New York Considers an “iPod Tax”

By Michael Santo
Editor-in-Chief, RealTechNews

New York State must be the leader in clever, snarky names for taxes. First, facing a huge budget deficit and noting just how sales to e-tailers was siphoning off sales tax, they imposed an “Amazon Tax,” named after Amazon.com. Now it is apparently looking at a possible “iPod tax,” to plug the huge budgbet deficit gap it has.

According to the New York Daily News, Gov. David Paterson has proposed an “iPod tax” on the sale of downloaded music and other “digitally delivered entertainment services.”

New York wouldn’t be the first state to do so; at this point Alabama, Arizona, Colorado, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, New Jersey, Nebraska, New Mexico, South Dakota, Tennessee, Texas, Utah, and Washington tax digital downloads, as well as the District of Columbia.

Of course, this is still a sales tax, so the states are only be able to tax retailers who have a physical presence in that state. New York, however, redefined such presence to mean any e-tailers who have affiliates in that state, such as Amazon.com.

To get around the “Amazon Tax,” Overstock.com terminated its relationship with any New York affliates; it also filed suit against the state of New York (as did Amazon.com, separately). Meanwhile, Newegg.com simply stopped collecting it.

In a 1992 Supreme Court decision, Quill vs. North Dakota, the Supreme Court ruled that out-of-state retailers cannot be required to collect sales tax on purchases sent to states where they did not have a physical presence.

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.

New York’s method of getting around the physical presence clause seems quite iffy to me, though I am not a lawyer. It remains to be seen if it holds up in court, but with the ongoing economic crisis and state budgets facing huge deficits, there’s no doubt that many are considering such taxes.