The federation says it's unfair that Canadian providers of digital entertainment are required to charge GST or HST, whereas their American competitors are not.
The federal goods and services tax adds five per cent to the cost of downloading from Canadian providers.
The taxpayers federation says in provinces that have harmonized their sales taxes with the federal tax, the additional cost is as high as 15 per cent.
In a submission to a Finance Canada consultation panel on tax planning by multinational enterprises, the federation argues the GST and HST should be dropped on Canadian-provided digital entertainment.
It says the current situation gives an unfair competitive advantage to American providers, like Netflix and iTunes.
"What if Canadian Tire had to charge GST or HST but not Wal-Mart or Costco?" says Gregory Thomas, the federation's federal director, in a statement.
"Canadian Tire would go out of business. That's exactly what's going to happen to Canada's phone and cable companies if we don't fix this."
In its submission, the federation says some government officials have suggested that foreign digital content providers should also be compelled to charge GST or HST.
But the federation maintains that would "difficult, if not impossible" to enforce.
"Digital downloads are notoriously difficult to monitor and new companies are popping up all over the world, every day," it says.
Rather than waste millions trying to tax downloads from foreign providers, the federation says scrap sales taxes on digital entertainment altogether.
"Canadian consumers already pay enough taxes. In 2010, Canadians paid nearly $60 billion in federal and provincial sales taxes," it says in its submission.
"The answer isn't to tax Netflix subscriptions and other foreign digital content but to eliminate sales tax on all digital content providers. That would be fair for businesses and consumers."
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