'iTunes weTax,' says New York State

Seeking the means to shrink a nasty budget deficit, legislators in Albany have floated the idea of slapping a 4% tax on entertainment services delivered via the net, including streaming movies, e-books, and music downloads.

The move, though perhaps among the least disruptive of the suggested changes to the state's $121 billion budget, could prove painful for legitimate services and provide additional motivation for those who lean toward getting their music and movies off the file-sharing services.

New York certainly wouldn't be the first to try to close what the budget calls the Digital Property Taxation Loophole. Tennessee has a similar law going into effect in January; Nebraska's version kicked in in October. (New York's actually held the line on not taxing downloads, as Apple discovered when they inquired in 2007 [PDF available here].) The question is of course how or even if such a tax -- which the budget-makers estimate could mean $15-20 million for state coffers -- could be collected.

The key concept is "nexus" -- the policy that a state can only collect tax from a business with a presence within its physical borders. Nexus is the rule of the land since 1992; though there's pressure afoot in Congress to change that, as long as a presence is required, there's no mandatory tax collection possible.

(We pause here for iTunes, eMusic, and such to figure out not only where their staff lives, but in which cloud or server farm they've parked their files.)

Times being what they are, pressure from the states to come up with a tax-assessment strategy is apt to increase. A CNET report last summer indicated that a number of states have agreed to adhere to the digital-download taxation standards of the Streamlined Sales Tax Project, which could facilitate collection by making it easier for digital-entertainment firms to figure out state requirements.

So why the uproar over New York? So far, Gov. David Paterson's budget is dismaying plenty of people -- slashing health care and education, closing a prison, and promoting new taxes on everything from soda to haircuts to seed-dealer licenses to movie tickets. (Paterson, has, however, announced that he has "ruled out taxes for the wealthy," claiming that the rich people might move away.) No one sane would claim that an "iTunes tax" is the worst thing on the menu, but as a term of synecdoche for a miserable nickel-and-diming situation, it's about pitch-perfect.