Here’s an interesting conundrum, posed by Representative Dennis Ross (R-FL), at a House Judiciary subcommittee hearing held on Monday:

“Imagine you are sitting in Dulles airport in Virginia, waiting for a flight back to Florida,” Ross began in his opening remarks. “You download a music file from Apple, which is headquartered in California. The music is sent to you via a server in Oklahoma.”

Which of these states should be allowed to tax the sale?

Without a “clear national rule,” he warned at the hearing, “all four states may attempt to tax the transaction.”

And so Congress is considering one such national standard: HR 1860, the Digital Goods and Services Tax Fairness Act of 2011. Representative Lamar Smith (R-TX) submitted the bill to the Judiciary committee two weeks ago. A similar law sponsored by Ron Wyden (D-OR) awaits consideration in the Senate.

The crux of the legislation centers around this sentence: “No State or local jurisdiction shall impose multiple or discriminatory taxes on or with respect to the sale or use of digital goods or digital services.”

The bill defines a “discriminatory tax” as a tax imposed by a State or local jurisdiction at a higher rate than “is generally imposed on or with respect to the sale or use of tangible personal property or of similar services that are not provided electronically.”

A “multiple tax” is defined as one in which that State or locality “gives no credit with respect to a tax that was previously paid on or with respect to the sale or use of such digital good or digital service to another State or local jurisdiction.”

Then come more specific limits on taxation. Any tax on the sale of digital goods and services can only be imposed on the state and its localities “whose territorial limits encompass the customer’s tax address.” This is understood as the address that the customer offered and which the seller received in good faith.

This legislation is strongly supported by the Download Fairness Coalition, which, not coincidentally, describes itself as is “a partnership of businesses, associations, and consumers who have joined together to prevent multiple and discriminatory taxation of digital goods.”

The Coalition includes Apple, Time Warner Cable, Comcast, Verizon, and, most notably, Amazon. The last mentioned company has been famously at odds with various states over taxes for years.

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