States may tax iTunes, other digital downloads
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
Stephanie Condon is a staff writer for CNET News focused on the intersection of technology and politics. She is based in Washington, D.C. E-mail Stephanie. 
Most of your taxes are going: to keep up our tens of thousands of nuclear bombs (we really only need about 100 of them for national defense), to the Army (who waste a heck of a lot of the money on 'future weapons' programs that are big money sinks and the 'future weapons' never come about), and on things like: road repair, school building, paying the paychecks of our elected officials, etc. - things that are NECESSARY to do in our society.
Welfare is a DROP IN THE BUCKET compared to all those other things.
You haven't proven yourself to be any better than anyone else.
This is blatantly in opposition to the interstate commerce laws, and I hope that someone will take these states to court if they try this BS, preferably the feds.
If you get too cold, I'll tax the heat.
If you take a walk, I'll tax your feet.
If you ride a bus, I'll tax your seat.
Instead of more taxes, why not cut off the lazy freeloaders? Why not? Because that makes sense.
The fact is that the REAL problem is that we allow business to hire/fire people on a whim.... if we would start MANDATING some job security, most of those 'lazy freeloaders' (who aren't usually lazy but cannot get a job because they have to take care of their children, which they had BEFORE getting on welfare) would be able to get a job and KEEP a job.
"...something that uses no oil and produces no carbon."
I guess Mr. Delbianco hasn't ever paid the power bill on a datacenter before. Those things don't run on sunshine and rainbows.
I'm not happy about taxes, but they do serve a purpose, and if states don't receive revenue from sales because they occur online then they will simply go get it somewhere else, so it's time to quit dancing around this and apply fair and standard taxes to online purchases.
Lerianis: A state or municipality CAN tax a transaction that occurs across state lines if the seller has a place of business in that state or municipality, they can tax the sale...and Apple has a lot of stores.
Before you start spitting and sputtering.... that came straight from a House of Representatives person who I sent an e-mail to about this. It was also confirmed by the numerous lawyers I talked to about this after I posted my comment.
You can tax things if someone is shipping things to someone else in your state FROM a distribution center IN your state, even if it is done by mail-order or online.
If the distribution center (the place the thing is coming from) is NOT in your state..... they have no right to taxes, EVEN IF THERE ARE PHYSICAL RETAIL STORES IN YOUR STATE OWNED BY THE PERSON YOU BOUGHT THE THING FROM.
You tax me, and we do away with DRM.
I don't mind being taxed on a CD. I have it there in my hands. But I don't like the thought of being taxed on a restricted copy of something that can get lost in a disk crash.
Check his IP, he lives in Alaska.
:)
Unless there is a specific justification for tax, I don't think we should be taxed. We should have this digital tea party. No taxation without justification!
Government taxes people to hire more cops to make more laws and to imprison them and control their daily lives. That's exactly what England did to the Colonists 300 years ago.
Funny thing is I met some people that moved here from Russia and they were moving back because they said Russia was way more free than the US.
Perhaps politicians should first address what the tax would be used for instead of just identifying another cash cow. So many times they tax something referring to a problem, ie cigarette taxes, but do they really use the money to try and solve the problem? My suggestion would be to take that money and at least establish regional hospitals to treat people suffering from cigarette related illnesses. Perhaps locate them at State Universities where they already have hospitals and research staffs in place. Not using the money to increase politician salaries or for other projects that have nothing to do with solving the problem. See where I?m going with this? In this case use the money to help train Americans for careers for all of the technological challenges that America and the world will be facing in the future or maintain the technological infrastructure. Not just the rampant tax and we have more money to spend on whatever attitude we have going on now. Is it going to upgrade the infrastructure, pay for what??? What needs fixed in your area? OR should the US be fixing things in other parts of the world??? We should have learned about what happens to America?s competitive edge from what happened when we fixed the steel mills overseas and didn?t upgrade the steel mills in America. Hardworking Americans lost their jobs and became freeloaders as some of you call them because there weren?t jobs for them to go to or they didn?t have the resources to make their own.
What's important to the average taxpaying American? Many of the wealthy don't care because they can usually afford to buy whatever they need, but the question is, can you, can your community? I think a lot of Americans should start comparing the US budget to what is absolutely necessary. We need to make a list of priorities we can agree on and then tell our elected representatives to start representing US and our interests. I mean they are supposed to be representing/working for US not US working for/supporting them. Somewhere we all got brainwashed into allowing them to have full reign over the cookie jar.
Yes, there are some lazy freeloaders in the US, but they are part of our community. How do you choose who is most important to give public assistance to? How much money is actually needed to maintain the life style we here in America take so much for granted and should everyone be allowed to enjoy that lifestyle? If you've ever had to go without a job for an extended period of time, you'll know how difficult it can be to find another decent paying job or any job for that matter and get hired when there are hundreds of other people trying to get that same job. The thing that bothers me about this line of thought is that Americans are so willing to help freeloaders in other countries, but so many of US are so willing to not help our own. When we provide aid, we shouldn't be providing cash. (It rarely gets where it should be going...) We should provide goods manufactured in America that are transported on American forms of transportation which could help to reduce the trade deficit (rather than giving them money to buy foreign goods with US dollars making the trade deficit worse) and provide jobs for American taxpayers. We are so busy taking care of the rest of the world that we've let ourselves go. We need to start taking care of America before we can't take care of everyone else and then what?
Perhaps what our government needs to do is figure out how much money we are spending on other countries then tell every country we have been supporting that they are going to have to do without/make it on their own for a year or two. Divide up what we give to other countries and give every American a million/billion or whatever it divides into. Then people would have money to spend, start businesses, fix things, go to college, travel, buy things, squander, gamble, drink or whatever they choose to do with it, since it is our money. See how much that generates from the taxes already in place. Sure some families will get more than others, the rich will get richer, some will do nothing, those that do will try and take advantage of others, charitable contributions will be made, but it will be a fair/equitable division. See what Americans do for US, watch our economy boom with a real influx of capital not some teeny stimulus check, but a massive one, watch the businesses that are started that hire American taxpayers. Then you can tell those freeloaders to take a hike, they had their chance.
FYI, I don?t download music, but like others am concerned about this lack of regard for taxing every and all things just because the politicians can. Seems to me, income tax was actually supposed to be a temporary thing that has continued without checks and balances. Taxes limit people?s ability to participate in all that is America because it takes money to pay for taxes they could choose to use for something else so maybe we should start limiting the Tax Man. Just ask the oil companies why they are crying foul when our representatives even hint at taxing their record profits that are being raked in at our expense.
Anyway, I could go on, but I appreciate you taking your time to read my thoughts!
- by benjaminstraight August 12, 2008 9:36 AM PDT
- It was only a matter of time, especially with the economy currently in a down-turn.
- Like this Reply to this comment
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