Democrats more likely to favor iTunes taxes

A CNET News.com analysis of the states that tax digital downloads, such as those from the iTunes Music Store, shows that nine protax states have legislatures controlled by Democrats. By contrast, five of the protax states have Republican-controlled legislatures.

Overall, state legislatures in the United States are evenly divided between the two major parties: 21 including the District of Columbia are Democratic; 21 are Republican; eight are split; and one (Nebraska) is nonpartisan, according to the National Conference of State Legislatures.

A News.com special report Thursday says most states have overlooked taxing digital downloads--iTunes purchases, e-books and movies--so far, but as online media purchases are booming, politicians and tax collectors are eyeing the area as an untapped source of new revenue.

New Jersey Gov. Jon Corzine, a Democrat, proposed in his budget (click here for PDF) that "downloaded music and videos" be taxed starting Oct. 1. The state tax agency expects legislation to be introduced in June.

Taxpayer advocates have criticized the trend toward increased taxation of downloaded media files. (This is a separate debate from the one dealing with taxation on items purchased via the Internet but delivered in physical form.)

"I'm sure that state and local officials, given enough time, will come up with a sky-is-falling study saying that if they're not allowed to tax this, they'll lose a trillion dollars a year," said Pete Sepp, vice president for communications at the National Taxpayers Union, a nonpartisan group that advocates lower taxes.

It's not always clear who authorized iTunes taxes. In Washington state, for instance, the Democratic-controlled executive branch reinterpreted the definition of "computer software" in the tax code to cover music downloads. But taxpayer advocates say that the legislature ultimately sets tax policy and is responsible for overriding any bureaucratic legerdemain.

NTU's Sepp also argues that digital downloads are already being taxed. He says that anyone connecting to the Internet through dial-up, DSL or a cable modem is already paying telecommunications taxes; anyone with an iPod paid sales taxes on it; companies offering downloads are paying property taxes; their stockholders are paying dividend or capital gain taxes; their employees are paying income taxes.

"Obviously we need to start considering limits on this sort of taxation," Sepp said.