E-Books Remain Tax Evaders — for Now

JUL 16, 2012, 1:13 PM
By Quentin Fottrell

Those who order “Fifty Shades of Grey” in paperback generally pay sales tax, but in most of the country the e-book version is tax free. That may soon change.

Republican governors are gradually easing their longtime opposition to sales taxes on online purchases, The Wall Street Journal reported Monday. This will push up the price for the wide variety of tangible goods sold on sites like Amazon.com. (Amazon did not respond to requests for comment.) Most Americans who read books on their Kindles, Nooks and iPads have been exempt from taxes, but getting a piece of such sales may be irresistible to cash-strapped governments, experts say. “It’s become too big a market to ignore,” says Carolynn Iafrate Kranz, chief operating officer at Industry Sales Tax Solutions. “We’re starting to see more states taxing digital content.”

Just as the iPod upended CD sales, Amazon’s Kindle and other e-readers now account for a huge chunk of all book purchases. In fact, U.S. e-book content revenue is expected to reach $3.19 billion by 2015, according to accounting and consulting giant Deloitte. States have been slow in enacting new sales tax legislation, but the number of bills proposing such legislation shows that’s changing, says Brian Kelleher, tax director with Deloitte. “When’s the last time you bought a CD?” he says.

Digital content remains exempt from sales tax in major states including New York, Florida, Connecticut, and California, and Washington D.C.  But earlier this year, Connecticut’s state legislature proposed a 6.35% sales tax on digital downloads to level the playing field with brick-and-mortar retailers. Lawmakers in California – the home state of Facebook, Apple and Google – introduced similar bills to introduce a digital tax in recent years.

Nearly half of U.S. states already have such laws on the books. Washington State introduced a specific tax on digital goods in 2009 for music, movies and e-books, as did Idaho, Kentucky, Vermont and Wisconsin. Other states like Texas, Arizona and Maine rely on existing laws by defining digital goods as “tangible personal property” even though it’s transmitted electronically. Most states don’t include magazines, newspapers or digital services like online dating in those laws. And in some states, such as Florida, e-books are tax exempt, but not TV shows and movies.

Even states that have sales taxes on digital content are still grappling with the complexities of a fast-changing industry, experts say. Although New Jersey imposed a sales tax on digital content like e-books and ringtones in 2006, the purchase of apps and other custom-made software for business – rather than consumer use — is not subject to sales tax. “Tax administrators are stuck trying to fit a square peg in a round hole by applying yesterday’s laws to today’s technology,” Iafrate Kranz says.


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