Taxing digital downloads

published 4/2/2009

You might have to pay extra for that song you bought on iTunes.

Sponsored by Rep. Jim Davnie (DFL-Mpls), HF1980 would expand the sales tax to digital products that are currently taxable in physical form. The bill was laid over by the House Taxes Committee for possible inclusion in the omnibus tax bill. A companion, SF1839, sponsored by Sen. Tom Bakk (DFL-Cook), awaits action by the Senate Taxes Committee.

“If I buy this CD of music in Minnesota, I pay sales tax,” Davnie said, while holding up a Bonnie Raitt CD. “If I download the same music in my basement from the iTunes store, I pay no taxes.”

He added that a growing number of states are passing legislation to tax digital downloads. Currently, 13 states legislatively impose this tax.

Stephen Kranz, a lawyer with Sutherland Asbill and Brennan LLP, said this is a very difficult area of tax law that requires very technical bill drafting.

“Washington (State) spent a year drafting their bill,” he said. “They spent that time to make sure things like online dating and online career services aren’t inadvertently taxed.”

He also said the bill would impose a tax on “green” products because digital products don’t require shipping or cardboard packaging.

- Mike Cook