California Seeks to Tax Music Downloads - MP3s Become MP3+8 Percent

April 22, 2008

99 cent iTunes downloads will go the way of the dodo if California state lawmaker Charles Calderon gets his way. His proposal, AB1956, seeks to tax music downloads, adding 8.25-8.75% sales tax to music purchases made online, and increasing the purchase price to $1.08.

Despite having an economy that ranks among the ten largest in the world, California has a long and (in)distinguished history of failing to manage it well. A rapidly worsening financial hangover has lawmakers staring at a $16B shortfall. Enter Charles Calderon, D-City of Industry, proposing this bill, and estimating $500M as the amount of tax revenue that would be raised. The State Board of Equalization, the agency responsible for tax administration and fee collection in California, disagrees, placing the figure at about $114M.

In a curious twist, the bill does not seek directly to impose taxes on music purchased online for download. Instead, it sets a perilous precedent by extending the definition of what is “tangible personal property” or “digital property” to include (and here I quote from Section 1(f) of the bill) electronic “products like music, movies and books.” Assemblyman Calderon himself stated that “the notion of taxing tangible, physical property is really an industrial-era construct when we made widgets and sold widgets. Now it’s not about widgets, it’s about information, and selling information and moving information.” It’s not a terribly long leap of intellectual effort to extrapolate from his statements an online sales tax where bits and bytes delivered to your computer could be liable for tax. Software as a service, online webapps, your own personal data stored on a remote server; where will the line be drawn? And do you for a second think that line will be static, forever fixed in one location? If you do, I’ve got some tangible personal sea-front property in Nevada to sell you.

And it all starts from this one small seemingly-innocuous redefinition of the word “tangible”. Whatever next, reclassifying the carrot as a fruit?

Maybe common sense and less fuzzy thinking will prevail. The bill was heard before a tax and revenue committee this week, and failed passage. It is down but not out; leave to be reconsidered at a later date was granted. Yet this is the kind of bill that should have been taken out from the committee room and ignominiously shredded. We hope this is its fate.

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