Download Tax: How You Know the State’s Desperate for Revenue

If North Carolina's Revenue Law's Study Committee has its way we residents will soon be paying state and local taxes on ringtones, movies and music we download.  According to the story the committee thinks the state would raise about $8 million and local governments would raise $4 million from the tax.  Considering how deep the revenue hole is for the state I'd say the stage is set for the legislators to enact this really bad idea. Why do I think it's a bad idea?  Well, it has to do with my professional life.

Back in the dark ages I started my career in direct marketing.  Put simply we sold things to people all over the country via mail (think catalogs) and one thing we had to track was the location of our purchasers.  If they lived in the state where our business was located we had to collect sales tax, but if they lived elsewhere we didn't have to.  There were some legal reasons having to do with interstate commerce that I didn't really grasp, but I was always thankful because the logistical headache of calculating all the different state and local tax rates around the country was an absolute nightmare. Also, because of shipping costs the cost to the consumer was pretty even if they purchased by mail versus purchasing from a store, but if you added tax it would become much more expensive to purchase by mail.  That's helpful to local businesses, but only if they carry the item you're trying to purchase.  What if they don't sell that item?  Then you, the consumer are paying shipping and taxes.  

In today's world it wouldn't be too difficult to set up an online shopping cart to automatically calculate taxes based on the buyers addresss, so as far as I know that issue doesn't really apply anymore.  What does bother me about this, though, is that because taxes on downloads aren't being applied in all states we North Carolinians might lose access to some online sellers who decide that it isn't worth doing business with North Carolinians because of the tax headache (calculating, collecting and paying taxes adds to a company's operational costs). That in turn could lead to fewer competitors in the marketplace and a rise in product costs that we'll also have to pay the extra 7%-ish in taxes on.

I'm also curious how the state plans to collect the taxes. In the offline world a retailer collects the tax at the point of sale and then sends it to the state.  Some businesses try to cheat and not send all the collected taxes, but if they do that and the state catches on then the state can take appropriate action.  How will they know when a seller in Fairbanks, Alaska sells a song download to me in Lewisville, North Carolina?  And if they do find out how will they go after the company in Alaska?  I'm sure there are ways, but won't it involve other states' agencies or the feds?  Basicaly, I'd think that the pain-in-rear aspect would prevent them from going after all but the biggest cheats.

All in all I'm just not sure it's such a great idea.

1 thought on “Download Tax: How You Know the State’s Desperate for Revenue

  1. darkmoon

    How exactly are they going to enforce this tax? If anything, they would just force anyone that has ISPs in this state that sells downloadable goods to move elsewhere (it’s not like hosting is all that difficult to change these days). You might be able to enforce ringtones purely based on the fact that there are only so many carriers to approach, but there’s no way they could enforce movies and music. It’s a matter of politicians not understanding the technology.
    On top of that, they can’t force someone that serves up from say… Texas to pay the taxes since by law, it’s based on where your servers are located. It’s the same for prosecution, etc etc. I’ll just laugh if they ever enact this since they won’t make a dime, and in fact they’ll just run out any businesses since the technology is easy to shift.


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