Some N.C. legislators want to take a closer look at taxing songs, movies, books, and games downloaded on computers. A study committee could discuss the issue Wednesday.
“I just think in terms of our retail merchants and folks with bricks and mortar [stores], they’re being burdened in a way that other retailers are not because of the way the world has changed,” said Rep. Jennifer Weiss, D-Wake, during the Jan. 7 meeting of the General Assembly’s Revenue Laws Study Committee. “We are facing an ever-shrinking tax base, and we need to kind of get with the 21st century.”
Weiss is not alone. “If neutrality is a goal of tax policy, this certainly isn’t neutral,” said Sen. Dan Clodfelter, D-Mecklenburg.
Those comments followed a committee presentation titled “Taxation for the Digital Age.” Trina Griffin of the legislature’s Research Division explained how the growth of digital technology has affected the state’s sales tax base.
“The takeaway from the presentation is really the stunning statistics about the growth of the digital media industry and the concurrent decline in the sales of physical media in just a few short years,” Griffin told lawmakers. “This committee, or even the General Assembly as a whole, may want to look at whether it thinks digital media should be treated differently than its physical counterparts — especially as the sales of those tangible counterparts shrink more and more each year, to the point where some analysts are predicting that virtually all music and movies will be digital in the near future.”
Growth in digital media sales has created a disparity in the sales tax’s application, Griffin said. “What we see now as this technology takes hold is that essentially equivalent items are being taxed differently depending on the method of delivery or their format,” she said. “If I go to the movie theater, or I buy a DVD in a store, or I order a DVD online and have it mailed to me, or I rent a DVD at Blockbuster or get it in the mail from Netflix, or if I watch a pay-per-view movie on cable, all of those things are taxed. But if I download a movie or stream it — and keep in mind I can download that movie and burn it onto a DVD — it’s not taxed.”
“Music [purchased] in-store [or] online, or even the satellite radio in my car would be subject to tax,” she said. “But if I download a song on iTunes … or download a ringtone, those are also items that are not taxed.”
Other digital items that face no tax include downloaded books, games, and software; online or subscription gaming; and online subscriptions for “information services.” These items are different from other taxable goods people order through the Internet, Griffin said.
“If I buy a sweater from L.L. Bean and have it shipped to me, that item is subject to tax,” she said. “But with digital downloads, they are not in the tax base at all. They’re simply not subject to tax because they don’t fall within our definition of tangible personal property, which is … the core principle of our sales tax statute.”
In effect since 1933, North Carolina’s sales tax applies only to “tangible personal property,” Griffin said. Such property is defined as “personal property that may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses,” she said.
More consumers are buying their music, movies, books, and other entertainment in formats that don’t fit that definition, Griffin said. “There’s no greater example of this transformation than in the music industry,” she said. “The statistics are pretty staggering, I think. Digital music sales [have] really emerged as the growth sector, at least at present, with regard to digital downloads. Overall, digital downloads accounted for 30 percent of all music revenues last year, and that’s expected to grow to 41 percent by 2013. That’s the first year, it is thought, that [digital downloads] will exceed the sale of actual CDs.”
States are starting to react to the changing market, Griffin said. “The media has cleverly referred to the trend of taxing digital downloads as the iTax,” she said. “Seventeen states and the District of Columbia currently tax digital downloads in some form or another. Five of these measures were passed last year, and there were two unsuccessful attempts: one in Wisconsin and one in California.”
An initial fiscal estimate shows North Carolina could collect an additional $3.7 million from an iTax here, Griffin said. That tax would cover about $80 million in downloads.
Clodfelter asked legislative staff to “work up some options for us to look at” during Wednesday’s meeting. The analysis should include potential revenue to be gained from an expanded tax, along with a list of “who would be affected by this and who would not be affected,” he said.
At least one legislator raised the issue of scaring away industry with a new tax. “If we do that, I know that some of these issues that Trina has brought up involve things like open-source software, involve things like the gaming industry, and some other things that we are working hard … to develop and promote,” said Rep. Pryor Gibson, D-Anson. “I want to make sure that if we do go off someplace, that it’s one of the usual [legislative] finance groups that everybody’s involved [with] so we don’t scare anybody to death. … We’re getting ready to go into session. I certainly don’t want to do something that not everybody’s aware of.”
Any ideas from the Revenue Laws Study Committee would need support from the full General Assembly to become law. The legislature will return to work Jan. 28.
Mitch Kokai is an associate editor of Carolina Journal.