Connecticut lawmakers are considering a bill to increase taxes on digital products such as e-books, mobile apps and MP3 files.
Currently digital downloads are taxed at 1 percent, but some legislators are proposing a tax increase on downloads to match the state”™s 6.35 percent sales tax.
Given the state”™s looming $2.5 billion budget deficit for the 2014 and 2015 fiscal years, proponents say the tax is a way to help close the gap and reform some of the state”™s Internet tax laws.
If adopted, the proposal would likely generate $20.5 million in tax revenue during the 2014 fiscal year and another $22.1 million the following year, according to the Office of Fiscal Analysis.
About 22 states have adopted similar proposals, but opponents like state Sen. Scott Frantz, a Greenwich Republican, say Connecticut should yield to the federal government on raising its online tax.
Frantz said that until a federal standard exists, Connecticut businesses would be at a disadvantage because as it is currently proposed, the tax would only apply to companies based in Connecticut. He said that would open the door for consumers to seek the same products from out-of-state businesses.
“Every state will eventually adopt a similar tax, but for the time being it”™s probably going to put a damper on any company that is in the business of downloads,” said Frantz, co-chair of the Finance Revenue and Bonding Committee where the bill, SB 1117, awaits approval.
Frantz said he expects the bill to pass, given that it is tied to several unrelated tax initiatives such as the repeal of a luxury tax on boat sales and the imposition of a tax per pound on palliative marijuana provided to the state”™s upcoming dispensaries.
Joseph McGee, vice president of public policy for the Business Council of Fairfield County, said he was opposed to the bill, given it is not a part of a broader Internet tax reform or strategy. Online purchases have largely gone untaxed up until recent years. Subscription-based services would still be taxed at 1 percent, as well as any online business-to-business transactions.
“This needs to be a part of broader tax policy, not just a proposal where we can pick up another $20 million,” he said. “This is a new industry and we have to think through what the taxation policy should be.”
Connecticut”™s bill also comes as Congress considers the Marketplace Fairness Act, which would allow state and local governments to enforce sales and use-tax laws on all online purchases. The bill could help the state collect another $152 million in tax revenue, according to U.S. Sen. Chris Murphy.
Given that digital media is also a growing industry in Connecticut, McGee said he believes the tax would ultimately send a mixed signal to an industry the state is trying to attract.
“I don”™t think you”™re driving industry out of the state with this, but I do think you”™re sending contradictory signals,” McGee said. “It”™s lousy tax policy.”
