States Look to Tax Digital Distribution, Violate 10th Amendment
Posted 08/12/08 at 10:07:35 PM | by Paul Lilly
Purchasing software and other digital content online is not only be convenient, it can also make fiscal sense when there's no sales tax involved. That's been the case for some time now, but according to DailyTech, the free ride may be rapidly coming to an end.
With a $130 billion digital market going untaxed, the temptation for some states to cash in may be too great to pass up, even if the idea of taxing downloads doesn't pass muster at the national level. Indiana, South Dakota, and Utah are the most recent states to sign digital download taxes into law, bringing the count up to 9 states altogether in 2008, and 17 in all. But are taxes the answer?
Several online entities have begun lobbying against the taxes, claiming that this differentiation is vital to their business. As Steve Delbiano from NetChoice - which is composed of Ebay, AOL, Yahoo, and others - explains it, "With global warming and a world that's running out of oil, the last thing governments should do is add taxes on something that uses no oil and produces no carbon. A digital download is the greenest way to buy music, movies, and software, since it requires no driving to the store, no delivery vans, and no plastics or packaging."
What's your stance? Do states have a moral and legal right to tax digital downloads, or should the internet tax moratorium trump individual state desires?
Image Credit: Flickr Joe Gratz
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It's all a bunch of
Submitted by Pixelated on Fri, 2008-08-15 21:17
It's all a bunch of bullshit! Until people demand these perverts and criminals in Congress do what we want it's going to continue downhill from here. Like in the movie Network, first you've got to get mad! I don't see that happeneing here in America where nothing seems to get peoples attention anymore. They can steal elections, spy on us, shred the Constitution and pass rediculous laws and just flat out lie and bullshit us and no one cares. What Brittney did today and who Paris slept with is more imporant. I'm starting to despise the corrupt Fascist state the once great US has become.
luxury tax?
Submitted by Wildebeast on Wed, 2008-08-13 16:58
Maybe I've got it wrong, or over-simplifying ---I thought State Sales taxes were justified by the idea "you are using the state's infrastructure [roads, etc.] to sell the item..."
I thought the reason broadband [which I don't have] would cost me $70/month is because my state is not, supporting the system in any way. I pay state and federal taxes on my access lines, right?
They got rid of the "luxury tax" on home telephone lines, a few years ago. If they're missing revenue, maybe this service I can't afford should actually be classified as a luxury. Maybe they should also keep in mind how competitively (or not) the service they are trying to tax is priced.
All I'm saying is that if they want income from internet downloads, they need to define what part of the service they consider taxable.
I'll try to explain this
Submitted by Skiplives on Wed, 2008-08-13 10:48
Okay, if you buy a product and do not use it for re-sale you usually owe sales tax on it in your state of residence. That is pretty much well settled law. It doesn't matter where you buy it or how you buy it.
Downloaded software was usually exempted from this because there is no physical product, so it looks more like a service. States are rectifying that and making it clear it is a product, subject to tax. I don't get the 10th Amendment arguement, and while it sounds cool it is rarely a winning arguement in court.
This is not like the issue with sales tax on products bought on the web.
There the issue is who can you make collect the tax. Going after each resident is really hard, though it is getting easier now that most people rarely use cash. States would much rather go after the retailers, they are larger and fewer.
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Your last paragraph is the crux of the issue
Submitted by jwalch.hawk on Wed, 2008-08-13 17:42
My issue isn't so much that it's "unfair" that there be sales tax on digital items. I understand the argument that digital goods don't necessarily utilize a lot of government-funded resources, but that's because there's not government-maintained resources that are really useful in the digital market. Yet. So, I'm ok with sales tax on digital goods (although for the vendors' sakes, it might nice if it was only half the regular sales tax or something; you'd have to cleanly define what "digital goods" are if you wanted to make that distinguishment, though).
The issue is with the collection of the tax, and LinuxForLife is kinda touching on what the implications are. Basically, digital goods are very easy and convenient implementation of interstate commerce. Just as an example, I can buy digital cards for my favorite card game in whichever state I'm residing in, and chances are that I'm not residing in the state which hosts the company's servers or their headquarters or whatever (which also brings up the question of deciding which state the purchase technically originates from). The point is that digital goods are very much an interstate commerce affair.
Now, I don't understand why Paul brought up the 10th Amendment (though I'd love to be enlightened with an explanation there), but the Constitution (Article 1, Section 8, sayeth Wiki) specifically states that the federal government gets to regulate commerce between states. Therefore, in my mind, the federal government gets to decide what (if any) tax is to be collected on these digital goods, who gets it, and how it is collected.
Now, I'm ok with the state of residence collecting the taxes. I'm not ok with the state of residence getting to determine what the tax is, and here's why: I can lie. I already posted a comment detailing this via example. If you don't want to be taxed on digital goods, just use an address in one of the 33 states that doesn't tax them (North Carolina was one last I checked, though I could very well be out of date on that). I'm reasonably sure that isn't legal, but neither is pirated software and look how strong that market is going. I am quite confident that if states mix and match whether they want to tax this (not to mention just varying tax rates between states) people will simply use fraudulent addresses to circumvent it. Now, if the federal government decides (just an example figure) that all digital goods will be taxed at 5% and that money will go directly to state governments in the same fashion that sales tax on physical items do... Then we'd have that settled. At least then it would just be down to the matter of the core principal question of whether or not taxes on digital goods are even a fair practice. And if it were appealed to the Supreme Court, that would be a challenge to exactly one piece of federal legislation... Not a messy bunch of state Supreme Court cases that might not even hand down consistent decisions.
Edit: Maybe I think I get why Paul mentioned the 10th Amendment. Maybe he meant that since the power was expressly granted to the federal government that the states were not granted that power? Seems more like a matter of "X doesn't apply" versus "X is being violated"... But headlines that say the Bill of Rights is being ignored get more readers, so I think I got that. ;)
Submitted by LinuxForLife on Wed, 2008-08-13 10:31
Now, its been a while since my constitutional law class, but what these states have done seems to violate the concepts held within the dormant comerce clause interpretation of the interstate commerce clause - that being that states are prohibited from passing legislation which discriminates against or places a burden on interstate commerce. Hell, look at Bibb v. Navajo Freight Lines 359 U.S. 520 (1959) as an example of a burden upon interstate commerce, or Dean Milk Co. v. City of Madison, Wisconsin 340 U.S. 349 (1951) as an example of discrimination against interstate commerce.
I smell some pending lawsuits - ones which invariably cost the taxpayers of these irresponsibly managed states more money.
Submitted by jwalch.hawk on Wed, 2008-08-13 10:10
Just to be clear, this isn't really news so much as it is coverage of an ongoing problem (this isn't a dig at you, Paul, this is more so directed at folks getting up and arms thinking this is a new problem). I know that Illinois has been charging tax on digital goods for quite some time (I'm wanting to say minimally a year). I think dcrail brings up a couple really good points. First of all, we have people making these laws that can barely turn on a computer. Not to say that *all* Congressmen are technologically inept, but I'd be willing to stake quite a bit that the vast majority of them are. Also, a funny thought... A little over half the year, my address is actually in North Carolina, which conveniently doesn't charge taxes on digital goods. So let's see... What would prevent me from using my non-taxed state address all year long? It's not like the goods are actually shipped, so there is absolutely nothing preventing me from doing that. This problem demonstrates the logistical problems behind allowing this decision to be made at the state level.
Why buy online...
Submitted by dwr50 on Wed, 2008-08-13 08:37
if it's not any cheaper than in store prices. If I buy from an online company I have to wait a week for it to be shipped to me it should cost less. With taxes added on for every purchase... I might just as well go Wallie World and have the item NOW.
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Submitted by dcrail on Wed, 2008-08-13 07:04
I like smooth roads, and emergency services that show up when I dial IX-I-I, so I don't mind paying taxes, whether it's payroll, or sales tax. But my problem with this comes from who's getting the taxes. I'm guessing that they are figuring the state that gets the tax by the billing address of the person downloading the software. But if my billing address is Colorado, and I'm in any other state when downloading the software, CO gets to collect sales tax on something purchased, and delivered outside of CO. That's one problem.
The other problem is that sales taxes are meant to fund the government, and infrastructure that is supporting the sale. The local and state government have nothing to do with the network, and electricity supply that make the sale possible. There are no trucks delivering the software on the roads, and it's pretty unlikely that the seller will have to call the cops due to a hold up.
Plus, as a consumer I am already obligated to pay sales tax to the state that I reside in, on anything that I order through the mail (that didn't already have the sales tax paid), so wouldn't this apply to downloaded orders also?
The real problem is that we have people, that have a very limited understanding of computers, writing and pushing laws that legislate the publics use of said computers. The blind leading the blindfolded.
This is bullshit. The
Submitted by Keith E. Whisman on Wed, 2008-08-13 00:44
This is bullshit. The federal government already has more money than it knows what to do with that's why half or more of it is given away foreign and domestically.
I guess the states are so used to having alot of money. Alot of states including Arizona have over spent on stupid programs that line their pockets with money and not much more. Last year the govenor said that we had a billion dollars left over after everything was payed for. This year she said that we spent that billion and an addional billion and a half. So the state of Arizona is 1.5billion dollars in the hole.
Crap like this is the reason why states want to tax downloads. Hell they would tax toilet use if they could figure out a way of counting the flushes. Double flushers would suck.
Submitted by Asevening on Wed, 2008-08-13 06:58
The U.S. Govt was $8.9 TRILLION yeah $8,900,000,000,000.00 in debt BEFORE they went out and signed British company AirBus to the largest Government contract in history. So yeah, over half of the money does go to foreign nations because we owe people money.
Submitted by proudcanadianeh on Tue, 2008-08-12 23:16
Wait... What? You dont pay taxes when you order online? How do you get around that? (I live in BC, up in Canada)
Submitted by roninnder on Tue, 2008-08-12 22:38
Just charge the people in those states more for their downloads. Maybe then people will be motivated to go out and elect someone that can repeal such unconstitutional taxes.
Submitted by whitneymr on Tue, 2008-08-12 22:12
The problem is our goverment is addicted to our money.
Submitted by pellier on Tue, 2008-08-12 20:39
it should not be taxed because if you get a tax break for driving a green car you shouldnt be taxed for virtually no carbon foot print that online shopping provides
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