Taxing Itunes

Senator Bakk recently brought up an interesting revenue-raising idea that’s worth looking at: taxing the digital downloads from the internet of music, videos and the like. (Under current state law, internet digital downloads are not subject to the state sales tax). Should Minnesota join the 21 states that currently tax digital downloads? I’ve laid out the major “pro” and “con” arguments below.

In the “con” column:

#1) Taxing the internet goes against the “free” nature of the internet and may prohibit/discourage internet use. However, this isn’t quite an issue of taxing the internet – it’s about a transaction that happens to take place on the internet.

In the “pro” column:

#1) Why treat buying a CD in a store and buying the same music online differently? Current law gives preference (no tax) to people who download music and videos online over people who buy the same material in a store. Why treat them differently? It’s hard to think of a compelling reason to promote online purchases over all others.

#2) Untaxed internet sales make the sales tax even more regressive. People with computers and credit cards buying online tax-free are disproportionately affluent.

#3) Letting internet sales go tax-free puts most businesses at a competitive disadvantage. Those businesses who actually have a store in the state of Minnesota have to charge the state sales tax, which potentially puts them at a 6.5% price disadvantage.

Some of you might be wondering, isn’t there a U.S. Supreme Court ruling that may prevent states from requiring sellers without a physical presence in the state to collect the sales tax? True, but that is not at issue here because the biggest sellers of downloaded music – itunes and Wal-Mart – have said they are willing to collect state sales tax because they in fact have a physical presence in most states. Instead, the issue is simply that digital downloads are not in the definition of goods subject to the state sales tax. The legislature certainly has the power to change that.

-Katherine Blauvelt

[Postscript, April 3, 2009 – Legislative to tax digital downloads has been introduced in both the House and Senate. On April 2, the House Tax committee heard testimony on HF 1980, authored by Representative Jim Davnie (its companion is SF 1839). The bill would raise an estimated $3.4 million over FY 2010-11. The St. Paul Legal Ledger has a nice write-up about this.]

About Katherine Blauvelt

Katherine Blauvelt served as the Minnesota Budget Project’s policy analyst from 2007 to 2009.
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2 Responses to Taxing Itunes

  1. Jon Marchand says:

    I wonder if this might generate a spike in subscription based music services, such as eMusic? Granted eMusic doesn’t have the same sort of access to major label artists that iTunes does, but they do really promote the independent artists that are generally featured on their site. And the music downloads are in a non-proprietory format, meaning that you can play them in any media player or mp3 device. I think a good concession for consumers would be that if we are to pay tax on iTunes purchases, they open their licensing options a bit for more consumer control over the product they purchase.

  2. Chris O. says:

    Competitive advantage to Amazon then, yes? Of course, I would agree that most people would probably still stick with digital downloads from Wal-Mart and iTunes even if Amazon was suddenly advantaged by being one of the few non-taxed online places out there.

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