Madison, Wis. – Tucked away on page 417 of the executive budget book outlining the 2007-09 spending blueprint introduced this week by Gov. Jim Doyle is another attempt to apply the state’s five percent sales tax to online purchases of digital content.
The proposed tax, put forth two years after a similar proposal died at the committee level in a Republican controlled Legislature, is designed to level the playing field for traditional music stores. But an opposition legislator quickly pounced on the plan, saying the state should not use the Internet as a platform for collecting taxes, and the proprietors of two online music retailers said such a tax would hurt their competitive standing.
Although the proposal is somewhat vague, it is referred to in the governor’s budget document as a digital products tax that would level the playing field for retailers by equalizing the tax treatment of certain products.
At the moment, the sale of digital content at “Main Street” music stores, or major retailers like Best Buy, is subject to the state’s sales tax. However, the purchase of music online – whether it is downloaded to a personal computer or to an iPod – is not.
The state, which is faced with a $1.6 billion budget deficit, would raise an estimated $6.3 million in sales tax revenue by applying the sales tax to downloaded digital information. That includes $2.6 million in tax collections in 2008, and $3.7 million in 2009.
State Sen. Ted Kanavas, R-Brookfield, who believes the tax also would apply to downloaded video content, said Republicans on the Joint Finance Committee would fight the tax. Kanavas, himself a technology entrepreneur, said there is a less costly way for the Doyle Administration to level the playing field.
“If we want to create a level playing field, cut the tax on these items in retail stores, don’t tax the Internet,” Kanavas said.
The governor’s office could not be reached for comment.
Proprietors of Musicnotes and Broadjam, two Wisconsin businesses that sell digital content online, declined to comment extensively until they could get more information about how – and to whom – the tax would be applied. However, both said they are concerned that applying the sales tax to online music downloads could put them at a competitive disadvantage.
Stephanie Essex Elkins, who co-founded Broadjam with husband Roy Elkins, noted that the Madison-based dotcom offers 99 cent downloads. Of that 99 cents, an industry high 80 cents goes to the artist, leaving the remaining 19 cents to barely cover, according to Elkins, the company’s administrative costs. With a low profit margin on each download, the application of the sales tax would negatively impact the business, she said.
Tim Reiland, chairman and chief financial officer of Musicnotes, deferred comment until he has a chance to assess the proposal. Reiland, whose company reported robust revenue growth of 45 percent in 2006, had editorialized against the previous attempt to apply the sales tax to music purchased online.
In his 2005 budget proposal, Doyle sought to charge sales taxes on more types of online purchases, including music downloads. Former State Rep. Scott Jensen dubbed it the “iPod tax” because many listeners stock their iPods with music they bought from Apple’s iTunes music store.
The digital sales tax proposed in 2005 was shot down in a Legislature where Republicans controlled both the Assembly and the Senate. Following the 2006 election, the Democrats now control the Senate and have cut into the Republican majority in the Assembly.