house facility for live or taped interviews via fiber-optic line for television or multimedia content.

Overview

The proposed six percent sales tax would apply to information goods bought and sold over the Internet, such as music downloads and applications from the I-Tunes Apps Store The plan also includes a so-called "Amazon tax," which would require Maryland affiliate sellers of the online retailer, and others like it, to collect a sales tax if they eclipsed $10,000 in sales the previous fiscal year.

The targeted activity essentially started with music and has evolved to books (among other media), and more recently downloadable apps, which previously were purchased as physical goods in the form of pre-packaged software.

Consumers downloading apps, instead of purchasing software packages, epitomizes the difficulty. "It's much more complicated to audit, monitor and meter the sales activity of digital information packets traveling through cyberspace than physical goods shipped on a road."

Nonetheless, Bailey says state governments see the continuously shrinking revenue from physical goods and say, "Why can't we go ahead and assess taxes on these information goods over the Internet?"

Maryland officials estimate the new tax would yield about $26 million. Bailey said the projection is probably too high. "There would be a lot of noncompliance, not from nefarious intentions, but more from a lack of awareness and understanding of the policies," he said. "For example, if I, as a Maryland resident, purchase a download while traveling through California, how does the (national) seller count that transaction, when the packets do not travel through Maryland? The fundamental question would be 'What is the technology that enables this and how do we count and measure these numbers?'"

About 25 states have recently enacted or are considering similar policy. "Outcomes will vary according to the political landscapes and prospects for retailers to do business with buyers from within these states," Bailey said. "Already larger Internet retailers from New York and Texas have voiced concern, claiming it's too costly and complicated to do business according to different state tax codes, and have threatened to stop selling to buyers in such states."

"I wouldn't look to any of the states that have put in these policies as having success," he said. "Even the small successes have yet to be played out in terms of enforcement and the impact it's going to have in terms of competition."