New York Gov. David Paterson has proposed a 4 percent tax on digital music downloads and other “digitally delivered entertainment services.”
The “iPod Tax,” as it’s become known, is just one of many new taxes the governor has proposed in an effort to close the state’s multibillion-dollar budget gap.
Although New York’s potential adoption is drawing attention, a number of states have already imposed a digital download tax, and many others could soon be following suit.
The proposed tax would affect many companies, including Apple, Amazon.com, RealNetworks, Microsoft, the major record labels — and any others that sell downloads of music or movies.
Apple and Amazon.com did not respond to requests for comment.
Impact on Consumers
Most music downloads cost about 99 US cents per song. A 4 percent tax would likely nudge the price to $1.03. That may not seem like much, but with the U.S. in a year-long recession, the proposed tax on digital entertainment downloads could have an impact on consumers.
“The more you tax a particular item, the more expensive you make it for consumers to buy,” said Josh Martin, senior analyst at the Yankee Group.
“Combined with all the other things happening in the market right now, people will have less money to spend on things like digital music,” he told the E-Commerce Times.
The greatest impact could be on companies like Apple and Amazon.com; both have substantial businesses built around selling digital music downloads.
“If you know anything about online music, then you know that service providers like Amazon and iTunes are living on pretty thin margins,” Michael McGuire, an analyst at Gartner, told the E-Commerce Times. “It also upsets Apple’s set price of 99 cents per song — that’s one of the value-adds they have pitched when trying to strike deals with the major record labels.”
The proposed tax raises another question: Will Apple, Amazon.com and the like simply pass the cost of the tax onto consumers?
It could go either way.
“I don’t know that they will,” said McGuire. “They may have to absorb it — it may be something they have decided to live with. Then they’re able to tell the consumer, ‘We’re going to spare you the extra cost of this tax.’ It could be a good PR move.”
More States Could Follow
Other states could follow in New York’s footsteps, said the Yankee Group’s Martin, especially in light of the recession.
“It seems like states are desperate to raise any revenue they can,” he noted. “The fact that you’re talking about trying to get 4 cents per song is an interesting indication of the state of the economy right now.”
The proposed tax could also cover more than just digital music downloads.
“Aside from the nefarious nature of [the proposed tax], it’s a recognition that technology changes too fast for the law,” Martin said. “If you make the definition broad enough, you can cover yourself for any technological changes along the future. It’s a troubling path I hope we don’t go down too far. The mind boggles over how they’re going to regulate all of this.”
It’s possible a tax on “digitally delivered entertainment” could encompass many areas, Gartner’s McGuire said, including online video, such as movies viewed over the Internet, or even audio books downloaded from Amazon.com for reading on the company’s hit Kindle product.
The proposed tax will almost certainly revive discussion of when, where and how to tax online transactions — a long-fought battle between regulators and e-commerce companies.
“I think we’ll see a revival of the discussion of taxation of these virtual transactions that happen on the Web for the delivery of content,” McGuire said. “That becomes an interesting state-by-state question.”
Companies like Apple, Amazon.com and RealNetworks will likely come out strong against the proposed tax in New York.
“A lot of entities will be affected by this,” McGuire said. “My guess is you’re going to see some opposition to it.”