Friday, April 14, 2006

States Taxing Digital Media

Slashdot tips that states are looking for ways to tax digital media. It would be better for these kinds of decisions to be made in the open, rather than by state officials reinterpreting the tax code, and Congressional action on this can't be too far off.

One interesting bit is that Kentucky justifies its taxation of digital music because "music downloads fit the definition of personal property." I thought that a (legit) music download was considered the purchase of a license to use rather than a purchase of personal property. Buying the cd itself is one thing, buying the sound is another. No?

Another bit worth mulling over is that media downloads should be taxed like software. Washington defines software as "a set of coded instruction designed to cause a computer to perform a task" and officials have determined that the same definition applies to music and even books and movies too. Like software, data files cause a computer to perform a task in order for the music to be heard. I can't think of much that can't fit under this theory of taxable software. Such an interpretation could make possible a tax for merely visiting a web page.

The problem with these kinds of changes to the tax law is that it effectively skews our understanding of intellectual property without Congressional authority and, presumably, without much knowledge of what intellectual property is all about. How much do state tax agencies know about copyright? Probably not much.

I don't want to pay taxes for downloads. Who does? Congress could decide on a federal scheme for internet taxation and that would be ok. We already pay taxes for cable tv. But applying local taxes to a decidedly unlocal thing like the Internet just sounds like a bad idea. Even worse if it serves to further confuse people about what exactly intellectual property is.

As another aside, while digital media is growing rapidly and states are looking for ways to increase their tax base, it seems misguided to increase taxes on Internet use while cutting taxes elsewhere. An overall tax policy that fails to provide for all of a government's responsibilities is bad, but instituting bad taxes to cover for budget shortfalls doesn't strike me as a workable or sustainable solution.
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