Tech & Biz

US to tax iTunes and digital downloads

by Rob Peters | August 12, 2008 at 01:49 pm

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States across the US are considering taxing digital downloads like iTunes and eMusic. They're currently tax-free because, well, legislators didn't know Amazon would exist when they drafted tax laws.

This raises an interesting question. What exactly are we paying for when we download a song? The transmission of data packets across the Internet, basically. But how do you tax that, I wonder? Nothing has exchanged hands except maybe a number of magnetic charges on your hard disk (and were those the property of the company to begin with?). I guess it will be considered a service.

In any case, our salad days of tax-free music downloading are probably soon over.

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.