Posted by: Cory | March 13, 2009

Taxing Digital Media

I try to keep the legalese out of here (it’s been since the Jammie Thomas’ $222,000 verdict in Oct. 2007 which is before you started reading), but I recently wrote an article for Barry Shrum’s Music Row Law blog arguing that the State should be permitted to tax digitally distributed media, including such content as MP3 files downloaded from the Internet.

While you probably realize that many files downloaded from sources such as iTunes, Amazon (or any other digital distribution channel such as most any software company) are not taxed, you might be surprised to learn that as a Kentucky taxpayer (or Indiana or Tennessee, along with 12 others excluding Ohio) you are nevertheless responsible for reporting those purchases on your tax return at the end of the year and paying the sales tax for them.  Considering the fact you’d likely have never thought of it should help you appreciate the fact that nobody else does either, resulting in thousands of unreported and thus uncollected taxes due the State each year.

Many would argue that people buying music are already doing the responsible thing by paying the 99¢ for the song in the first place, and that taxing those purchases would likely to lead people to illegal downloading.  Maybe so, but States have copyright laws to protect the arts and tax laws to generate revenue, and there are instruments in place to enforce each.  Further, the State already requires you to pay taxes on it, so for those True Americans who too frequently complain about people delinquent on their taxes…so are you.

Although the case that established the precedent is an old one (1992), I would expect things to change very soon with the State deficits as they are and the volume of digital downloading increasing as it is.  You can read my full article HERE and if you’re interested in the legal aspects of the music industry, I highly ecourage you to check out Music Row Law blog.

UPDATE: Looks like I’d written my article just in time.  According to CNET, a bill anticipated to be introduced as early as Monday is projected to finally contain the right language with all the i’s dotted and t’s crossed to get the vote.  As I mentioned in my article, the court in Quill stated that Congress is free to require retailers to collect taxes, but that State’s are not.  While the SSTA has been pushing forward for some time, it looks like we’ve got the right Congress and the right recession in place to make it happen.



  1. why argue for another excuse for the government to get their hands in our pockets?

  2. I doubt anything will change anytime soon. They’ve been wanting to tax sales of physical goods that occur across state lines forever, like if you mail order a CD from a company that doesn’t have a foothold in KY, you don’t have to pay sales tax there either. They would have to change a whole lot more than just iTunes to get this to work.

  3. Drew….you must not have actually read the article. First, it has absolutely nothing to do with changing iTunes. Second, the court established guidelines for taxation, and 15 states have fully aligned with the Streamlined Sales Tax Agreement and several others have been working towards it. New York has already taken a proactive stance since I originally wrote this article several month ago and redefining “substantial nexus” and members to the SSTA have been putting substantial pressure on this congress with this president because they believe they can finally get it to pass…and it should.

  4. Yes, I read your article. What do you mean it doesn’t have anything to do with iTunes? It’s about iTunes (and everyone else online) charging state sales tax.

    I get that, and I get that you are in favor of it. The Streamlined Sales Tax Project is a way for online stores to voluntarily pay state taxes, and I’m just saying that I doubt they will start voluntarily collecting state taxes any time soon. Why would they?

    And it’s just a guess, based on the fact that nothing substantial has happened with it in the last nine years, that not nothing will happen with it any time soon. That’s all.

  5. No…it has literally nothing to do with iTunes. It has everything to do with digital distribution whether wits tunes or Walmart or Walgreens. The changes happening are not at all on the iTunes level, but rather the legislative level. it’s not about the online stores coming together. It is to THEIR advantage NOT to collect taxes…that is the ENTIRE GOAL of avoiding collecting taxes for the iTunes’ of the world…the goal is to quit having to “voluntarily” pay taxes, but to actually own up to your actual residential responsibilities as a KY citizen…it should be an obligation

  6. Cory:

    Being a lawyer and all, you understand the necessity of taxes for operating the various parts of government. Unfortunately, most average Americans still believe that they can have their government services while voting to cut taxes and borrow the money from the Chinese et al and that there will be no negative consequences to themselves, such as having to pay higher taxes later. Besides that, web geeks still think everything should be free. But it’s good of you to make the argument clear.

  7. I’m not talking about what you should or shouldn’t do. If you think people should report online sales on their own, and pay the state sales tax, that’s fine. I’m not disagreeing with you there.

    I’m just saying that the Streamlined Sales Tax Project, being a way for online stores to volunteer to collect state sales tax for other states, isn’t likely to ever be anything more than a nice idea.

    I used iTunes just as an example, since you specifically mentioned iTunes several times. They probably should collect state taxes for every state, it would be a nice responsible way to get people to pay sales tax. I’m just saying that they won’t anytime soon, since they don’t have to.

  8. Check out the update to this post. Looks like I’d written my article just in time. It appears the SSTA is going to likely be introduced on Monday and is expected to pass within a couple days.

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