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States surf for answers on taxing Internet sales
(Daily Oklahoman, The (KRT) Via Thomson Dialog NewsEdge) May 02--With the success of Apple's iPod mp3 player and the iTunes online music store, white earphone cables have become a familiar part of pop culture.
Digital music sales topped $1 billion last year, and state legislatures and tax officials hoping to grab some of the revenue have decided to tax digital downloads.
Oklahoma officials aren't interested.
They said they have no plans for taxing music, movies or electronic books bought on the Internet.
"I think it's something ongoing with state entities, as well as the federal government, but I have not heard or seen any legislation," Oklahoma Tax Commission spokeswoman Paula Ross said. "I don't see it happening any time soon for Oklahoma."
According to a report from a trade association, the International Federation of the Phonographic Industry, about 420 million single tracks were downloaded in 2005, which is 20 times more than two years ago. Digital music sales tripled from 2004 to 2005, jumping from $400 million to $1.1 billion worldwide, according to the association.
The success of iTunes and such rivals as eMusic.com, Yahoo! Music Unlimited and Wal-Mart's music download site recently has caught the attention of several state legislatures.
An analysis from CNET News.com, a Web site focused on technology issues, shows 15 states and the District of Columbia tax downloads of music, movies and electronic books.
Rep. Kevin Calvey, R-Del City, House chairman of the Revenue and Tax Committee, said taxing Internet sales is a perennial question for lawmakers.
"I'm not aware of any move to tax downloads and I think I would be opposed to it," Calvey said. "I think the Internet is a great free market tool, and we certainly shouldn't strangle it in its adolescence by over-taxing."
According to Apple's Web site, "iTunes Music Store purchases will include sales tax based on the bill-to address and the sales tax rate in effect at the time of download. If the sales tax rate for the billing address changes before the song is downloaded, the new tax rate in effect at the time of download will apply. We will only charge tax in states where music downloads are taxable."
Wal-Mart has an almost identical policy for downloading music from its online store.
Ross said Oklahoma's tax law cites a "use tax" for Internet or catalog purchases if the company has a brick and mortar location in the state. The buyer is supposed to report the purchase on his tax return.
In a 1992 case, Quill v. North Dakota, the U.S. Supreme court affirmed the need for an actual store for a state to collect sales tax, and said only Congress has the power to change those rules.
Because of the decision, purchases from Internet sites such as Yahoo! and eMusic.com would escape a sales tax. Online sellers such as Apple and Wal-Mart, which have stores in Oklahoma, could be required to collect sales tax if the state mandated it.
Internet tax proponents said buying music online is no different than buying from a local store. Taxes should apply.
"It's always a possibility that people could get interested in taxing it," Calvey said. "One could make the argument that the end result is the same, so it should be taxed the same. I would have a concern about that. We'll put our Internet companies in America at a disadvantage and people will send their money overseas."
Bennie McElhaney, owner of ProMac Computers in Oklahoma City and an Apple retailer since 1980, said he doesn't think a sales tax on downloads would affect the method of buying music and he would support a tax.
"I think the whole idea of Internet taxation is a problem for local communities," McElhaney said. "They're losing money right and left."
While no effort to tax downloads is ongoing in Oklahoma, officials don't rule out a future possibility.
"I think the basic thing with Internet sales is that if the tax base starts to erode over time it becomes of more interest to tax those things," Ross said.
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