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Taxman to tap iTunes downloads?
Plan redefines digital files as tangible property

A Democrat in the California State Assembly has introduced a plan that would tap into the lucrative flow of money on the Internet, and apply what amounts to a sales tax on every download of a digital file, such as songs from the popular iTunes website.

But where Charles Calderon, D-Whittier, believes his plan would strike it rich for California is in the taxes that would be collected on the downloads of pornography.

"I think it could go into the billions," he told a columnist for the Orange County Register recently. Calderon long has sought a tax on pornography but has been stymied by First Amendment concerns.

Such a download tax, however, would include his target along with all the other digital projects consumers purchase.

His plan is Assembly Bill 1956, which would simply redefine those digital songs and movies as "tangible personal property" so that the states sales tax, amounting to about 8 cents on the dollar, would apply.

Register columnist Brian Joseph went to some lengths to explain what Calderon wants to have happen.

"New taxes require a two-thirds vote of the Legislature, meaning some anti-tax Republicans would have to sign onto the proposal, but Calderon got creative," he wrote. "Instead of proposing a new tax, AB1956 simply requires the Board of Equalization to amend the definition of 'tangible personal property' to include 'digital property.' That needs only a majority vote, meaning no Republicans [are] necessary."

He noted the state is facing an $8 billion budget deficit and iTunes recently was named the nation's second-biggest music retailer, trailing only Wal-Mart.

"It is a money machine – and our Legislature appears to have noticed," he reported.

Michelle Steel, a member of the state Board of Equalization, however, wrote in an article published by the Republican Party of Orange County, such an idea is ridiculous.

"When it comes to generating revenue, an iTax would be as effective as your e-mail program's spam filter," she wrote. "Online media stores could easily create a separate entity out-of-state; thereby, avoiding sales taxes altogether. Under such a situation, California taxpayers would be obligated to report those purchases individually and pay the 'honor system enforced' use tax, which has a 99.8 percent noncompliance rate."

She said California obviously loses some sales tax revenue from online commerce, but the economic benefits of e-commerce outweigh any lost taxes.

"More so than any other state, online commerce has been an economic boon for California. Online commerce brings high-paying jobs, major economic benefits, and significant tax revenue to the Golden State. State government has received increased capital gains, property, income and business taxes from e-businesses," she said. "Last year, capital gains from the stock sales of just 16 Google employees generated $380 million in tax revenue for California. Compare that to less than $1.1 billion in lost California tax revenue from all of e-commerce and mail-order businesses. Just 16 Google employees' capital-gains taxes offset close to 40 percent of the lost use-tax revenue from all of e-commerce."

Further, she said a new tax would be unlikely to receive the required two-thirds approval in the Legislature.

"Like sneaky, malicious spyware, AB 1956 avoids the two-thirds vote requirement by requiring the Board of Equalization to merely redefine digital downloads as tangible personal property. Voila, an intangible product becomes tangible overnight and subject to tax by regulatory fiat," she said.

It isn't the first such proposal in the nation. Surveys have shown that other states have some sort of download tax. And on the newspaper's forum, "carmadogma" noted that the tax would be on something you simply download and can use, but do not own.

"The Digital Millenium Copyright Act reminds us of that. You are merely purchasing a license to use the media for your own personal enjoyment. You can't sell it or share it," carmadogma said.

"What next? Ebay?" asked "getinvolved."

The law firm of Sutherland, Asbill & Brennan warned such a plan could be challenged under the state constitution.

"Businesses concerned about state efforts to expand the tax base to electronically delivered products should act quickly to alert their government affairs representatives," the company said in a statement. "A coalition of companies represented by Sutherland will be moving to oppose AB 1956 as it has with similar bills in South Dakota, Nebraska, West Virginia and Indiana."