California may soon be added to the small but growing list of states that impose a tax on iTunes digital downloads, and though the Californian consumer may not feel the pinch, local businesses probably will.
Although digital goods are a potential gold mine for the ailing California state budget, they come with the unavoidable headache of tax collection issues. For instance, in states where digital media taxes already do exist, the vendor does not necessarily collect them.
According to a 1992 Supreme Court case, Quill v. North Dakota, sales taxes may be collected from the consumer only where the consumer and business have a physical presence in the state. This is where the taxation of digital media may be a detriment to the California economy, rather than a godsend.
So when an individual at UCLA purchases digital media from Amazon.com, which is based in Seattle, Wash., they effectively avoid the California tax on digital goods because Amazon does not have a physical presence in the state.
The small amount consumers can save by avoiding sales tax might make Amazon more appealing than online vendors based in states that enforce a sales tax.
Since California online businesses will have to collect the imposed tax, which could negatively impact their overall sales, some may lose business or choose to leave California. This exodus may result in a greater loss for the Golden State in income and corporate tax revenue.
And the concern extends to the entertainment industry.
A tax on digital downloads may further damage an already struggling industry; some postulate a tax on digital media would result in increased incidents of piracy, as consumers look to avoid paying for music let alone paying a tax on a product consumers would prefer to obtain illegally.
Yet, the digital download tax clearly has the benefit of providing some much needed income to offset the staggering deficit the state faces.
Agonizing over whether consumers will elect to download illegally because of a marginal increase seems like a waste of time.
Those who download illegally will most likely continue to do so, while those who wish to comply with the law are unlikely to be deterred by a few extra cents.
There are several less obvious consequences to enacting and enforcing these taxes.
The potential for businesses to leave the state presents a greater problem to the Californian economy ““ more so than the slight burden consumers face.
With a significant portion of the California businesses capable of selling goods, digital and otherwise through the Internet, we should be concerned about corporations choosing to leave California to avoid the financial burden they are sure to incur.
Many already believe that existing state taxes are driving certain industries across the border to Nevada, which does not have any form of sales tax.
Whether this concern is reflected in the rejection of the tax on downloading digital media, however, is another matter. The Internet as a tax-free zone is an illusion quickly coming to a close, as more states adopt similar tax laws. It seems unlikely that any one state will hold out as the haven for corporations seeking to avoid taxation.