That download of an Angry Birds app, Katy Perry song, or "Captain America" movie could end up costing consumers more, thanks to a "digital products" tax proposal that's being pushed in Annapolis this year by Gov. Martin O'Malley.
The bill is part of a move by the governor to close Internet tax loopholes, and includes a so-called "Amazon tax," which would require Maryland affiliate sellers of the world's largest online retailer to collect a sales tax if they do more than $10,000 in business over 12 months.
A 99 cents iTunes song or iPhone app, for instance, would jump to about $1.05, after the 6 percent sales tax is added. But some worry that a broader range of products and services could end up being taxed than originally intended, based on the bill's language.
"A lot of folks are looking at this language right now trying to get a grip on it," said Ron Wineholt, vice president of government affairs at the Maryland Chamber of Commerce. "At a minimum, we would need a lot more clarity and narrowing of these provisions."
The bill is drawing scrutiny from parts of the state's business community and some Maryland Republicans, who say they see the potential for a "Tech Tax 2" fight if its broad language on digital downloads isn't clarified.
Four years ago, a tax on digital services galvanized the state's technology businesses, ending in the repeal of the so-called "Tech Tax." And previous attempts to impose a sales tax on out-of-state vendors such as Amazon have failed in Maryland.
A bevy of online retailers and software companies, from Overstock.com to Microsoft, offer affiliate programs that allow people to sell a firm's digital products through their own websites in exchange for a commission.
Faced with a billion-dollar budget gap, state officials estimated the digital download tax and so-called "Amazon tax" would bring in a total of $26 million.
Raquel Guillory, an O'Malley spokeswoman, said the administration is open to clarifying the language in the bill, but that taxation of digital products is not a new concept among states.
"We understand their concerns about clarification," Guillory said. "We recognize there are some areas where there is some clarification needed, and we will do that to answer some of the questions coming up."
The digital download sales tax would be levied on digital music, videos, apps, electronic greeting cards, video games and ebooks, as well as some news websites and blogs. The sales tax may also be applied to users of online media-streaming services, such as Netflix and Hulu.
If the digital products tax becomes law, Maryland would join 24 other states and Washington, D.C., that have placed similar taxes on digital goods. Supporters of such provisions say that states are losing revenue as consumers increasingly turn from buying traditional physical media such as music CDs, DVDs and books, toward digital downloads of similar content.
For instance, the dollar value of digital music downloads in 2010 was $1.4 billion — nearly $200 million more than the previous year, according to the Recording Industry Association of America. Meanwhile, CD sales shrank, slumping from $4.3 billion in 2009 to $3.4 billion, according to the RIAA.
The language in Senate Bill 152 — part of the Budget Reconciliation and Financing Act of 2012 — also applies the sales tax to electronic versions of newspapers, magazines, online chat rooms and blogs that charge fees. For example, newspapers that charge a fee for readers to access online content could potentially have to collect a sales tax from customers.
"I suspect we'll oppose it," said Jack Murphy, executive director of the Maryland-Delaware-DC Press Association, which represents news media companies' interests in the region. "Our reading is it would affect any newspaper that has a paywall, or an electronic edition that a newspaper might produce. With the strain on newspaper finances right now, why would we do anything that might discourage people from supporting the news business?"
(The Baltimore Sun and Carroll County Times are among the local news organizations that offer digital subscriptions.)
A study by the Comptroller's office last fall estimated that the state's market for digital goods will approach $200 million in 2013. The O'Malley proposal aims to collect a fraction of that amount: $5 million from a tax on digital downloads, and $21 million from vendors and independent contractors who act as affiliates for an out-of-state entity, such as Amazon.
But it's challenging to collect sales taxes from in-state affiliates that sell products on an website based outside Maryland. Some online retailers respond to such taxation attempts by changing their business operations to avoid triggering an instance where they would have to collect the tax from consumers.
Generally, online retailers don't have to collect sales tax in states where they do not have some type of physical presence, though some states have exceptions for software companies.
Joseph Shapiro, a spokesman for Comptroller Peter Franchot, said the state official "strongly agrees with the principle of tax fairness and leveling the playing field for Maryland's bricks and mortar stores."
"However, he believes without federal action, any revenue collected will be minimal and could lead to legal challenges," Shapiro wrote in an email to The Baltimore Sun. "He urges Congress to act and give states the tools they need to ensure tax fairness."
Efforts at the federal level to create a systematic and comprehensive framework for states to collect taxes from Internet sales have foundered for years. Amazon has pushed Congress to support federal legislation, a company spokesman said.
"For more than a decade, we've supported a national approach to sales tax," spokesman Scott Stanzel said in an email. "Rather than focus on state by state legislation, we are working with members of Congress, retailers and state leaders to get a federal bill passed this year. Federal legislation permitting interstate sales tax collection is the only way to level the playing field for all sellers and provide states the right to obtain more than a fraction of the revenue already owed."
Patrick Donoho, president of the Maryland Retailers Association, which represents bookstores, electronics sellers and other physical stores, said the group generally supports parity in sales tax collection between online and bricks-and-mortar retailers. But it hasn't formulated a position on the tax proposal.
"I think the devil is going to be in the details," Donoho said.
Some business leaders say that the tax proposals are part of overly broad language that could be applied to businesses that sell and deliver products digitally to clients, such as advertisers and creative services agencies.
Cynthia Blake Sanders, legislative chair of the American Advertising Federation of Baltimore, said the group's 450 professional members are worried that digital services they provide to clients could suddenly be taxed under the O'Malley proposal.
For instance, an agency could create a video advertising spot and email it to a client, who then downloads it. Presently, such activity is billed to a client as a service, and a sales tax is not collected. The way the bill is currently written, Sanders said, creative professionals will wonder if they need to charge and collect a sales tax from clients for the digital work product they deliver.
"For our clients, it's going to cost 6 percent more than they used to pay," Sanders said. "That's a jump in cost. … The law of unintended consequences looms large over this."
Some state Republicans criticized O'Malley for proposing the tax.
On Wednesday, Rep. Neil Parrott, a Washington County Republican, held up his new iPhone 4 at a news conference in Annapolis and criticized what he is calling the "App tax" — a tax on Internet downloads.
"This is the heavy hand of government," he said later in an interview. "The problem in Maryland is not that we have a revenue problem, we have a spending problem."
Sun reporter Annie Linskey contributed to this report.
Digital downloads subject to proposed tax
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