Sometimes referred to as an iTax, digital download taxes are now the law in five states, with at least four more state's considering approving similar bills.
Retail e-commerce sales are estimated to exceed $130 billion a year.
Nebraska's governor signed a digital download tax bill into law in April, and a similar measure was adopted in Tennessee in June. Indiana, South Dakota, and Utah also enacted digital download taxes this year. Politicians in Wisconsin and California attempted this year to impose taxes on digital downloads but were unsuccessful.
Because most tax laws were written before the creation of the Internet, downloads were long considered exempt from taxation. And to keep it that way, some industry groups have pushed the "green" factor of downloads as opposed to physical DVDs or CDs.
"With global warming and a world that's running out of oil, the last thing governments should do is add taxes on something that uses no oil and produces no carbon," said Steve DelBianco, executive director of NetChoice, a tech industry group that includes eBay, AOL and Yahoo as members. "A digital download is the greenest way to buy music, movies, and software, since it requires no driving to the store, no delivery vans, and no plastics or packaging."
Despite the arguments, other states may still consider new digital download legislation soon.
Massachusetts currently has a draft bill, and legislators in both Wyoming and Washington will be reviewing their download tax policies at the request of tax collectors.
Not all online vendors, though, would be compelled by state laws to collect digital download taxes from their customers. A state generally may only tax a company that has a physical business presence within the state's borders. Translated, that means a company such as Seattle-based Amazon would not be required to collect taxes for the items it sells to San Francisco residents, even if California imposed a digital download tax.