New York State Looks To Implement "iTunes Tax"

How do you stem a state's $15.4 billion budget gap? By implementing the age-old American tradition of creating new taxes, that's how! Because of the current state of the economy and New York State's dire budget woes, New York state residents might be surprised to find that Governor David Paterson's new $121 billion budget proposal looks to tax items and services that have been traditionally been tax free in the state, including digital downloads. According to Ron Deutsch, executive director of the New Yorkers for Fiscal Fairness advocacy group, "the governor is nickel-and-diming working class families" with his new budget proposal.

At this stage there is no guarantee that Governor Paterson's budget proposal will be approved as is--or even at all--as it will need to be approved by the New State Legislature. But if it does, the New York Daily News reports that New York State residents can expect to start paying sales taxes on "movie tickets, taxi rides, soda, beer, wine, cigars and massages" as well as "cable and satellite TV services and removes the tax exemption for clothes costing less than $110." Keeping in the spirit of taxing these arguably "luxury" items, all "digitally delivered entertainment services" would be taxed as well. This includes all music and movie downloads from online retailers and services such as iTunes and Amazon, and even online digital movie rentals.

New Yorkers are already used to paying sales taxes from some online purchases, as the state's "Amazon Tax" went into effect in June 2008--this tax requires any online retailer to collect sales taxes on purchases if the online retailer has any affiliates within New York State.

New York would not be only state to claim the right to collect sales taxes on digital download. CNET News reports that more than a dozen states "said that their laws and regulations meant that digital downloads should be taxed." As of April 15, 2008, CNET News reports that these states are:

  • Alabama
     From New York State Governer David Paterson's
    December 16, 2008 Budget Presentation (PDF)
  • Arizona
  • Colorado
  • District of Columbia
  • Hawaii
  • Idaho
  • Indiana
  • Kentucky
  • Louisiana
  • Maine
  • New Jersey
  • New Mexico
  • South Dakota
  • Texas
  • Utah
  • Washington
  • West Virginia

But just because the states might claim the right, does not necessarily mean that the states are currently enforcing the right and nor does that mean that online retailers are necessarily collecting sales taxes from digital downloads of customers in these states. For instance, based on our own experience, Amazon does not currently collect sales taxes from MP3 downloads by customers in the state of New Jersey. Even some online retailers, such as stopped collecting New York sales taxes even though New York State's "Amazon Tax" says they are supposed to. So even if New York does start claiming the right to collect sales taxes on digital downloads, it begs the questions: Will the State actually enforce the ruling and will online retailers comply?