Politics and Law

Microsoft CEO Steven Ballmer offered an unwelcome economics lesson to the Obama administration this week: Higher taxes have consequences that Washington policy-makers may not especially like.

Ballmer said Wednesday that if Congress enacts President Obama's plans to impose higher corporate taxes, a sensible thing for Microsoft to do would be to move jobs offshore.

"It makes U.S. jobs more expensive," Ballmer said, according to Bloomberg News. "We're better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S."

Last month, the president announced a plan to rewrite tax law by preventing U.S.-based multinational companies from "deferring" and keeping profits offshore, which can lower their tax bills.

The current U.S. corporate tax system is unusual because it taxes income that Microsoft and other companies make in other countries, even if they already paid foreign taxes on that income. That makes U.S.-based companies less competitive than, say, Irish firms that don't pay taxes on foreign income and aren't hit by double taxation; deferred taxation is a way to lessen the sting.

If deferred taxation is eliminated, it becomes more tempting for a company to move its headquarters from Seattle to Dublin. That's voting with your feet.

That's why business groups have opposed the president's plan. The U.S. Chamber of Commerce says it will "impede growth in the U.S. economy, (and) cause the loss of jobs." The National Foreign Trade Council called it "counterproductive."

Microsoft says it employs about 95,000 people worldwide, and about 56,500 in the United States.

Editors' note: This is a guest post. See Michael Songer's bio below.

Throughout the 1990s and 2000s, we have seen a number of well-known legal disputes: legality of peer-to-peer services such as Napster and Grokster, cybersquatting, laws (trying) to regulate porn, even "veejay" Adam Curry trying to use the MTV domain name.

As we head into 2010 and beyond, here are some legal issues that are likely to careen through cyberspace in the next few years.

1. Lawsuits related to stupid/silly conduct shown on the Internet.
The assimilation of broadband brought with it those "viral videos": Star Wars Kid, Numa Numa Dance, Aleksey "Impossible is Nothing" Vayner, and the like. The latest fad seems to be taking videos of crude behavior and posting it for all to see--think of the two girls bathing in the Kentucky Fried Chicken kitchen, or the Domino's employees creating a "special" meal for a customer.

Someone will be offended, someone will sue. In some cases, the lawsuits make sense (violating health codes for the KFC and Domino's videos); in other cases, they don't (Star Wars Kid sued, and Aleksey Varner threatened a suit, though the legal basis for these is shaky).

Expect to see a rise in these types of lawsuits related to conduct shown on the Internet and calls for Congress to do something. What, exactly, can be done is less clear; it's hard for the legal system to regulate conduct that, while not breaking the law, is merely stupid. But that won't stop people from trying and lawyers from garnering headlines.

2. Lawsuits related to social media.
The last few years have seen a number of lawsuits brought against Facebook and MySpace for conduct occurring on those sites--think of the Megan Meier case (Megan Meier was the teenager who committed suicide after a woman pretended to be her friend, and then turned on her).

The government prosecuted the offender in that case, though the legal basis for the prosecution is less than clear, and an appeal is under way. And there have been calls for regulating what you can and cannot do (no sock puppets!) on these sites.

These are likely to continue for the simple reason that more and more people are using these new technologies. With that increased use comes the increase in libelous statements, crude conduct, even illegal activity (think prostitutes using Craigslist to advertise their services).

I'm sure--if it hasn't already happened--that someone will sue over some "tweet" in the next year. Expect more of these lawsuits.

3. The next battle in the copyright wars.
The $1 billion battle between Google's YouTube and Viacom is churning away, with no end in sight. At issue is the liability of sites like YouTube for hosting content posted by others.

Like the earlier Napster decision, this case has major ramifications for content on the Internet. However, just as Napster begat legal file sharing (iTunes), consumer demand might work out a solution faster than the courts.

YouTube recently announced a deal with Sony to stream movies, with television shows on the horizon. But whatever the final outcome of the YouTube lawsuit, nagging copyright issues associated with liability and fair use of content uploaded into social sites will not go away.

Recently, the Associated Press threatened to sue aggregators and clamp down on the use of their articles, and others are sure to follow this path. Expect more content owners to use copyright lawsuits to shape what we view and read on the Internet.

4. Blogger liability for the comment section.
Currently, bloggers cannot be sued for libelous statements posted in the comment section of their blogs. Something called "section 230" (after the particular legal code) immunizes bloggers from legal harm caused by another's comments (bloggers, however, can be sued for libelous statements that they post).

This immunity was enacted in the mid-'90s and was designed to protect the "publishers" on the Internet at that time: the AOLs, CompuServes, and ISPs that enabled Internet access. The law never contemplated the explosion of bloggers, MySpace authors, and other "social publishers." And the law never contemplated the accompanying (usually anonymous) comments to those posts, as well as the ill will associated with the all-too-common flame wars.

Several courts have expressed dissatisfaction with the blogger immunity--particularly when the blogger knows that the comments are defamatory or wrong. Expect more challenges to this immunity, and perhaps calls for Congress to roll back section 230.

5. The taxman cometh.
Anyone who has read a phone bill has seen a dizzying array of taxes, assessments, and special charges. Your Internet access is free from such taxes until at least 2014, due to Congress and the Internet Tax Freedom Act. The law, passed in 1998 and extended by the Bush administration, prohibits federal, state, and local governments from taxing access to the Internet, and it bans "Internet-only" taxes such as bandwidth or e-mail taxes.

States remain free to tax sales on the Internet.) Of course, that was before the current economic crisis, and the general rise in taxes on everything from mobile phones to cigarettes. A bill has been introduced to make the tax ban permanent, but nothing is "forever" with Congress. Expect to see calls for Congress to tax these areas before 2014.

Of course, given a steady pace of new Internet technologies that allow different ways for humans to interact with one another, more unique, complex, and downright strange events will occur that give rise to legal disputes. (Think "upskirt" cams.)

The legal system is flexible and has dealt with much over the last 10 years, in many instances driving Internet growth in ways both good and bad. The next 10 years promise much of the same.

Tax protester at San Francisco "tea party" gathering on April 15 holds up sign saying "IRS: We take $$$$$$ from working people to pay for big government."

(Credit: Declan McCullagh/CNET)

If a little-known but influential alliance of state politicians, large retailers, and tax collectors have their way, the days of tax-free Internet shopping may be nearly over.

A bill expected to be introduced in the U.S. Congress as early as Monday would rewrite the ground rules for mail order and Internet sales by eliminating what its supporters view as a "loophole" that, in many cases, allows Americans to shop over the Internet without paying sales taxes.

Currently, Americans who shop over the Internet from out-of-state vendors aren't always required to pay sales taxes at the time of purchase. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't pay sales taxes at checkout time that they would if shopping at a local mall.

"We will have the bill ready for introduction by next Monday," said Neal Osten of the National Conference of State Legislatures. "We finalized the language and now we're working out the remaining issues and adding some new provisions at the request of various stakeholders."

This is hardly a new debate: pro-tax officials and state governments have been pressing Congress to enact such a law for at least seven years. They argue that reduced sales tax revenue threatens budgets for schools and police, and say that, as a matter of fairness, online retailers should be forced to collect the same taxes that brick-and-mortar retailers do.

Even though those arguments have been unsuccessful so far, the National Conference of State Legislatures and its allies believe the recession has sliced into sales tax revenue so much that Congress will have to act. A report this week from the Rockefeller Institute says that sales taxes have declined by 6.1 percent, the largest decline in half a century.

"One of the big things the states have learned in the recession is they have declining revenues," said Scott Peterson, executive director of the Streamlined Sales Tax Project, which counts state politicians and tax collectors on its governing board. "We're very optimistic about Congress this year. We think we are within a day or two of finalizing the legislation."

The final legislation is expected to be introduced by Sen. Mike Enzi, a Wyoming Republican, and Rep. Bill Delahunt, a Massachusetts Democrat, who have championed similar proposals in the past. Delahunt's office on Wednesday confirmed he was interested; Enzi's did not respond.

On the other side are the Direct Marketing Association, the Electronic Retailing Association, and companies including eBay, L.L. Bean, and Overstock.com. One of their biggest objections to the idea of collecting sales taxes on out-of-state shipments is the dizzying complexity of state laws.

Take candy, which would seem to be a straightforward item to tax. It isn't. During a 2003 discussion of tax policy, a representative of Indiana, James Turner, noted that a proposed definition of candy would have taxed the Milky Way Midnight candy bar but not the original Milky Way bar.

But further investigation showed that Turner's counter-proposal would have treated "certain flavors of Pop Tarts" and Cookies and Twix Crunchy Cookie Bars as candy--but not Cookies and Snickers Crunchy Cookie Bars. Peanut butter Girl Scout cookies would be candy, but Thin Mints or Caramel deLites would be classified as food.

Bizarre distinctions like this, coupled with the existence of more than 7,000 different tax agencies, are why the U.S. Supreme Court ruled that out-of-state retailers generally couldn't be obligated to collect sales taxes unless Congress changes the law. The justices noted in a 1992 case called Quill v. North Dakota: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence. If Amazon had an office in California, it already would be collecting sales tax for Golden State residents. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)

In response to complexity concerns, the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws' most notorious convolutions.

Since 2003, more than 20 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.

"You'll see governors from states who are active participants pushing the Hill to move the issue forward--Kansas has been a long-standing leader. North Dakota, Iowa, Oklahoma, those are some with members on the governing board," said David Quam, director of the office of federal regulations at the National Governors Association. "The states have done the heavy lifting of coming up with a voluntary system that makes sense. Now it's Congress' turn to grant states the authority to collect this."

Representatives of the Streamlined Sales Tax Project are gathering in Washington, D.C. next month for a three-day governing board meeting, including a "lobbying day" that's scheduled for May 13.

Under existing law, the caveat is that online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time.

California residents, for instance, are now burdened with a sales and use tax of at least 8.25 percent. State law is strict: if Californians travel to a state with a 5 percent tax and shop there, the law requires them to cough up the 3.25 percent difference when they return. Online purchases are taxed as well.

But compliance is spotty at best. California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents aren't paying use taxes--and attributes $208 million of that to online purchases.

"There's no member of NRF that does not support" the forthcoming legislation, said Maureen Riehl, vice president of government relations at the National Retail Federation. "The sooner we can get it done the better, as far as retailers are concerned."

Online retailers tend to disagree. If the Streamlined Sales Tax Project (SSTP) were actually simple and easy for a shipper to work with, they might be more willing to compromise, but that may not be the case.

"The states are desperate for new revenue and I think they realize they're straying far from the simplification they originally promised," said Steve DelBianco, executive director of NetChoice, which counts as members AOL, eBay, NewsCorp, Oracle, Verisign, and Yahoo. "That creates an urgency on their part--to get the federal mandate before it becomes clear they have no intention to simplify."

"They have no real intention of simplifying or compensating sellers for the burdens of collecting," DelBianco said. "It's a shell game."

Among his complaints: That states are unwilling to compensate sellers for the burden of sales tax collection; that small businesses with minimal sales should be exempt; that only one state (as opposed to all states) should be able to audit a business; that participating states are not paying attention to the idea of simplification and are actually making definitions more complex.

"There has to be some oversight," DelBianco said. "These guys have demonstrated--the streamlined states have demonstrated -- an inability to stick to the streamlined promise. Only the U.S. Congress is going to be able to protect sellers from unreasonable burdens."

CNET's Stephanie Condon contributed to this report.

Because of quirks in many state laws, sales taxes may be levied on CDs sold in storefronts but not on iTunes and other digital downloads. It's a situation that recession-weary, tax-hungry politicians are hoping to change.

A growing number of states are considering laws to tax digital goods, such as iTunes songs, Amazon MP3s, or electronic books. Yet at a time when governments say they want to encourage broadband adoption and the development of a low-carbon economy, opponents say taxing digital goods sends exactly the wrong message.

Mississippi is one of the latest states to write into law a tax on digital products. The measure, which was adopted mid-March and goes into effect July 1, imposes a sale and use tax on specified digital products--including digital audio-visual works such as movies, digital audio works such as ringtones, and digital books.

Republican Gov. Haley Barbour endorsed the legislation via Twitter. "On HB 1461, I support this bill and here's why: This bill will treat Internet sales like catalog sales making it a level playing field," he said on March 11.

Including Mississippi, at least 18 states claim they have the authority to collect taxes on digital goods, and more are likely to join them.

On March 12, a bill was introduced in the North Carolina general assembly "to modernize the sales and use tax statutes by treating music, movies, books, and computer software that are delivered electronically the same as those that are purchased in a tangible medium."

A digital goods tax measure was also introduced in the Minnesota House of Representatives in late March. The bill could raise the state more than $8.2 million in 2010 through 2013, according to the Minnesota Department of Revenue (PDF).

States such as Washington and Vermont are also considering such measures, according to Stephen Kranz, an attorney at the Sutherland law firm who represents companies in the digital media industry.

The idea isn't popular everywhere. A proposal to tax digital goods in New York died this month when it was left it out of the state budget.

Rob Atkinson, the president of the Information Technology and Innovation Foundation, said that policy makers should distinguish between digital goods and digital services in their tax laws.

"A service would be someone designing your Web site for you," Atkinson said. "Whether they design it from a thousand miles away or in your office is irrelevant. On the other hand, if someone is buying (music online), it should be treated in the same way as a physical analog in the economy."

"I don't think most policy makers think about it that way," he added.

The Washington state bill would clearly tax digital services as well as what's typically considered digital goods, Kranz said. The Streamlined Sales Tax Project, a multistate effort to develop uniform standards for taxation, adopted in 2007 a specific definition of digital products, along with procedures for how they should be taxed.

Location, location, location
A uniform definition across states would make the taxes less burdensome to merchants, Atkinson said.

"There has to be some easy to use plug-in software...so each seller doesn't have to go through this accounting nightmare," of determining the taxes due in each state, he said.

However, some proposed laws such as Minnesota's would not apply to online merchants based outside the state, Kranz said. That's because under the legal concept of "nexus," a state generally may only tax a company that has a physical business presence within the state's borders--though a state may apply a "use tax" for goods coming into the state from elsewhere.

Those states that are not including a use tax in their proposals are "'discriminating against their own digital community," Kranz said. "If I'm a consumer and I have a choice between two Web sites and one charges tax and one doesn't, which one do you think I'm going to purchase from?"

In fact, North Dakota Gov. John Hoeven on March 19 signed into law a measure to explicitly exempt digital goods from taxes for that reason.

"I think it's important we send a message to the world of digital products that this is a state that's favorable to their interests," Dwight Cook, the state senator who introduced the tax exemption bill, told CNET News in January.

The tech industry has also been advocating for the government to promote the use of information and communications technology as a means of creating a more energy efficient economy--a goal that may be undermined by digital goods taxes, according to some.

"The digital economy is growing fast, and the tiny carbon footprint of downloads is something that benefits all of us," said Steve DelBianco, executive director of NetChoice. "Digital downloads are the most environmentally responsible way to get movies, music and software, and tax policy is one the ways we promote environmentally sound decisions."

Digital goods taxes may be particularly unappealing to consumers on April 15, DelBianco said.

"Writing a fat tax check is particularly painful when your home (value) and savings have declined so deeply, and the idea of facing new taxes on digital goods makes that pain last all year long," he said.

A growing number of states are considering taxing songs from iTunes to relieve their strained budgets, though at least one state may buck the trend in the hopes of appearing more tech-friendly.

A state legislator in North Dakota last week introduced a bill to explicitly exempt digital goods such as digital music or movies, digital books, or ringtones from the state's sales tax and use tax. A hearing on the bill is scheduled for next week.

At least 17 states currently collect taxes on digital goods, and a handful more may join them. A bill was introduced last week in the Mississippi state legislature to impose taxes on digital goods, and lawmakers in North Carolina are considering a digital goods tax as well. New York Gov. David Paterson has proposed the tax in his state, and legislators in states like California and Wisconsin may take up the issue again this year despite a lack of support for it in the past.

The extra revenues that could be gained from taxing digital downloads may be appealing to state lawmakers, but Stephen Kranz, an attorney at Sutherland law firm who represents members of the digital media industry, called digital download taxes "a short-sighted approach to digital tax policy."

"It punishes people who can't move and discourages companies" from moving to states that impose such taxes, he said.

That's because under the legal concept of "nexus," a state generally may only tax a company that has a physical business presence within the state's borders-- though a state may apply a "use tax" for goods coming into the state from elsewhere.

While North Dakota has not taxed digital goods in the past, Dwight Cook, the state senator who introduced the tax exemption bill, said he wanted to make that point clear to technology companies.

"I think it's important we send a message to the world of digital products that this is a state that's favorable to their interests," he said.

At least one major technology firm has been drawn to North Dakota--Microsoft first established a presence there when it acquired the company Great Plains Software in 2001.

"I don't completely understand the high-tech world, but I do understand they use a lot of electricity and they need a lot of water, and we certainly have both," Cook said.

Cook decided to introduce the tax exemption legislation after learning more about the issue from the Streamlined Sales Tax Project, a multistate effort to develop uniform standards for taxation. In 2007, the project adopted a specific definition of digital products, along with procedures for how they should be taxed.

Correction at 9 a.m. PST: Tim Geithner's nomination status has been corrected. His nomination has not come up for a full Senate vote yet.

This was originally posted at ZDNet's Between the Lines.

Treasury Secretary nominee Tim Geithner--the man who hopes to be entrusted with overseeing the Internal Revenue Service and a remaining $350 billion in bailout funds--apparently isn't so smooth when it comes to Intuit's TurboTax.

His mention of TurboTax as he tried to explain away back taxes during a confirmation hearing last week highlights two common problems in IT: users vs. software, and the "garbage in, garbage out" conundrum.

Last week, a flurry of news reports noted Geithner's comments about TurboTax. As background, he was grilled about failing to pay more than $34,000 in payroll taxes earlier this decade.

Geithner said he "mistakenly believed" he was meeting his tax obligations. When asked which tax preparation software he used, Geithner noted that the taxes were his responsibility, "but I used TurboTax to prepare my returns."

This incident--see The Wall Street Journal's live blog and Senate Finance Committee video (TurboTax mention comes at the 48-minute mark on the January 21 video)--highlights the never-ending user error vs. software tug-of-war in IT.

Was your application screwy or did you fail to input data? Were Geithner's tax problems the result of TurboTax's failure to flag potential issues--like payroll taxes--or Geithner's failure to cough up critical information.

Intuit was clear about where it stood. In a statement, Intuit said:

Each year, millions of Americans use TurboTax to accurately prepare and file their federal and state tax returns. The software helps taxpayers report their income and find the deductions and credits they're entitled to claim. TurboTax, and all software and in-person tax preparation services, base their calculations on the information users provide when completing their returns. TurboTax also has built-in error-checking tools that routinely catch common taxpayer mistakes. Federal law and our own privacy policy prohibit us from discussing specifics of any customer's return.

Advantage Intuit. No one watching Geithner's testimony is likely to buy the blame-the-software routine. Clearly, this fiasco is a "garbage in, garbage out" issue. Geithner didn't provide the necessary data.

The larger question is whether a guy who wrestles with TurboTax should realistically be expected to oversee the IRS and fork over $350 billion in bailout money. I'll leave that for you to decide since that answer goes well beyond the scope of my blog. I'd hate to add yet another IT problem--scope creep--to this post.

In the end, Geithner will probably be confirmed, but his standing has certainly been diminished.

If you enjoy buying music from iTunes, movies from Amazon.com's Unbox, or computer software from anywhere, be warned: the halcyon days of tax-free digital purchases may be over.

With retail e-commerce sales now estimated to exceed $130 billion a year, and iTunes song purchases topping 5 billion, state politicians and tax collectors have begun to levy new fees on digital downloads.

Call it the iTax. In 2008 alone, at least nine states have considered digital download taxes, and at least five of those states have enacted them into law. Nebraska's governor signed a digital download tax bill into law in April, and a similar measure was adopted in Tennessee in June. As CNET News reported a few months ago, Indiana, South Dakota, and Utah also enacted digital download taxes this year.

The push stems from an odd legal quirk: because most states' tax laws were written long before the Internet existed, they may accidentally immunize downloads from taxation. This is the case even in otherwise high-tax states like California, where physical CDs are taxed heavily but iTunes downloads remain tax-free for now.

Tech industry groups like NetChoice, which counts eBay, AOL, and Yahoo as members, have been lobbying against the rise in so-called iTaxes--with limited success.

"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 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."

Politicians in Wisconsin and California attempted this year to impose taxes on digital downloads but were unsuccessful, according to Stephen Kranz, an attorney at Sutherland law firm who represents members of the digital media industry.

But other states may still consider new digital download legislation soon. "Massachusetts has a draft bill circulating around," Kranz said, and legislators in both Wyoming and Washington will be reviewing their download tax policies at the request of tax collectors.

Including Nebraska and Tennessee, there are 17 states, plus the District of Columbia, that tax digital downloads, according to our earlier research: Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, New Jersey, New Mexico, South Dakota, Texas, Utah, and Washington. (For more details, see our special report from 2006.)

The new Tennessee law (PDF) that taxes "the retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers" takes effect in January 2009. The Nebraska law, which taxes "sales of digital audio works (music), digital audiovisual works (movies, music videos, TV shows), and digital books," takes effect in October.

The increasing popularity of online merchants makes taxes on digital downloads an attractive source of revenue for politicians; last week, for instance, we reported that iTunes was the top music retailer in the United States for the first half of 2008.

And iTunes isn't alone: According to the trade association the International Federation of the Phonographic Industry, there are more than 500 legitimate digital music services worldwide. Digital sales account for 30 percent of revenues in the U.S. music market, the association reported this year.

The International Digital Publishing Forum has been tracking the steady growth of wholesale electronic book sales in the U.S., which reached $10,100,000 in the first quarter of 2008--up more than 25 percent from a year earlier.

The pitfalls of download taxes
Not all online vendors, though, would be compelled by state laws to collect digital download taxes from their customers. Under the legal concept of "nexus," 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.

The Supreme Court ruled in 1992 that nexus was required for mandatory taxation--unless Congress changed the law. Advocates of mandatory sales tax collection are now doing just that: related bills were introduced in both the House and Senate last year.

"Most of the proponents of the nexus legislation would concede that given this is an election year, it's unlikely the legislation will pass," Kranz said. He predicted that there will likely be an effort to revive the legislation next year.

Digital download taxes have also been criticized for running businesses out of state. Michelle Steel, a member of California's Board of Equalization, wrote in an editorial in April that if the state were to tax downloads, "Golden State retailers would be at a competitive disadvantage to out-of-state companies."

Democratic Assemblyman Charles Calderon has been pushing legislation in California to tax "digital property." The California Board of Equalization said in an analysis of Calderon's bill that if the state were to "adopt a regulation subjecting digital property transfers to the (Sales and Use Tax) Law, state and local revenues could increase by approximately $114 million annually."

Calderon's bill was defeated in a preliminary vote in April by the state assembly's Revenue and Taxation Committee. Tom White, Calderon's chief of staff, said the politician had not yet decided whether to pursue the measure in the next legislative session but probably will.

For those companies that do have a physical presence in many states--like Apple--it can be a logistical headache to comply with digital download tax laws in multiple states. That's because many states have varied definitions of what constitutes a digital download and how they may be taxed.

The Streamlined Sales Tax Project, a multistate effort to develop uniform standards for taxation, adopted in September of last year a specific definition of digital products, along with procedures for how they should be taxed, according to Scott Peterson, the project's executive director. For instance, "Digital Audio-Visual Works" is defined as "a series of related images which, when shown in succession, impart an impression of motion, together with accompanying sounds, if any."

The definition was first suggested by a group of multistate businesses. Twenty-two states have agreed to the project's standards, including eight of the 18 states that tax digital downloads. "I suspect we will see the next 14 attempting to address it in the next legislative cycle," Kranz said.

Industry representatives say the uniform definition won't lessen the tax burden shouldered by digital media companies, but may at least help eliminate some of the ambiguities and compliance problems.

Washington state law, for instance, does not explicitly permit the taxation of digital downloads, but the state taxes them anyway. Previously, the Washington Department of Revenue told CNET that it taxes downloads on the basis that they fall under the definition of computer software, which is taxable.

"As these technologies meet, there is this question of what is digital goods and what is software," said Drew Shirk, a legislative policy coordinator for the Washington Department of Revenue.

To answer those questions, the state legislature commissioned a committee, chaired by State Representative Ross Hunter, to provide a report to the legislature by the end of the year "to define where technology is today and how it should be taxed," Shirk said.

The committee is meeting on Tuesday to report its results.

More taxes coming soon?
Semantic disputes and other complications aside, the lure of easy revenues--especially if they can be sold to voters as a technical change in definitions rather than a tax increase--continues to lure politicians.

Wisconsin Gov. Jim Doyle promoted a digital download tax in the 2005-2007 budget, but it was not approved. The tax proposal was once again included in the Department of Revenue's 2007-2009 budget, according to Department spokeswoman Jessica Iverson, but was shot down a second time. The tax would have covered digital items, "provided that the non-electronic version of that item was not exempt," Iverson said.

The Wyoming legislature will also likely consider taxing digital downloads early next year, according to Dan Noble, the administrator of the excise tax division for the Wyoming Department of Revenue.

"The way our statute is currently we probably could tax them, but we should probably have the legislature have the final say," he said.

A number of large states, however, have yet to pursue this new line of revenue. Susan Burns of the New York Department of Finance said her employer made clear in 2007 that it does not tax downloaded music or movies (PDF) in two advisory opinions issued in response to an inquiry from Apple. "The sale of digital music delivered electronically to customers for download on their computers... constitutes the sale of intangible property and is not subject to sales or use tax," the music advisory states. Burns said the policy has not changed since the advisories were issued.

CNET News' Declan McCullagh contributed to this report