More states join iTunes tax debate

A growing number of states are considering taxing songs from iTunes to relieve their strained budgets, though at least one state may buck the trend in the hopes of appearing more tech-friendly.

A state legislator in North Dakota last week introduced a bill to explicitly exempt digital goods such as digital music or movies, digital books, or ringtones from the state's sales tax and use tax. A hearing on the bill is scheduled for next week.

At least 17 states currently collect taxes on digital goods, and a handful more may join them. A bill was introduced last week in the Mississippi state legislature to impose taxes on digital goods, and lawmakers in North Carolina are considering a digital goods tax as well. New York Gov. David Paterson has proposed the tax in his state, and legislators in states like California and Wisconsin may take up the issue again this year despite a lack of support for it in the past.

The extra revenues that could be gained from taxing digital downloads may be appealing to state lawmakers, but Stephen Kranz, an attorney at Sutherland law firm who represents members of the digital media industry, called digital download taxes "a short-sighted approach to digital tax policy."

"It punishes people who can't move and discourages companies" from moving to states that impose such taxes, he said.

That's because under the legal concept of "nexus," a state generally may only tax a company that has a physical business presence within the state's borders-- though a state may apply a "use tax" for goods coming into the state from elsewhere.

While North Dakota has not taxed digital goods in the past, Dwight Cook, the state senator who introduced the tax exemption bill, said he wanted to make that point clear to technology companies.

"I think it's important we send a message to the world of digital products that this is a state that's favorable to their interests," he said.

At least one major technology firm has been drawn to North Dakota--Microsoft first established a presence there when it acquired the company Great Plains Software in 2001.

"I don't completely understand the high-tech world, but I do understand they use a lot of electricity and they need a lot of water, and we certainly have both," Cook said.

Cook decided to introduce the tax exemption legislation after learning more about the issue from the Streamlined Sales Tax Project, a multistate effort to develop uniform standards for taxation. In 2007, the project adopted a specific definition of digital products, along with procedures for how they should be taxed.