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Connecticut Proposal Would Hike Tax On Digital Downloads

Tax Would Go From 1 Percent To 6.35 Percent
iPhone (file / credit: John Moore/Getty Images)

iPhone (file/credit: John Moore/Getty Images)

HARTFORD, Conn. (CBSNewYork) - Downloading e-books, music from iTunes, or apps for your phone could become expensive for folks in Connecticut.

A provision in a legislative package that has emerged would have the 1 percent tax on these products rise to 6.35 percent, the amount of Connecticut’s sales tax.

Rep. Patricia Widlitz, D-Guilford, co-chair of the Finance Revenue and Bonding Committee, included the provision in the committee’s tax package in an attempt to make brick-and-mortar retailers more competitive.

“As our way of doing business changes, our tax structure has to look to the future as well and change with that,” she said.
One lawmaker who won’t go along with this is St. Sen. Scott Frantz, ranking member on the Finance Committee.

“We already have 378 taxes on the books and eventually people, consumers, will find out about how many taxes are on the books and how much they take away from one’s own personal income, disposable income, every year,” Frantz told WCBS 880 Connecticut Bureau Chief Fran Schneidau.

Supporters of the tax hike say it would generate $40 million in badly needed revenue over the next two years.

Proponents see sales tax expansion as a way to help fill Connecticut’s projected two-year, $2.5 billion budget deficit. The proposal would generate $20.5 million next fiscal year, which starts July 1, and $22.1 million the following year, the legislature’s nonpartisan Office of Fiscal Analysis estimated.

The tax would apply to one-time free software downloads of music, movies, books, games, apps and even ringtones. Subscription services, such as Netflix and Spotify, would retain the current 1 percent rate as would many elements of cloud computing services and all business-to-business transactions.

Tax reform and consumer advocates call the proposal misguided. States ought to operate within their means rather than raise taxes, said Katie McAuliffe, federal affairs manager at Americans for Tax Reform.

“It’s not really about a level playing field,” she said. “It’s about getting revenue.”

Taxing digital downloads is one of many provisions being considered in closed-door budget negotiations. Gov. Dan Malloy has said his budget proposal includes no new tax increases, and his budget director, Benjamin Barnes, insists that position has not changed.

Connecticut’s proposal comes as Congress considers expanding states’ tax collection authority. A Senate bill passed this month would empower states to require online retailers to collect state and local taxes for online purchases. Under current law, states can only require a store to collect taxes if it has a physical presence in the state.

If federal legislation passes and Connecticut moves to apply its sales tax to digital downloads, the state could demand payment on such products from out-of-state businesses just as it would be able to do with physical products.

Taxing digital downloads is increasingly popular across the country. 22 states and Washington, D.C., tax downloaded music, movies or books, according to a report by the Center on Budget and Policy Priorities.

Expanding taxes to include digital goods and services is sound public policy, argues Michael Mazerov, a senior fellow at the center. He said the issue is about fairness: Users of digital goods consume economic resources just as users of physical goods do, so they should pay the same tax rate. The current imbalance disproportionately impacts lower-income households, which are less likely to shop online, Mazerov said.

“There’s no justification for states waiting,” he said. “This is way overdue. It’s a no-brainer.”

The Connecticut Technology Council echoes Mazerov’s position and supports taking a national approach to taxing digital products. President and CEO Matthew Nemerson said the council accepts that the Internet cannot maintain what in many cases amounts to an exemption from state and local taxes.

Reform is necessary to prevent tax base erosion, argues Mazerov. With more and more products delivered in digital format, he says, states are losing funding for vital services like education and health care.

But opponents of taxing downloads contend that digital products generate a smaller carbon footprint and that their nature makes it inappropriate to tax them as equivalents to physical goods.

“You’re just downloading a license,” McAuliffe said. “You don’t actually own the products. You have less ownership and less power over them.”

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