iTunes Tax

Did you remember to pay taxes on your iTunes downloads when you filed this year? Now that iTunes has surpassed one billion downloads, state governments want a piece of the action. This by itself isn’t anything new. According to CNet News.com, 15 states and the District of Columbia already tax digital downloads. If you’re not taxed when you download the music, you’re responsible for reporting your purchases when you file your annual taxes. (Do I hear the sound of iTunes users quickly amending their returns? Probably not.)

What’s new is that states who have not previously taxed digital media downloads are starting to take note. New Jersey, for example, has proposed legislation that would tax iTunes and other downloaded media beginning October 1. States already taxing downloads use the rationale that it is the same as any other shopping or online purchases. Some states that do not specifically address this issue use other laws, such as those allowing taxation of computer software.

Still, most people don’t worry about paying taxes on these or other online purchases. Enforcement is difficult. Most states already tax other internet and out-of-state purchases but have found that consumers are not reporting and paying taxes these taxes. (If you didn’t know you were supposed to do this, well, now you know.)

Frequent online shoppers or digital downloaders might be interested in knowing that states are looking for ways to enforce tax payment. New York state, for example, has added a line to its tax form for residents to calculate what they owe on any out-of-state purchases, including internet and mail-order purchases. Residents who leave this line blank or indicate they owe nothing had better hope they don’t get audited. The burden of proof is on them, and they will need to produce credit card statements and bank statements to back up their claims. In other words, consumers need to keep track of every dollar spent in other states.

For more on what you can expect in ways to get you to pay your iTunes taxes, check out Internet Sales Tax Fairness. This article will give you an overview of an effort called the Streamlined Sales Tax, designed to simplify state tax codes and make it mandatory for out-of-state sellers (such as those on the internet) to collect taxes.

Efforts to tax digital media downloads are frequently referred to as the “iTunes Tax.” As iTunes continues to grow, expect more taxation legislation to follow, as well as new ways to enforce these taxes.

Some would argue that paying these taxes when consumers could just as easily download music for free just penalizes those who are trying to do the right thing by paying for it. In addition, as companies that offer these services take in more income, they pay more taxes. Others reconsider purchasing iTunes gift cards, arguing that it isn’t right to pay taxes when they buy the card and again when they (or the recipient) download music.

Would the addition of state taxes on iTunes downloads affect your buying habits? I’d like to hear if or how this type of legislation would make a difference to you. For myself, it just seems wrong to collect taxes on something consumers could get free elsewhere. What do you think?