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One of the troubles with how government legislates is that legislatures are often constrained to reacting to the changing technological landscape. It's very difficult, and unwise, for government to try and be proactive when it comes to the taxation and regulation of innovation.
Case in point: e-commerce. The Internet has changed the way folks do business and with whom they conduct business. For the last ten or so years it has become increasingly common for someone to walk into the corner shop to physically examine a product, then go home and purchase that same product from an out-of-state seller for much less. Part of the comparative disadvantage facing the corner store is that the local seller has to conform to the local taxing jurisdictions, while the online, out-of-state seller often does not.
This is actually becoming increasingly less frequent as more states sign on to the Streamlined Sales and Use Tax Agreement. Washington did in 2007. This means that online sellers in states that signed the SSUTA will charge sales tax commensurate to where the purchaser resides. This is why, when you buy music from iTunes (which is based in California), you still pay your local sales tax on the downloaded content. But the terms of the SSUTA stipulate that 2010, Washington may not continue to impose retail sales tax on the sale of certain digital property. So, policymakers need to come up with a policy to tax digital goods.
This is a long way of introducing the latest twist to this issue; how do we tax those digital goods? These are intangible products such as digital audio, digital books (think Kindle), and digital movies. But legislators are looking at what else could potentially fall into this same tax jurisdiction.
The bill legislators have been looking at for some time, HB 2075, took the recommendations from the Task Force established in 2007 to study the issue. The report and recommendations from the Task Force provide for a good backgrounder reader on the issue.
However, a new bill, HB 2320, was introduced earlier this week. The new version, however, lacks some of the exemptions that the earlier bill carried. Namely, there is no exemption for audio/video programming provided by a radio or television broadcaster. There is also no exemption for digital automated services or programming obtained by the end user free of charge.
Now, these are very tricky and technical pieces of legislation. This is also not a "colossal tax grab." E-mails will not be taxed, nor will most functions a business or person would use on the Internet. But my question comes ! in about services that you have already paid for but whose services you can also use for free. I know, sounds complicated. But when you pay to rent Netflix or Blockbuster mail DVDs, you pay sales taxes for the service on the tangible property (the actual discs). But now both companies offer streaming video content as part of the service package. Do I need to now pay more taxes when I stream a movie over my computer, without coming into contact with any physical property like a DVD?
As the proliferation of these streaming sites skyrockets (see Hulu.com, Fancast.com, AppleTV, NBC.com, etc.) the question then becomes, "can the state tax my usage of a semi-free product?" We already pay our internet service provider a monthly fee to access the web. Do we need to pay the state to access the free content? And what happens if the state decides that its default position should be to tax all content? This could get very messy.
It does ! seem fair to pay the sales tax on the new U2 album if downloaded from Amazon or iTunes, likewise if I want to download Outliers for a Kindle or other e-reader. It also seems fair to pay sales tax if I want to download Quantum of Solace instead of buying it on DVD. But if I already pay a monthly fee to Netflix for its DVD service, should I also have to pay another tax for the right to access their streamed content? Or pay a tax on watching The Office on Hulu.com for free?
A sticky situation indeed.