New York to Tax Music and Creativity on the Internet

by on December 17, 2008 · 11 comments

Gov. Paterson unveiled the New York budget yesterday, and among the 137 proposed new and increased taxes is a new tax on digital products.  An article in today’s New York Post quotes NetChoice opposing the Governor’s effort to tax music and creativity distributed through the Internet.

New York’s approach is two-fold, broadening what is taxed and who has to collect: 1) add digital music, books, songs and movies to what can be taxed; 2) expand and assert the concept of “nexus” to cover out-of-state sellers that use an online network of affiliates

First, New York is imposing a new tax on digital goods. It’s not as the state claims, to close a “digital property taxation loophole” — instead, this is a new tax on New Yorkers, for a service that’s not taxable under today’s law.

What’s worse, why in the world would NY impose a new tax on something we all want to encourage right now?  Digital downloads of music, movies, and books have no carbon footprint and use none of the oil consumed with a round-trip to the store. Moreover, there’s no plastic and paper packaging to create and crate off to a landfill. I’ve blogged on the environmental benefits of downloading here.

It’s also important to note that this is more than just a new tax, it will also extend the long hand of government to the long tail of online commerce. Who’ll be hurt? Small, independent artists that have websites to sell their own creative works. If a NY-based author or musician adds a link to her webpage saying ‘buy my book/music now on’, she’d be creating a new tax collection burden for Amazon–on everything Amazon sells to anyone in NY State.  Amazon’s not going to sit still for that, and they might just stop their affiliate program for NY-based suppliers, authors, and musicians.

I’ve blogged about nexus issues here. The gist is that imposing sales tax collection burdens on websites that sell music, movies and games raises Constitutional nexus issues. Merely having a website accessible in a state is not enough to convey general jurisdiction for tax purposes. There’s some form of physical presence required. If New York proceeds along this nexus path, it’s reasonable to see it as a new tax burden on advertising, and Madison Avenue’s not going to like that!

Look for me and NetChoice’s Exec Dir Steve DelBianco to mobilize our members and NY consumers to take these messages to Albany when the Governor’s budget gets over to the legislature. New taxes like this iTunes tax should be debated in the daylight, not buried in the fine print by a tax administrator.

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