More States Adopting The ITunes Tax

Now that digital sales account for 30 percent of the U.S. market, state governments are trying to get a piece of the pie. Most state laws were written long before the digital downloading era, which explains why CDs are heavily taxed, but we’ve enjoyed purchasing digital media with no penalty.

Now that digital sales account for 30 percent of the U.S. market, state governments are trying to get a piece of the pie. Most state laws were written long before the digital downloading era, which explains why CDs are heavily taxed, but we’ve enjoyed purchasing digital media with no penalty. With iTunes now topping 5 billion purchases and e-commerce sales exceeding $130 billion a year, the oversight has been seen and a wave of state governments are pushing the tax through. At least 15 states plus the District of Columbia have already incorporated a tax on digital music, movies, and books. This means that the harmless 99 cents that a Tennessee resident drops for a song on iTunes will actually be $1.08 effective January 2009.

“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,” says Steve Delbianco of Netchoice. Netchoice represents eBay, AOL and Yahoo, but their lobbying has seen limited success.

One potential loophole still exists. The legal concept of “nexus” stipulates that generally a state may only tax a company that has a physical presence in its borders. This means that a N.Y.-based eBay would not be required to collect taxes on items sold to another state, even if that state has a digital download tax.

“Most of the proponents of the nexus legislation would concede that given this is an election year, it’s unlikely that the legislation will pass,” says Stephen Kranz, attorney for Sutherland law firm representing the digital media industry, but he predicts a lively effort to revive the legislation next year.