Nexus, Schmexus…New York Wants Digital Download Tax

The Governor of the State of New York wants to address their $15 billion deficit by taxing, well, almost everything. Among the specifics is the taxing of digital downloads. The so-called “iPod Tax” would be 4 percent on all music and video downloads.

For years, we’ve been waiting for the axe to drop on e-commerce by the issuance of taxes on internet-based sales. The arguments against it (and there are many, as there should be) include complexity (which state charges what rate for what type of item, and if states, why not counties and cities?), the cost to revamp shopping cart software and accounting practices, and the obvious fact that government really doesn’t need to tax everything.

What is interesting about this specific tax proposal is that it will also include pornography. Opponents of the tax argue that taxing such a thing legitimizes it. The government would profit from porn.

This is not new. Sin taxes have been around for a very long time (ask a smoker). Inevitably, the argument for a sin tax is the very thing that ultimately dooms it: diminishing returns due to reduced use of the product or service. The state gets hooked on the juice from it, then when it falls off, the tax rate increases. This then accelerates the drop-off in use, and there we go down the spiral. The people who adopt such tax policies aren’t very bright. But of course, you can pass any tax as long as it’s For The Children.

With every state in some measure of financial turmoil, any hope of keeping the tax hounds off the net will likely fail, and soon. What remains to be seen is how complex and unwieldy the new system of internet taxation will be, and just how far states will go to establish “nexus.” Can you really do business in a state you’ve never entered, and what would this mean for international jurisdictions?

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