Conn. considers raising tax on digital products

HARTFORD, Conn. (AP) -- Connecticut residents may soon have to pay more to download an app, e-book or iTunes song.

Some Democratic state lawmakers are proposing to raise the 1 percent tax on such products to match the state's 6.35 percent sales tax, making Connecticut one of nearly two dozen states to extend sales taxes to downloaded products.

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.

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 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. Dannel P. 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. Twenty-two 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."