Policy Documents

Research & Commentary: Taxing Internet Sales in Connecticut

April 18, 2012

Connecticut is one of many states struggling to balance their budgets by introducing taxes on Internet goods and services. State senators have introduced a bill (SB 400) to tax digital downloads, including applications, songs, ringtones, electronic books, and movies.

SB 400 would expand Connecticut’s current 1 percent digital sales tax to 6.35 percent, thereby increasing exponentially the complexity of collecting taxes in the state and providing additional incentives for businesses with a physical “nexus” in Connecticut to relocate to states with more favorable tax rates in order to compete with out-of-state businesses that also sell products and services via the Internet. The businesses that effectively become tax exiles will cause layoffs of thousands of skilled Connecticut workers and significantly reduce investment in the state.

SB 400 might also disadvantage consumers directly by incurring multiple taxes for a single download due to confusion over tax jurisdictions. Connecticut consumers visiting other states, for example, could be taxed for downloaded purchases from Connecticut, the state in which they make the purchase, and the state where the seller is located. Redundant taxation for a single purchase creates a significant disincentive for online sales, thereby harming the economy.

The following documents offer more information about taxing Internet downloads.

Oppose Tax Hikes on Digital Goods!
http://www.ntu.org/in-your-state/connecticut/oppose-tax-hikes-on-digital.html
The combined state and local tax rate in Connecticut is already the highest in the nation, write Grover Norquist of the Americans for Tax Reform and Brent Mead of the National Taxpayers Union in their open letter to the Connecticut General Assembly. Connecticut businesses, Norquist and Mead report, pay a 7.5 percent corporate income tax in addition to a 20 percent surcharge, which effectively raises the effective rate to 9 percent. Norquist and Mead also note SB 400 will negatively impact small-business startups and create disincentives for current businesses to increase investments.

The Information Technology Revolution and the Small Business Economy: A Collection of Essays
http://news.heartland.org/sites/default/files/information_technology_revolution_and_the_transformation_of_the_small_business_economy.pdf
Many of the essays collected in this volume express not only the value of Internet businesses to job growth, wealth development, and investment but also the importance of Web activities for traditional bricks-and-mortar stores.

Digital Goods
http://www.mywireless.org/federal-issues/digital-goods/
“The 2011 Digital Goods and Tax Fairness Act” is a bipartisan bill introduced in the U.S. Congress as an attempt to simplify state and local Internet taxes. MyWireless.org—a nonprofit, consumer advocacy group—identifies the complex tax issues and the threats to high-tech jobs and investment such legislation is supposed to remedy.

The iTunes Tax
http://taxes.about.com/od/statetaxes/a/sales-tax-for-digital-downloads.htm
Several states already have implemented a download tax similar to the one proposed in Connecticut. This brief essay identifies 11 states that have adopted the so-called “iTunes” tax, although other sources claim 24 other states and Washington, DC have some form of Internet download tax.

Unfair Download Taxes
http://unfairdownloadtaxes.com/
Introducing download taxes harms state businesses by putting them at an economic disadvantage with neighboring states without the tax, according to this blog post from an informal group of companies, trade associations, and consumer organizations united to protect the online marketplace from excessive and discriminatory taxes.

Want an App? There Could Be a Tax for That
http://articles.baltimoresun.com/2012-01-25/business/bs-bz-digital-download-tax-20120125_1_sales-tax-amazon-tax-app
If Maryland adopts a download tax, customers who download an $0.89 song from iTunes would wind up paying $1.06, notes Gus G. Sentementes in The Baltimore Sun. Maryland legislators introduced an Internet download tax in January 2012 but rejected it in March of this year.

Sales Tax Levies on Digital Downloads Facing Headwinds for Now
http://www.accountingweb.com/topic/social-networking/sales-tax-levies-digital-downloads-facing-headwinds-now
Anne Rosivach, writing on the AccountingWeb.com site, writes, “[B]usinesses that sell in multiple states are left to cope with complex compliance issues” because of download taxes. “South Dakota, for example, taxes all products transferred electronically. New York law imposes a sales and use tax on tangible personal property (including prewritten software) and certain information (and other) services,” Rosivach writes.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit InfoTech & Telecom News Web site at http://news.heartland.org/tech, The Heartland Institute’s Web site at www.heartland.org, or PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or the Heartland Web site, contact Heartland information technology and telecommunications research fellow Bruce Edward Walker at 312/377-4000 or bwalker@heartland.org.