Utah Considers Imposing an ‘iTunes Tax’

Published January 10, 2018

When Utah state lawmakers return for the 2018 legislative session, a proposal to tax downloads of digital audio and video products will be one of many changes to the state’s tax code up for consideration.

The provision, part of a 233-page draft bill, would begin levying “iTunes taxes” on digital products, such as downloaded audio, software, and video, purchased from out-of-state businesses.

In Quill v. North Dakota, the 1992 Supreme Court case which created the “nexus” standard for interstate business taxation, the Court decided states cannot require businesses to collect and pay sales taxes to jurisdictions in which the companies are not physically located.

The Utah State Legislature will begin its 2018 session on January 22.

Questions Legality

Bruce Edward Walker, a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says the download tax would not be legal.

“The proposed tax violates the legal precedents established by the U.S. Supreme Court in its Quill Corp. vs. North Dakota ruling, which requires a company to possess a physical nexus in a state seeking to tax profits made through commercial transactions in that state,” Walker said. “Therefore, the collection thereof will be challenged as a violation of legal precedents of the U.S. Supreme Court’s Quill ruling.”

Streaming New Revenue Sources

Utah lawmakers are not the only ones eyeing digital services as potential revenue streams.

“It’s difficult to conjecture whether a tax on digital downloads such as the one proposed in Utah will pass,” Walker said. “What is known is the increased popularity of streaming and download services such as Amazon Prime, Hulu, and Netflix make their customers an easy target for states seeking new revenue streams. Make no mistake: If the adoption of this tax is realized, customers will see their fees increase as internet companies attempt to recover the additional costs of collecting taxes.”

‘Not a Solution’

Utah state Rep. Paul Ray (R-Clearfield)says the download tax is wrong for Utah.

“Creating new ways to tax products and services, for the sake of trying to increase revenue, is not a solution,” Ray said. “When you start taxing something new, like streaming media, you eventually start looking at similar areas that you can tax too. It becomes a never-ending game to find additional sources of tax revenue.”

Wants Lower, Flatter Taxes

Instead of finding new things to tax, Ray says his fellow Utah lawmakers should brainstorm ways to reduce spending and make taxes fairer.

“There are better ways to do things,” Ray said. “Reforms need to come in areas of expenditures. We need to take a hard look at everything that we do, to determine what is necessary and what is not. Going to a flatter tax and lowering existing tax rates should be considered as well.”