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States seek levies on digital-media downloads
Previous pageCausing additional concern is the Streamlined Sales Tax Project, a multistate effort to develop uniform standards for taxation and straighten out some of the notorious convolutions of state tax laws.
Like Washington state, many participating states have adopted the project's standardized definition of computer software (click here for PDF).
Some, however--namely Michigan, Minnesota, Nevada, Iowa and North Carolina--have yet to expand that definition to include other electronic media.
"We do not have a sales tax on an actual digital download," said Caleb Buhs, a spokesman for the Michigan Department of Treasury. "If you were to, say, purchase something that was a prewritten computer software (program) that was in essence delivered electronically, then we would. But not on something from, say, iTunes."
Buhs said he did not know of any plans in Lansing, the state's capital, to follow Washington state in broadening the definition of computer software to raise additional tax revenue.
The tactic of reinterpreting legal terms to increase the tax base is hardly limited to state officials. The Internal Revenue Service drew opposition in 2004, when it suggested reinterpreting a Spanish-American War tax on "telephonic" communications in a way that could cover Internet phone calls. After opposition from a congressional Republican and the Internet industry, the IRS quietly abandoned the proposal.
"We'd like the exemption to continue. We don't use any state or physical
resources other than the networks over which the digital goods travel, so it's
pretty hard to justify their requirement to tax at the state level on digital
sales." eMusic.com
The prospect of the dozens of states participating in the Streamlined Sales Tax Project, expansively interpreting the meaning of "computer software," worries some of the project's supporters, who fear the potential of a public backlash against the broader effort. Digital-media downloads are already addressed with a separate definition, they say, and should not be shoehorned into a category intended to cover only executable code.
In February, two top officials from the bipartisan National Conference of State Legislatures wrote a letter to the project's organizers, criticizing tax collectors' loose definitions (click here for PDF).
"We were concerned to learn that at least one state tax department has extended the state's definition of tangible personal property to include digital goods," wrote Texas State Senator Leticia Van de Putte and Iowa Speaker of the House Christopher Rants, co-chairs of the legislature conference's task force on electronic commerce taxation. "The task force believes that the decision to tax or not tax any item should be decided by each state's elected policymakers and not through departmental or administrative interpretation."
Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, said he believes that the NCSL letter was referring to legal reinterpretations by Kentucky tax collectors. He added that the topic may be discussed at the board's meeting in Indianapolis, set to begin April 17 (click here for PDF).
"There is no debate about the ability of the Kentucky legislature to tax the sale of digital downloads," Peterson said. "The question is, 'What is the proper method for a state to tax digital downloads?'"
Krantz, of the Council on State Taxation, is coordinating a tax working group that includes Comcast, Microsoft and Amazon.com. He says multistate businesses have proposed a tightly worded definition of digital media to the Streamlined Sales Tax Project. "We're currently in negotiations over that proposal," Krantz said.
A 1992 court ruling's lasting impact
Not every business that offers music, movies or games over the Internet would be required to collect taxes right away, even if many more states begin to change their rules. That's because of the legal concept called "nexus," which means that a company can be taxed by a state only if it has a business presence there.
Nexus is why Seattle-based Amazon.com does not have to collect taxes on shipments to California, a state where the company has no office locations or substantial business presence. Nor is Amazon required to collect taxes on the e-books it sells for about $7 to $20 each.
In a 1992 case called Quill v. North Dakota, the U.S. Supreme Court affirmed the requirement of nexus, saying only Congress had the power to change those rules.
That decision has given rise to two classes of online sellers. Apple and Wal-Mart, in one class, have physical stores all over the country and could be required to collect sales taxes if each state mandated it. But companies without as many storefronts or offices, like Yahoo and eMusic.com, would be immune.
"eMusic is not required to collect state or federal taxes of any nature from our Internet customers; thus, we do not," said David Pakman, chief executive of the the New York-based music service provider.
The company had a 12 percent share of the music download market for computers running Microsoft Windows software as of January, according to NPD Group analyst Russ Crupnick, behind iTunes' 68 percent market share and in front of Napster's 4 percent.
"We'd like the exemption to continue," Pakman said. "We don't use any state or physical resources other than the networks over which the digital goods travel, so it's pretty hard to justify their requirement to tax at the state level on digital sales."
Backers of the Streamlined Sales Tax Project believe that once taxes are simplified, Congress can be persuaded to require retailers to collect taxes on sales even to out-of-state residents. Two bills that would do that--and effectively override the Supreme Court's 1992 decision--are pending in the Senate.
Until the federal government changes the rules, though, the political tussle over taxing digital downloads will continue in state capitols. Last year, Democratic Wisconsin Gov. Jim Doyle proposed a tax on iTunes purchases, with his administration calling it an "issue of tax equity." Republicans pledged to defeat it, and they ultimately prevailed.
"The Joint Finance Committee voted not to include that provision in the budget," Eva Robelia, a spokeswoman for the Wisconsin Department of Revenue, said this month.
That could be a harbinger for similar initiatives in other states.
"To have bureaucrats making these decisions is much worse than having our state legislature do it," Rockwell of the Mises Institute said. "But it's very bad no matter who does it." 
Online purchases from sites like Amazon.com or eMusic.com may seem to arrive tax-free. Strictly speaking, however, shoppers are required to pay their own state's sales tax rate--the concept is called a use tax--and voluntarily report the amount owed on tax day. Few do, a situation that state tax collectors are hoping to change.
In states like California that currently don't tax digital downloads, online shoppers don't have to worry about calculating use taxes. But if more states follow the lead of Texas and Washington state, which now tax online-media purchases, the reach of such taxes will steadily grow.
Apple seeks tax haven in Nevada
Jobs uses his Apple shares to pay taxes
Senators propose taxing Internet shopping
Apple steps up iPod 'tax' push
Renewing the push to collect Net taxes
Internet taxes? It's just a matter of time
States yearn to collect online sales taxes
'iPod tax' planned for music downloads?
Canadians get iTunes on the cheap
States won't write off taxes on Web sales
States push for piece of online sales
Unexpected twists in Internet law
Debating digital media's future
Sales taxes coming to a site near you
States to vote on Internet taxes
U.S. officials knock EU tax proposal
Commentary: Internet taxes are coming
Digital commerce sparks tax tango
California lawmakers OK Net sales tax bill
Net firms concede need for taxes
Taxes can get complicated for online entrepreneurs
Apple's iTunes leads soaring digital-music sales
State losing millions in Net transactions
eBay sellers face tough tax questions
Thumbs down on an Internet sales tax
States move forward on Internet sales tax
Bush signs Internet tax moratorium
New reports urge states to simplify taxes on e-commerce
Are you reporting your Internet purchases?
Congress tackles taxing issues
Apple may offshore iTunes to duck taxes
Techies to wait longer for green card
Editors: Mike Yamamoto, Zoë Barton
Design: Michelle White
Production: Daniel Judd, Andy Lottmann
Download the full report in PDF format.
Not to mention, if you believe the BS from the RIAA, we don't own music, movies, or e-books, we're only renting the information. So if you're going to tax it like a movie rental, ok, fine. But it's not a purchase in that case.
If they're going to impose a tax, fine, push it through the state legislature, but don't just have some fool in an ivory tower making decisions that affect thousands of other people.
Each new copy sold represents a new virtual property and new tax obligation. How's that for a turn around on their contention that virtual music is a tangible property and "theft" of such should be punished under standard theft laws?!
Perhaps the RIAA will decide I do own the music I purchased afterall, in which case they'd better get their hands off my property and stop telling me how and where I can use it and whom I can and can't sell it to.
Now, states - the primary sales tax collectors - have been long pointing to "lost revenue" in it's maintance activities, as a result of more and more people moving towards internet purchasing as opposed to traditional 'bricks and mortar' stores (like Sears). And while that's undoubtably true, that argument on its own fails to mention the cost saving benefits (from a maintanence standpoint) that comes from a more efficient delivery mechanism (i.e. the internet). Much less physical infrastructure is used in the first place. Police and fire companies are used much less, if at all, and really only at the location the goods are stored. It's also worth noting that very few thefts and accidents occur during transit from supplier to purchaser, and those that are reasonable to expect are monitored by the delivery authority - UPS/FedEx/etc - NOT a state or municipal authority. In other words, whereas the states are losing revenue, they are also incurring less costs. It may or may not be a one-to-one ratio (i.e. every dollar of tax revenue lost equals a dollar saved in less government sevrice costs), but the effect is real nonetheless. And yet I've never heard of any state offering to impose an internet sales tax that is less than the regular sales tax. In effect, once internet sales taxes become as ubiquitous as regular sales taxes, states will be enjoying a windfall. I predict higher gross state sales tax revenues will become the norm very soon, much to everyone's 'surprise'.
Anyway, if you accept the above as being a valid point, then just think of how low a states infrastructure costs are on downloads of SOFTWARE. There is NO physical good traversing the roads, NO theft or accident protection costs incurred, there isn't even an impact on the environment (from fuel use in transportaion primarily) that wouldn't otherwise be occuring if you were using your computer normally anyway (like electricity generation). Indeed, such traditional costs are IMPOSSIBLE to incurr with downloads, because physical costs by definition can only happen in the physicial world, and an download of any type is purely digital in nature. Lastly - and perhaps most important - the infrastructure that is used to facilitate internet downloads (phone lines, coax cable, what have you) is ALREADY taxed for maintenance purposes, at both the federal and state levels. There are so many arcane taxes & fees tacked on to the average phone bill that most people have no idea what they're even for anymore.
So to sum it up, the concept of taxation on iTunes downloads (or any software at all) is a complete and total racket. They would be taxing something that leaves almost no additional footprint in the physical world, thus requiring NO additional governent effort (and taxes) than already exist in order to facilitate it. There should be no download sales tax - ever.
And if we want to be intellectually honest about the situation, any sales tax imposed for buying even physical goods over the internet should be much, much less than the sales tax imposed on traditonal commerce as well. Anything else amounts to free money - otherwise knnown as a tax increase - for the government. How ironic that the Republicans seem to be just as willing to impose it as Dems, eh?
Everything I buy and use is taxed. Even food. What in the world is going on?
Where does all the billions collected go??? Infrastructure and maintenance goes according to the home value in the neighborhood.
This is sickening. The worst part is that no one is willing to say "enough is enough." No one is willing to ask, "where and how are you spending MY MONEY"???? I'm not implying that we shouldn't contribute to the maintenance of our country. But damn it, stop the overzelous taxing on everything in life. And, stio wasting MY MONEY on stupid politically driven projects.
It's the greed that drives them, and the "we're in charge and no one can stop us" attitude that goes on around the country that sickens me.
Like they say "if moves; tax it. If it doesn't move; tax it until it moves."
The worst part is that no one will stop them from doing it.
Sales tax is charged by the retailer on the purchase of these cards.
Then, when music selections are made in the iTunes Music Store,
Apple deducts sales tax again (Texas).
It's a downward spiral, we really need taxation reform. I can't see how anyone is going to get ahead anymore. Wages don't increase anywhere close to the amount of taxes or goods.
Try upping the miniumum wage federali's!
was the outrageous taxation of tea that was the major force for
the original revolution against England.
Less and less representation (or accountability) and higher and
higher taxes.
States simply feel their "due" this "revenue" (they don't even see
it as a tax anymore) and use fear and threats if we don't track
our "use tax".
To date, I have seen ZERO ACCOUNTABILITY. I have seen tons of
waste, tax dollars squandered on stuff we never wanted.
"We are missing out on our cut of $100 Billion in sales. That's
lost revenue." And exactly do I, the PAYER, get in return for yet
another tax of 7-10%? Pretty much nothing.
More tax + Nothing in Return = Tax Revolt Time.
We are taxed on the iPod (or other player), taxed on the computer it's plugged into, taxed on the blank media to burn the song to (and anti-piracy levied here in Canada), taxed on the electricity to run it all...
Enough already. Do you really need to tax me on the bits of information too? Why don't you just tell everyone to go back to stealing music? Between record companies demaning more than $0.99 per song now that iTunes has worked, and then the govt wanting to tax it too, you may as well have a banner ad to Kazaa on the iTunes home page.
It's just greed, shame on you (govt).
I still have a fully functional 486 computer loaded with DOS and Windows 3. (Don't ask why I still have it; I have a sentimental attachment to this thing.) Anyway, it has no music player installed on it. If I transferred my digital music files to it and clicked on them, outside of filling up my 200MB hard drive, the computer wouldn't do anything except tell me it doesn't understand the extension.
This Dunderheads logic is hereby debunked!
A computer requires additional software to make sense of the file, the file itself is meaningless without it. Just because modern OS's have music players included with them doesn?t mean the file enables the computer to perform an action or function. Microsoft?s Windows Lite offered in Europe doesn?t have a media player bundled with it, because of a legal decision. If someone doesn?t install a third-party player on a computer with that version, the files will be meaningless again.
Additionally, as others have pointed out, the legal morass regarding who owns the rights to digital music adds additional confusion to the discussion. The issue of whether the end user owns, or leases in perpetuity, the rights to the file has to be sorted out in court first, before the downloads can be taxed. If I don?t ?own? the file, then I shouldn?t have to pay taxes on it, and thereby I give the true owner rights to restrict its use. If I own the file, the music companies should lose the ability to restrict how I can use my personal property.
?Nuff said!
This whole system violates basic human rights and requires a major overhaul.
Most of what is now mandatory, should be only be supported voluntarily (by those who deem it worthy) and be required to provide accountablity on a regular basis.
The government will always do exactly the worng thing in
promoting new technologies and capabilities, it's a proven fact.
Then when sales or adoption rates slow down,... who do they
blame?
I am amused by this one: '"Music is included because music downloads fit the definition of personal property," said Jill Midkiff, a spokeswoman for the Kentucky Department of Revenue.' I wonder if the state is willing to tell RIAA that as RIAA is insisting otherwise. Or will RIAA tell the state they are wrong and Kentuckians not have to pay?
And this one is simply a failure to apply the correct wording in truth: "...why should a stream of bits from iTunes or Walmart.com be tax-free?" Or, phrased another way, why shouldn't we charge you for numbers? Yes, life is becomming a game of numbers. Patent, trademark and copyright on numbers and formula (aka software) and charge for it.
This one is silly beuracracy, and I doubt will stand: "Washington law defines software as "a set of coded instructions designed to cause a computer...to perform a task," which tax officials have interpreted to include music, movies and e-books." as that takes a book to be equivalent to the act of writing or reading a book. Music, text (html!), pictures are all merely data, not executed. They cause the software to behave differently, not the CPU to do anything. In mathematical terms, it is a number or variable (the music) vs a function (the code/software/executable). Of course, if nothing is charged for it (html?) then they don't get taxes on it, unless it is s rebate deal.
"Not every business that offers music, movies or games over the Internet would be required to collect taxes right away, even if many more states begin to change their rules. That's because of the legal concept called "nexus," which means that a company can be taxed by a state only if it has a business presence there." Hmm, i.e. make sure they cannot operate in their state or be unable to price compettitively, OR, move out of the US. I think I'm leaning against the tax...
It's a failure, and points up how News.com is a shell of what it was in the 1990s.
2. The State Of Washington has NO State Income Tax, but has State Sales Tax, so now they're targeting Tax On iTunes...Citizen Gates + REAL pulling some political strings?
3. The Apple Corps is creating a BeatlesTunes Store for downloading the Beatles catalog of music. Maybe "The Taxman" will comes after them too, (Not just in England with their enormous tax rates), but in America as well. BeatlesTunes will be $$$.
4. STUPID IDEA GREEDY PEOPLE!
You laugh, but you know you could probably patent that.
- What Liberal Dreams Are Made Of!
- by WJeansonne April 13, 2006 10:33 AM PDT
- Oh, how they must be partying at government offices these days! Once again they get to nickle and dime us to death. First VOIP, now music, next movies. I now pay 26% of my home phone bill on state and local taxes. It's absolutely disgusting and a waste of my money. What do I get for it? A brand spanking new "Temporary Worker's Facility" that helps legitimize so-called "undocumented workers" (a liberal catch phrase no less)--more like illegal aliens!! Yes, it the socialist state of Maryland I'm talking about here. And it's turning becoming more like California every stinking day. Ugh.
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