Get Ready to Be Taxed for Online Music

Standing to make at least $360 million a year in revenue from its App Store, and recently celebrated five billion iTunes song downloads, Apple’s success with near tax-free online digital sales, along with other E-retailers, has not gone unnoticed. U.S. politicians would love to get their hands on some of that money, but there are some issues that need to be overcome first before that can be managed successfully.

First off, there actually are online-applicable sales taxes already in place within many States, but due to a federal 1992 ruling, it isn’t the responsibility of the seller to collect those taxes from buyers across state lines. With the large variety of tax laws throughout the nation, it would make it nearly insurmountable for many small business to manage their sales outside of their state. The 1992 ruling was put in place to help those, such as mail order businesses, to simplify things on their end while leaving the taxes to be determined and paid for by the out-of-state consumer themselves. An online vendor benefits from the same ruling, as they need only collect taxes from the States they are physically located in. If you have ever made an online purchase before, there is a chance you owe unpaid taxes to the government on that purchase. It may not be your fault if you didn’t know this, it’s not well advertised by the government nor by online retailers, and there seems little chance of being caught of this tax evasion.

To complicate matters further, not all online purchases are taxable in most States, even when making the purchase from the same state as the seller. It seems that when the state tax laws were being written up long ago, politicians just couldn’t foresee the need to include taxes on digital media sales, rather only including tangible goods. The Internet since has developed, and it hasn’t been until recently that certain States have started to clue in on this glaring omission. Several States just this year have modified their definition of what is a tangible good to include digital downloads, in attempts of getting a piece of iTunes’ revenues. There are 17 States now with this new digital download sales tax, including the District of Columbia, and there are several more trying to adopt this new iTax. Sadly, Apple and its iTunes store are susceptible to these taxes, despite the 1992 ruling of no forced collection of out-of-state taxes, as Apple actually has many physical locations throughout the U.S., including States with the new iTaxes. You do not need to worry about paying these iTaxes still if you are ordering from a state that does not yet recognize them.

Despite the iTax, there is still a major cash cow being missed online with both digital and physical goods caused by the 1992 ruling of no out-of-state tax collection being required. There are some options that could solve this though, with some being sensible and some not so much so. One possibility is that online taxes could be simplified on a national level, dispelling the idea that a small business couldn’t be able to handle online tax collection, and then dissolve or modify the 1992 ruling. Another crude option could be forcing online the local state tax, while leaving it up to the consumer to file for reimbursement if they get over taxed on a purchase made from another state. To say such online taxing is impossible though, one only need look North to Canada, where a tax is already in place on all online music sales. While these tariffs go to musician’s pockets to counter the financial effects of piracy, not the government’s, the concept is working.

Though the U.S. Government is under heavy pressure to revoke the 1992 ruling, that probably won’t happen anytime soon with this being an election year. It would likely be in a candidate’s best interest to not promise more nationwide taxes, though post-election consideration is always a possibility. Despite that, not everyone is willing to wait for such changes to occur, as States like New York are finding their own means of taxing out-of-state companies, such as Amazon.com.

According to Amazon.com’s website,

Items Shipped to New York State
Effective June 1, 2008, Amazon.com LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date.

Amusing, no? Although New York’s actions go against the 1992 ruling, as Amazon.com is not located physically within the State, they still able to enforce dubious tax collection.

Are these new online taxes a good thing? Not everyone thinks so, and it’s not just consumers. Some Fortune 500 companies believe online taxes will only drive online businesses out of States who impose them, potentially even to other countries. Furthermore, companies required to collect taxes will be also be faced with increased competition from those who do not impose taxes, reducing profit margins. Imposing taxes could also increase illegal downloading of software and media, costing companies even more money. Some believe that this could also prompt increased CD and DVD sales, as downloadable media would face increased prices, adding to environmental concerns.

Whatever the concern, taxes are necessary for a functional society. We may not like it, but online taxes seem to be coming one way or another. What is needed for this to be a smooth ride however is a unified movement that both consumers and businesses are able to work with.