Taxing Digital Downloads, aka iTaxes, Gaining Momentum

By August 18, 2008

In 2008, five states incorporated digital download taxes into law. This makes seventeen states including the District of Columbia, not to mention four additional states presently considering iTax measures. It appears the days of tax-free digital downloading are numbered. A potential barrier to iTax legislation is the current semantics of some state laws. When they were written, the Internet had not yet been invented, and lawmakers may have unintentionally immunized digital downloads by only permitting the taxation of tangible


Another barrier is the issue of nexus. In a 1992 United States Supreme Court decision titled Quill v. North Dakota, retailers are required to collect sales taxes only if the company has a “nexus” in the state where the customer resides. Nexuses have been interpreted as warehouses, retail stores, and data centers.

When combined with the nexus rule, a digital download tax may influence more companies to move to other states. For example, Amazon currently operates a warehouse in Nevada to avoid sales taxes in California, which produces significantly more customers than Nevada. Legislators have proposed bills in the House and in the Senate to change the law of the Quill Supreme Court decision.

Politicians are jumping onto the iTax bandwagon now that revenues from digital downloading are significant. The U.S. Census Bureau estimates retail e-commerce sales to be more than $130 billion per year.

A veritable lobbyist against iTax legislation is NetChoice, who boasts members eBay, AOL, and Yahoo. "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," said Steve DelBianco, NetChoice executive director. "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."

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