Illinois Governor Rethinks Tax on Digital Downloads

Published May 10, 2010

Illinois Gov. Pat Quinn (D) saw a tax on music and movie downloads as a great way to help plug a huge hole in the state budget—for one day. He quickly backed off the proposal after getting blowback from state legislators.

Quinn’s director of the Office of Management and Budget, David Vaught, floated several tax proposals on April 20 in a grand plan to balance Illinois’ budget, currently staring down a $13 billion deficit. Among the ideas was a tax on digital downloads of music and movies—50 cents on a $9.99 album and 75 cents on a movie costing $14.99.

“We think that’s an area where we’ve not kept up with technological change,” Vaught told reporters, adding it’s unfair that those who visit a retail shop in person pay the tax while those who download music and movies on their laptops and iPhones do not.

Quick Retreat
The day after Vaught’s comments hit the newspapers, Quinn started to backpedal—at least on the idea of taxing digital downloads. The governor told reporters covering the Illinois state legislature he was “simply offering suggestions” to help balance the budget.

He emphasized he didn’t really support a new digital tax that his office said would bring in about $10 million annually to the state coffers.

“We had a meeting with the legislative leaders the other day, and we made a list of all the possible things that could happen,” Quinn told reporters. “I didn’t advocate that. I’m not interested in doing that, frankly.”

E-Taxes a Growing Trend
Quinn set himself apart by backing off a proposal to impose taxes on the purchase of goods on the Internet, including digital music, movies, and books, or physical items ordered online and mailed to one’s home.

Many states around the country—including Colorado, North Carolina, New York, and New Jersey—have imposed such levies or are contemplating doing so. Attempts to collect such taxes have tripped over constitutional hurdles, however. Recent Supreme Court precedent prohibits a state from taxing businesses not physically present within its boundaries, a legal requirement called “nexus.”

In addition, Web-based companies such as have threatened to cut all ties to affiliates in states that attempt to charge such taxes. Online retailers note imposing what has come to be known as the “Amazon Tax” means reducing the collection of income taxes from state residents who help Web-based companies sell their wares with links on their blogs.

Praised for Backing Off
Pete Sepp, vice president for policy and communications for the Alexandria, Virginia-based National Taxpayers Union, applauds Quinn for quickly backing off his proposal—and hopes he sticks to his decision.

“Illinois taxpayers can only hope Quinn has seen the problems with this exotic form of taxation,” Sepp said. “He doesn’t want to mire his state in the legal and political controversy that New York, North Carolina, Colorado, and a handful of others mistakenly chose to step into recently.

“Whether they’re download taxes or ‘Amazon taxes’ or old-fashioned mail-order taxes, the issue is still the same,” Sepp added. “States should not be allowed to reach beyond their borders and tax transactions with remote sellers.”

Enjoying the Spectacle
Kelly William Cobb, government affairs manager at Americans for Tax Reform in Washington, DC, said he was amused by how quickly Quinn started “backpedaling on the downloads tax.”

“Quinn came up with a massive list of tax hikes, then threw his Office of Management and Budget director under the bus, claiming the taxes were his idea,” Cobb said. “But this was only after Quinn was vilified by the press and public.

“Digital goods taxes are a lose-lose for states and politicians,” Cobb added. “They are widely unpopular, especially with younger voters, and target an area of the economy that is flourishing.”

Failing to Raise Revenue
Sepp said raising taxes in Illinois, regardless of the targets, would be an “economically and fiscally devastating policy for Illinois, and would likely lead many already overtaxed citizens and businesses to leave the state.

“An income tax hike could produce less revenue than anticipated because there could be fewer taxpayers to soak,” Sepp added. “But the same would be true of remote taxation schemes.

“In other states where policymakers have unwisely preyed upon e-commerce, companies like Amazon and Overstock have terminated business relationships with affiliate advertisers, who in turn pay less taxes because they’ve lost income from their businesses,” he noted.

E-Taxes in Legal Limbo
“E-taxes raise serious questions about enforcement, since the U.S. Supreme Court ruled a state can’t go after purchases made from businesses located outside its borders,” Cobb said, adding such a tax would put Illinois at a competitive disadvantage.

“Since the digital economy is so unbounded, many businesses can easily give up their physical presence in Illinois and continue to serve residents without being burdened by the tax,” Cobb said.

Lesson Learned?
Sepp says he’s encouraged by Quinn’s decision to scuttle the download taxes, and he hopes it’s a sign of a fiscal trend in Illinois.

“If Quinn has indeed learned a lesson on remote taxation, he’s got a few more to read up on, such as avoiding an income tax hike and embracing reductions in state spending,” Sepp said.

Jim Lakely ([email protected]) is co-director of the Center on the Digital Economy at The Heartland Institute and managing editor of InfoTech & Telecom News.