Is the Taxman Eyeing ITunes?

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The $0.99 that the iTunes Store charges for individual songs has taken on an almost iconic role in the field of music downloads, becoming what many consider the standard for fair pricing.

While the record labels have long lobbied for variable pricing, Apple CEO Steve Jobs has fought them to keep the rate flat across the board. But the price of some customers' music has already been threatened thanks to an entirely different source: state governments.

This week, a controversial proposal in the California State Assembly that would have extended the state's sales tax to include digital downloads of media such as books, movies, and music was narrowly defeated in a hearing of that body's budget committee. Introduced by Assemblyman Charles M. Calderon of the 58th District, Assembly Bill 1956 would have asked the California Board of Equalization, the body responsible for administrating taxes in the state, to draft a regulation to extend the law's definition of tangible property to include digital property.

While the bill's demise shelves such plans for now, there's no guarantee that the issue won't return in the future. With the steady rise of digital media consumption, the taxation of such material is an area that many states have had to consider.

"It's going to be a significant test there," said Phil Leigh, president of market-research firm Inside Digital Media, who thinks that the California proposal could encourage other states to adopt similar measures.

A Bite of the Apple


Assemblyman Calderon estimated that the additional taxes from downloads--which would also cover the immensely lucrative digital pornography market--could bring $500 million in annual additional revenue into the state of California, which has suffered from significant budget shortfalls in recent years. That number was contested however: The Board of Equalization itself cited a more modest potential figure of around $114 million per year. Meanwhile, the proposal's numerous opponents, among them many prominent technology and entertainment companies, argued that the move could actually harm California's economy by alienating businesses in the tech industry and encouraging them to move to more financially-friendly locations.

"There will be a backlash," said Leigh, "but it will not change things. Most people recognize that death and taxes are inevitable."

Last year, Apple was the number two music retailer in the country and in the first two months of this year the company has already climbed to first place. With more than 4 billion songs sold since the store's inception, digital downloads of music have undeniably hit the mainstream. Assemblyman Calderon estimated that, had the tax been in place last year, California would have taken in $20 million from music downloads in 2007 alone.

Apple and other purveyors are also on the brink of bringing the same popularity to downloading movies and television shows. It's little surprise that state governments--who have long collected sales tax on physical media, like CDs and DVDs--want a piece of the action on downloads as well.

An Apple spokesperson told Macworld that the company had joined with the AeA (formerly known as the American Electronics Association), a trade group of electronics companies, to oppose the proposal, which it believed would have unfairly punish California companies.

Roxanne Gould, the AeA's senior vice president for state government affairs, echoed that sentiment. "This is an industry you want to encourage," she said. "The tech industry could be a huge part of solving the state's economic woes." Gould added that the resulting revenue would not likely have an effect on the state's bottom line, and that the bill could possibly result in litigation, "costing the state more money."

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