Vt. begins taxing digital downloads
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By DANIEL BARLOW VERMONT PRESS BUREAU - Published: July 2, 2009
MONTPELIER – Did you pay to download a song, book or movie this week? You may have to pay sales tax on it.
Vermont became one of a growing number of states to target digital downloads as a new source of tax revenue. Starting July 1, many purchases from iTunes and other online download retailers are subject to the state's sales tax.
Residents of Vermont are already expected to pay sales tax for purchases over the Internet, but the new digital download tax targets forms of entertainment that don't necessarily have a tangible product attached.
The new tax was proposed as a way to boost the state's coffers during an economic downturn, according to Rep. Jim Condon, D-Colchester, a member of the House Ways and Means Committee. It also recognizes that the buying habits of Vermonters are changing, he said.
"If you go to a record store – I hear there are still some of those around – or a bookstore in Vermont and make a purchase, you pay sales tax on it," Condon said. "But if you made the same purchase as a download online, there is no sales tax. That just didn't make sense."
Music and media companies fought the new tax in Vermont and even encouraged Gov. James Douglas, who did not support the new tax, to veto it. Instead, Douglas signed the bill containing the new 6 percent tax into law – and officials hope it will net anywhere from $700,000 to $1 million in new revenue each year.
Steve Kranz, a Washington, D.C. attorney who represents companies that sell digital downloads, said his clients believe these downloads should not be taxed because they are not tangible – and unlike physical CDs or books, the delivery of the products to the stores do not use local highways and roads and other state services.
"These are really very different products," Kranz said. "From a policy standpoint, the taxpayers are not impacted when someone pays for a download."
Taxing digital downloads makes sense, according to Don Mayer, the CEO of Vermont's Small Dog Electronics.
Years ago, most people would go down to their local record or bookstore to buy the latest releases, Mayer said. Now, those releases are available faster via Internet downloads, whether it be the latest Stephen King novel or the new Jay-Z CD.
With Internet downloads replacing local purchasing, it only makes economic sense to tax downloads too, Mayer explained.
"I can download a book to my Kindle in 10 seconds," Mayer said. "That couldn't be done two years ago, and five years ago it probably seemed impossible. The whole structure of how we acquire entertainment has changed."
Taxing the Internet is a tricky issue. A U.S. Supreme Court decision from the early 1990s forbids states from taxing sales unless the seller has a presence in that state.
Therefore, under its new digital download law, Vermont can only collect the taxes from companies that are set up here in the state, either as a corporation or with a storefront, according to Tom Pelham, the commissioner of the Vermont Department of Taxes.
That would include a company such as Borders, the Michigan-based bookstore chain with retail locations in Vermont. Pelham said if a Vermonter buys a download through Border's Web site, his office will find out about it through their routine audits.
There are some other retailers from outside of the state that Vermont can tax – as long as they are members of what is known as the Streamlined Sales Tax Project. More than 20 states are members of this project, which attempts to create a national, uniform approach to taxing sales over the Internet.
Pelham said there are "22 states and growing" on that list – including the Green Mountain State – and a bill in the U.S. Congress that would essentially force the other states to sign on, as well, is gaining steam (Vermont's three-member congressional delegation supports the bill).
That means downloads from a company such as Apple – which is a voluntary member of the streamlined sales tax group – will calculate Vermont's sales tax into online purchases. But a company such as Amazon, the online retail giant that is not a member of the sales tax group, does not, despite that it is the largest shopping center for e-books.
"All the states really need to be on the same page," Condon said. "Collecting tax revenue from online purchases will be a lot easier once there are not more than 1,000 different sales tax codes across the country."
daniel.barlow@timesargus.com
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