Policy Documents

Five Reasons Why the ‘iTunes’ Tax Is a Bad Idea

James G. Lakely –
December 28, 2008

New York: If you can make it there ... it’s going to cost you a lot more in taxes under a plan by Gov. David Paterson (D).
 
The governor could not resist aiming his harpoon at the Great White Whale of tax-obsessed politicians everywhere: downloads of music, books, games, and other digital media purchased on the Internet.
 
Here are five reasons why you should hope Paterson misses his quarry and the so-called “iTunes” tax slips back into the deep—away from the ships of other states, too.
 
1. This proposal will open a gateway to taxing Internet access. The federal Internet Tax Freedom Act won’t live much past 2014 if online sales taxes proliferate. It is a short trip from taxing that Charlie Brown Christmas album you downloaded this month to taxing all kinds of online activity in the future: how much broadband you consume, your emails, and even access to the Internet itself. Taxation of all of these things is currently banned by federal law.
 
2. The tax will never go away. Paterson claims the tax is necessary to stop New York’s financial bleeding. But will the tax be repealed when Wall Street recovers and the good times are here again? Don’t count on it. In the booming ‘90s, states found the tax revenue bounty too tempting and spent at a rate that far outpaced inflation.
 
3. The plan presents a collection nightmare. Paterson’s plan would turn thousands of online businesses across the country into collectors of very complicated taxes. There are about 7,400 tax districts across the United States, according to The Tax Foundation. Even a corporate giant like Apple would incur huge costs to keep it all straight, to say nothing of small online entrepreneurs. Who, for example, gets the tax revenue when a person who lives in New Jersey grabs a wi-fi connection at an East Village coffee house and orders an e-book from Washington-based Amazon.com in a sale routed through a Pennsylvania server?
 
4. The tax is probably unconstitutional. Internet sales taxes are constitutionally suspect—for now—under the Supreme Court’s 1992 interpretation of the Commerce Clause in Quill v. North Dakota. The Court upheld the principle that a state has no right to force a company with no physical presence in the state to collect its sales taxes. Indeed, several online retailers are currently challenging the constitutionality of the so-called “Amazon tax” New York passed earlier this year.
 
5. A new tax will harm the economy at the worst possible time. The largely tax-free Internet has been an economic juggernaut, fostering a level of productivity unimaginable just 20 years ago. The economic growth created by the Internet is already a rich source of income tax revenue for the states—not to mention “real world” sales taxes when Web-based employees spread their wealth around. Internet taxes discourage online firms from hiring and expanding, and thus create an entirely unnecessary long-term drag on the economy, killing jobs.
Instead of targeting the Internet for more revenue, Paterson should do what every New Yorker who chooses to remain a resident of his already high-tax state must do—tighten the belt.
 
James G. Lakely (jlakely@heartland.org) is managing editor of Infotech & Telecom News, a publication of The Heartland Institute in Chicago, Illinois.