May 6, 2008

Return of the iPod Tax

Some bloggers appear to have caught Tennessee Revenue Commissioner Reagan Farr in an untruth about the state's tax on digital music downloads, thanks to a ruling approved by Farr himself and issued just a few weeks ago which categorically states that "songs downloaded onto the hard drive or accessed via the Internet are not subject to the sales and use tax because the music is delivered electronically, which is not taxable as sales of telecommunications services under Tenn. Code Ann. § 67-6-102(81)(B)(ix) (Supp. 2007) or as sales of tangible personal property under Tenn. Code Ann. § 67-6-102(80) (Supp. 2007)."

See: TerryFrank.net and Kleinheider at Post Politics.

It looks like the Bredesen administration has been illegally collecting sales tax on music downloads since Jan. 1, 2008, and that Farr is now pushing "technical correction" legislation to amend the tax code in order to make legal the tax they're already collecting. In other words, the technical corrections legislation will institute a new tax on digital music downloads.

Farr's explanation misleading spin is that the ruling letter, dated March 12, 2008, is actually several months old and doesn't reflect changes to the law that went into effect on Jan. 1, 2008. But the ruling letter itself belies that claim as it references on multiple occasions in its footnotes those changes that went into affect on Jan. 1, 2008.

As of today, no new law has been passed since the Department stated on March 12, 2008, that digital music downloads are not subject to the state's sales and use tax. As you were previously warned and more than once, the Revenue Department's "technical corrections" legislation now pending before the General Assembly contains a provision to levy a new tax on digital music downloads. That's not a "technical correction." It's a policy change.

This is the same administration and Revenue crew that slipped a $64 million gift to Nissan into law and also instituted a new tax on propane for your backyard barbecue grill via previous "technical corrections" legislation.

Update: I'm told Farr claims that in approving the ruling letter he did consider the new law, but just misinterpreted it. But that makes no sense - if the law already authorizes charging sales tax on digitally delivered products such as downloaded music, no "technical correction" would be necessary.

I'm hearing that the fireworks are only beginning on this, and that some major organizations representing some rather large corporations are about to get involved in the fight - and they aren't happy with the way the Revenue Department has, in the words of one, "duped" them into collecting a tax that didn't exist.

Is it possible that the existing statute really doesn't authorize the tax, but that the Revenue Department decided to go ahead late last year and tell companies to start collecting it anyway, while planning to implement the tax via this year's "technical corrections" bill?

Incidentally, major tech states like California have rejected this kind of tax.

Update: Welcome Instapundit readers.

Update: Tennessee GOP press release.