Politicians push for new iTunes sales taxes
Updated at 7:25 AM PDT with new information about the status of the California tax bill.
A growing number of state politicians are proposing new laws to levy taxes on digital downloads, including music, video, and books, as a way to remedy budget pains.
Call it the iTunes tax.
Two years ago, a CNET News.com special report found that 15 states and the District of Columbia said that their laws and regulations meant that digital downloads should be taxed. A few months later, New Jersey joined that list.
Since then, more states have become tax-inclined. In 2008 alone, Indiana, Utah, and South Dakota have enacted laws reiterating their commitments to collect taxes on digital downloads, while Nebraska recently voted to send its governor a bill (PDF) that would tax downloads of books, movies, and music starting October 1. Others, including Wisconsin and Massachusetts, have formed groups to "study" new iTunes taxes.
"I wouldn't be surprised to see other states attempting to impose taxes on digital goods," said Stephen Kranz, an attorney who represents a group of Fortune 500 digital goods vendors opposed to new taxes. Kranz said he couldn't name the companies because irked tax administrators might retaliate by singling out his clients for audits.
One reason that music and movie downloads have partially escaped the notice of tax collectors is that, until a few years ago, the market was relatively small and state tax laws sometimes apply only to tangible goods. But their attitude has changed now that iTunes, Amazon.com, eMusic, Rhapsody, Wal-Mart Music, Yahoo Music Unlimited, and others have demonstrated that there is plenty of untapped revenue for tax-hungry politicians--underscored by reports like one in February stating that iTunes has sold more than 4 billion songs.
Arguably the most heated showdown is looming in California, home to an $8 billion deficit and lawmakers who are scrambling to do something about it. The state legislature is considering a bill proposed earlier this year by Democratic Assemblyman Charles Calderon, who represents a district east of Los Angeles. The bill calls for new taxes to sweep in "digital property," which "includes, but is not limited to, products like music, movies, and books."
Some opponents fear that broad definition could sweep up everything from electronic tax-preparation services to video games to advertising, causing new headaches for online retailers and their customers.
Backers of the new taxes--which, in California's case, include the AFL-CIO and associations that represent state, county, and municipal employees, teachers, firefighters, and county governments--contend they're necessary to offset budget deficits and to create parity with the physical versions of those products that would otherwise be taxed.
A recent analysis of that bill by the Assembly Committee on Revenue and Taxation said it's "imperative" for California to rewrite its tax laws to reflect an increased "amount of transactions in this state involving the electronic transmission of information and 'digital property.'" Calderon said that if California collected taxes on music downloads alone, it would collect $20 million a year in new taxes from state residents.
But opponents--including a wide array of Internet companies, retailers, local chambers of commerce, and the Motion Picture Association of America--argue the new fees will impair digital media sales and, at least in some cases, reduce the incentive of high-tech companies to do business in high-tax states.
Does my state tax digital downloads?
At the moment, Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, New Jersey, New Mexico, South Dakota, Texas, Utah, Washington, West Virginia, and the District of Columbia impose such taxes, according to research by CNET News.com and the California State Board of Equalization, which sets the state's tax rules.
Not all state legislators, however, have been so quick to applaud digital goods taxes. Last year, for instance, Iowa legislators agreed to strip out such a proposal by the state's Department of Revenue.
There's also lingering confusion over which state taxes what digital downloads. A list of frequently asked questions at the Web site for Electronic Arts, the video game maker, for instance, says it is also required to collect such taxes from residents of Pennsylvania, Minnesota, Connecticut, and Kansas. (EA did not respond to requests for comment about how it came up with its list.)
Making matters more complicated is that not all states have statutes explicitly stating their position on taxation of digital downloads.
"If a state wants to start taxing a product or service not previously taxed, they've got to enact new legislation, such as the Maryland computer services tax that was just repealed," said Steve DelBianco, executive director of NetChoice, which represents e-commerce companies like eBay and Yahoo. "But many of these states are hiding behind tax administrators who are anxious to create new taxes on so-called digital equivalents."
Not so simpleJust because a state imposes sales tax on digital downloads, however, doesn't mean that a retailer will actually have to collect it.
That's because a 1992 U.S. Supreme Court case called Quill v. North Dakota says mail-order companies only have to collect sales taxes from customers who live in areas where they have a physical presence, or "nexus," such as a retail store, warehouse, or data center. So if a California resident buys a digital track from an online music store--say, Seattle-based Amazon--that has no physical presence in the state, a tax shouldn't show up on that order, even if California imposes sales taxes on digital downloads.
Because of those legal inconsistencies, however, opponents argue that the California bill will punish companies located in the state and provide a reason for them to move elsewhere. (Amazon operates a warehouse in neighboring Nevada, for instance.)
"In-state companies will be required to collect the new Internet tax while out-of-state companies will not," more than 200 companies and organizations argued in a recent letter to state legislators. "There will not be a level playing field with other states which will place in-state companies at a competitive price disadvantage." Apple and Wal-Mart, for instance, have physical stores all across the country.
If companies choose to exit California, then the state will actually see reduced tax revenue in the form of corporate and personal income taxes, the same group of opponents argued.
The California bill is also drawing cries of exasperation from the entertainment industry for a completely different reason: intellectual property theft.
In a separate letter opposing the bill, MPAA Vice President Vans Stevenson argued the adoption of an "expansive, unprecedented new Internet tax" will "likely encourage more digital piracy," which he said will lead to "lost jobs, lost sales, and lost tax revenues."
That consideration hasn't been lost on state politicians, either. In an op-ed piece published Sunday in the Sacramento Bee, Republican Michelle Steel, who represents a swath of southern California on the state Board of Equalization, argued that "new taxes encourage consumers to return to their nasty habit of illegally downloading music."
Kranz, for his part, said he believes the California bill, if passed, will be ripe for a legal challenge on procedural grounds. State law normally requires a two-thirds vote for approval of new taxes, but Calderon's proposal attempts to circumvent that by instructing the state Board of Equalization to set the new tax policy and, because of that, requiring only a majority vote.
Foes of new taxes argue that state regulators don't have the legal authority to set such rules in the first place and that allowing such a "back door tax" could set a dangerous precedent.
Update at 7:25 a.m. PST: The California download tax bill was narrowly defeated in a preliminary vote late Monday by the state assembly's Revenue and Taxation Committee, the San Jose Mercury News reports. But Calderon, its sponsor and committee chairman, is still trying to keep it alive. He expects to call up the proposal, which fell one vote short of the five votes needed for passage, for a "reconsideration" vote as soon as next week.
News.com's Declan McCullagh contributed to this report
This is a very dangerous slope they're heading down. They could even tax downloading free information or software since you are receiving something of "value" (like cell phones that are free being subject to sales tax). At this rate in ten years there will be a tax for reading the NY Times online.
Instead of finding new and creative ways to tax people why don't we cut back on spending. I know that's a stretch but we could go back to basics in our government spending.
Also, many of those 'state laws' fall afoul of the Constitution's 'interstate commerce' clause which only allow the FEDERAL government to put taxes on interstate commerce..... this definitely fits into that category, as do almost all downloads online that you pay for.
When you bow to and buy a license to listen to a little ditty instead of putting the traveling minstrels in their rightful place you've placed them in a power position and you'll get just what they shovel. Stop buying music and quit going to movies for one year.
As far as cutting taxes:
Here is where "we" will cut government spending: Libraries, parks and recreations, road repair, meals on wheels; where-ever there is a program that actually works and does something for the taxpayer, that is what "we" will cut out.
Soon there will be gas rationing coupons and a click-a-tax.
resell it... even on eBay.
People resell digital non tangible information all the time. eBay has hundreds of auctions for World of Warcraft in game items.
You are also incorrect that governments would start taxing free items.
Does McDonalds not only tax the Happy Meal... then the toy it comes
with? Do breakfast cereals tax the cereal? Then the "prize"?
However, those are items that come with the purchase. Your example
of cell phones is a poor one. That is a single tangible item. And it is
subject to taxes by the way, and is taxed in many states. Many manufactures and/or retailers may, as a courtesy to its customers absorb the tax, but someone is paying that tax.
music-on-hold minutes with your credit card banks.
already collects sales tax on iTunes purchases.
No - this is an attempt of States to squeeze more money out
their citizens. Rather than making the business conditions more
favorable to having corporate presence in the State, they will just
tax.
I'd like to see a little more accountability on all the taxes already
being paid. When was the last time we audited our State's
MULTI-BILLION DOLLAR budgets and looked at how effectively
the money was really being spent.
Taxes will go up, but nothing else will change. Your roads will
still be crappy, traffic will still be unbearable, state services will
still suck (and you'll still have to pay extra every time you want
to use one).
As much as I don't want to pay it, I can see why these things should be taxed. However, I don't think anyone can come up with a decent system to collect those taxes. The Fed would have to do it universally, but it seems the States are the ones who are really looking for the income.
music and movies over iTunes and no its not $0.99 its actually
$1.06. Sales tax is already added to my purchase of a non-
transferable license to watch or listen to the downloaded content.
What more are they asking for?
wonder if my state and town are actually getting that money from
Apple.
And I don't buy the argument that government spending and waste have been cut to the bone. Consider this: California is experiencing a huge budget deficit. But it collects both a sales tax and income tax. I am from Oregon, and here we have only an income tax, no sales tax. For the last several years, Oregon's "kicker" law has kicked in. If the state spends less money in a particular year than it had forecast, then it must return the extra money back to the taxpayers. I've received a "kicker" refund almost every year in recent memory. And remember, we are doing this with just a state income tax, which comes out to around 8-9%. California has both an income tax and sales tax, and is deep in the budget hole. There is waste in there. There are some fat-cat executives in the system collecting inordinately large paychecks, but when people ask for cutbacks, the first things on the chopping block are always schools, parks, emergency services, etc. It's just a dirty little trick to shut people up. This is the only way I can reconcile the difference between Oregon's and California's budget situations.
simplistic it's hard to even comment upon. The needs of the
people whom the government serves change and the needs to
raise revenues changes as well. To say that we should have a
static tax system is to say we have a static society and we don't.
As far as differences in how OR and CA collect taxes, CA has
Prop. 13 which limits the amount of property tax that can be
levied on homeowners. It is a big handicap to how taxes can be
raised in CA but lawmakers have worked around it. When
Schwarzenegger become governor Warren Buffett mentioned
that it was stupid that he paid fewer taxes on his $500,000
home in Omaha than he paid on his $3 million home in Laguna
Beach. They shut him up real quick. Politicians in CA don't talk
about Prop. 13. Old people vote and don't want their property
taxes going up: they'd rather have a sales tax. But be assured of
this: whether you live in OR or CA the government is going to
get your money. They just do it different ways.
A friend asked me this. What if our money just isn't worth enough anymore because of inflation or something. So, the government taxes and taxes, but it doesn't help. No matter how much they have it doesn't help.
Gas tax gets raised so some people conserve gas. Sales tax goes up so they buy less HD TVs. Perhaps the state brings in a little more, but it doesn't do anything because now everyone wants more money to pay for the extra taxes. That causes inflation. Now the money is worth even less. So, now more taxes. Now everyone wants more money to cover the extra taxes.
What if they actually hit an equilibrium? They're trying to play one big game of whack a mole. It's like getting a raise at work, but it isn't enough to buy anything you couldn't already afford. What do you do then?
Do they keep raising taxes until it becomes pointless to pick up my paycheck? What if taxes go so high we get layoffs because everybody is paying tax instead of buying product? Has it all become a cycle? It has to stop somewhere. They can't just keep raising forever, and forever, and forever.
money as our various governments are, I'd be broke and begging
out on the street, because unlike the politicians, I can't steal more
money from the people by raising taxes. Everyone running for
office seems to brag about how fiscally responsible THEY will be,
yet it seems few (if any) of them ever are.
warming) to try and get their residents to drive more fuel-
efficient cars. When many people did, they bought less gas, and
tax revenues went down. Now, to offset that loss to government
coffers, they're' trying to (and probably already have) impose a
law to set a "environmental offset" tax on people who drive
SUVs, motor bikes 4-wheelers, and many other recreational
vehicles.
Talk about loony. The moment my state tries crap like that, I'm
moving.
They sure don't know how to manage it.
Can you imagine if these bozo's managed their household budgets the way they **** away and waste our tax dollars? Another tax...digital downloading...good god, are you kidding me? How about you learn to manage all the TAX DOLLARS you had from the boom? Where did all that surplus go?
Don't punish us 9 to 5ers because you're idiots!
Listen to me politicians, YOU DON'T HAVE TO SPEND IT JUST BECAUSE YOU HAVE IT. B-u-d-g-et
Sounds pretty stupid to me and can only be unreinforced if big ISP/Cable companies monitor and restrict content types to enforce political and economic models for American Corporations.
Oh well, I am sure people will find a way to get around it. Hell I could buy the "media" via paypal and have the vendor email a DVR of Mp3 files to me. Totally by-pass the internet filters and trackers completely.
Loosing battle if you ask me and only the uninformed consumer will be caught in the farce and have to pay.
Of course, do most citizens claim this tax? No.
There is no way to enforce it.
Online stores must charge sales tax if they have a physical presence in that state. For example, you purchase an iMac from Apple.com and you are charged sales tax -- this is possible because there is a retail store in another part of the state.
What ends up being a huge problem is for the consumers as well as the companies. The companies must file state sales tax forms for many states (for each state where the customer resides). This increases costs to the consumers in the long run.
I am more conservative on the tax side because I think government needs to be run more efficiently. Fight the government bloat, spend more wisely, and save my tax dollars for something important.
Doe anyone realize this? Responsible reporting would call it the
"Download Tax", because that's what it is.
Dig a little deeper, and you'll realize this fiasco does spell dread,
and gloom for us, in so many ways. The states do not maintain
the internet, the Federal government does. This is a tax out of
thin air, a tax without justification.
There is nothing to read between the lines here. If they vote on
taxing something they neither support, maintain, or service in
any way, what's next? Taxing your thoughts?!?? Because that is
how nebulous this is.
Hypothetical conversation:
Politician A. "Mr. B, we need to balance the budget, all the
money we have squandered, and stolen is coming back to haunt
us."
Politician B. "Mrs. A, just what the hell do you think we should
do? Every time we raise taxes on highways, or utilities, they
actually expect us to do something."
Politician A. "I know, it's ridiculous. Do they actually expect us
to fix the roads, or pay teachers, or even buy books for children?
!?"
Politician B. "Yea, I know. It's pathetic, don't they know their
children are only good for photo opportunities."
Politician A. "Hey!"
Politician B. "What?!?"
Politician A. "I have a great idea. Let's tax something we have
nothing to do with, or control over. That way, they can't ***** at
us, and we can get totally free, untraceable funds!"
- short pause -
Politician B. "OK, I give up ... what is it?"
Politician A. "Tax people on data they download to their
computers on the internet."
Politician B. "What! Are you crazy!? That will never fly."
Politician A. "Oh you of little faith. I have a plan."
collected on Postage & Handling.
This means sales taxes on US Postage.
We fought a way over unfair taxes, but the spawn of present day
yuppies does not have the 'balls' to standup for unfair
governmental taxes!!!!
FYI: There are lots of really smart, free thinkers in Oregon, should any of those companies want to escape the sales tax trap of the other states. We gotta at least be in the Top 10 of most inventors per capita.....no sales tax, lots of tech companies already established, etc.
- Tax Freedom Act of 1998
- by chash360 April 15, 2008 5:12 PM PDT
- After some research of the subject I think I have anwered my own question.
- Like this Reply to this comment
-
Showing 1 of 2 pages (54 Comments)Unfortunately the Internet Tax Freedom Act only applies to Internet access and Internet services, and not products sold over the Internet.
Its could be a fine line of whether downloading music is an Internet Service or a Product, but it also appears that it would not take much to position such a thing as one or the other to avoid the taxes.
Basically Apple could do what it needs to satisfy the definition of a service, rather than selling 'products' on iTunes.
A P2P sharing network could be considered a service, if properly organized.