Lowdown on download taxes? They hurt artists, labels and students

One old cliche resonates in the tax-happy bureaucracy of Chicago, where I live: "If they could, they'd tax the air we breathe."

This past week, though, the Illinois state legislature almost joined 19 other states in one-upping that hoary aphorism: They almost instituted a tax on honesty.

On Thursday, Illinois Gov. Pat Quinn backed off a proposed plan to impose a state sales tax on digital downloads of music and movies, which would've made Illinois the 20th American state to institute such a plan. The new levies--quoted at around $0.50 per $9.99 album and $0.75 per $14.99 movie--provoked criticism and made headlines on Wednesday, including front-page coverage from the Chicago Sun-Times, which dubbed them "iTaxes."

Since 2007, 19 states have enacted such download taxes, including Indiana, Wisconsin, Kentucky, Mississippi, Nebraska, New Jersey, South Dakota, Tennessee, Utah and Washington, according to the Sun-Times. And one can only wonder whether lawmakers are using the revenue as efficiently as college students who might save all month long for a single mini download spree. Doubtful.

In Illinois, honest music consumers should applaud, at least for now. Why do I label such fees as "taxes on honesty?" As any college music junkie can tell you, rampant piracy has already made it hard enough on those of us who still choose to pay for our music. Every time I purchase an album on iTunes or at a record store (which I try to do about once a week, although I'll readily admit that I acquire some songs for free), I lose out on a decent meal, some beer, a new book--whatever--to satisfy my music appetite.

A classically-trained economics prof might call that an "opportunity cost." But the dawn of the BitTorrent era pretty much nullified classical economics for the digital music industry, because I'm now choosing between products I absolutely must pay for (such as food) and one that I could get for nothing, if I so chose.

Anyone with basic web skills can find a decent rip of just about any album they're looking for--and believe me, many of my friends and peers suck up pirated albums the way blue whales ingest krill. Basically if you can stomach compromising your ethics and morals, then you can have your Sea & Cake album and eat, too. With unlimited free music for the picking, and no one (for the most part) watching downloaders or enforcing the laws against partaking of pirated tunes, my choice to keep buying music has becomes an act of conscience.

When pressed to explain the rationale behind the proposed download tax in Illinois, the director of the Illinois governor's Office of Management and Budget offered the kind of clueless justification that shows lawmakers still fail to understand that fact. Customers already pay taxes on music at physical record stores, he noted, so Internet consumers ought to pay them as well.

The difference, though, is that record stores provide a physical product--and one that's not so easy to duplicate in its original form. Hand any joe (or jane) on the street a professionally-manufactured vinyl LP or CD and a home-packaged bootleg, and I'm willing to wager they'll pick the winner without a second thought.

But the audible difference between a high-quality 256k rip from a piracy site and a track from iTunes? The basic joe-on-the-street could only tell if she happens to be a professional audio engineer carrying thousand-dollar cans.

This dilemma pretty much sums up the challenge that online retailers of digital music and movies face. They essentially have to co-exist with the black markets in their backyard that offer just about all of their products for free--and, perhaps most importantly, the free stuff is just about equal in quality (especially to the ears of average, non-audiophile consumers) to what they're asking (or pleading) customers to pay for.

The effects have made themselves apparent, to say the least. Over the last ten years alone, revenue from U.S. music sales and licensing plummeted by fifty percent--a previously-unthinkable figure for an industry that had never even clocked a decline in sales over a decade until the 2000s. (The film industry and television industries haven't been hit quite as bad, but signs of a similar storm are gathering on the horizon.) No brick-and-mortar business has ever or perhaps will ever come up against a problem quite like it, and, as a society, we've yet to figure out a solution that will ensure the long-term vitality of the creative content industries as the economy continues to digitize.

So what are state legislatures doing imposing taxes on a business model that's still wobbling on its heels? And why should honest consumers who pay for music in the face of such illegal abundance get forced to pay additional taxes on their scrupulousness? It seems that U.S. lawmakers, unwilling to seriously consider forward-thinking solutions such as universal licensing fees on wireless and Internet accounts, frame the issue in terms of the holes in their budgets and the legal opportunities for a short-term cash-in on a sinking ship.

College students may especially wind up on the losing end of additional download taxes. Although they pursue new music more than just about any other demographic, their lack of disposable income tends them toward the pirate sites to keep up with new bands and tracks, which is why college campuses are such hotbeds of piracy. Every 10% that states tack onto the price of MP3s turns more cash-strapped students toward online music theft--and at least a few will even get sued as record companies, well aware of this dynamic, continue to trawl college networks, seeking potential targets for "we'll-make-an-example-of-you" lawsuits.

I'm not the only one who sees state taxes on digital media in these terms. In an e-mail statement, Gene Hoffman, a digital music expert who used to serve as the CEO of eMusic before he founded Vindicia, a billing consultant for digital merchants, told me that he views these taxes as both ill-conceived and difficult to implement.

"The state sales tax model is predicated on a bricks-and-mortar retail model that simply doesn't apply to digital retail channels," he wrote. "As a result, state sales tax is unfairly onerous to providers of this content, while also penalizing states that don't tax content or have digital content providers operating within their borders."

And, although the media tend to focus on the big content distributors and their epic woes, the implications of this debate stretch all the way down to indie labels and niche markets nationwide. When I worked as an intern at local Chicago record label Minty Fresh last year, the label was settling out of a long transition that reflects the way most surviving indies stay afloat. The major-label offshoot that introduced the Cardigans to America in the '90s had, over time, downsized into a small, two-employee operation that now sells the majority of its music online.

I called up my old friend and boss at Minty Fresh, owner and founder Jim Powers, to ask him about his take on the Illinois download-tax proposal and the wider issue of state download taxation. By some coincidence, he described such taxes with the exact same term Gene Hoffman had typed out: "ill-conceived."

"You know, it's hard enough to keep honest people honest [when it comes to downloading music]," he said. "To me, it's just one more thing to steer people away from actually paying for music, when they're already having a hard enough time doing that now."

Later that day, the governor of Illinois came out with his formal retraction of the proposed "iTax." Although that more likely signals a temporary truce than a halt to the spread of download taxation, it's still one tentative step forward by my estimation-- and 19 more until we reach the starting line for a sensible discussion about the future of digital media.

Steven Kent is the Dollar Store Dilettante, a blase lad who knows more about saving a buck and stoking his hipster credentials than all his editors combined. His Money College column runs Sundays; send tips and best MP3s of Pitchfork bands to Steven at steven.t.kent@gmail.com.

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